FAQs – Swap fee for Cash products

   

Dear Client,

Due to the current uncertainty about future demand resulting from COVID-19 as well as supply due to potential future intervention by OPEC+ (and potential resolution of their current conflict)  we are seeing back month contracts trade at much higher spreads than normal in the market. 

As a result the overnight swap fees in cash products have become much higher particularly as they approached the rollover date of the front month expiring contract.

What is a cash product?

A cash product is an over-the-counter derivative product of the futures contract. USOUSD is such an example, which is a derivative of Oil futures product. Unlike Futures products, the Cash products trade continuously with no expiration date.

What is a swap fee and how is it calculated for the cash products?

When clients hold a cash product past end of the trading day, similar to currencies and metals, the product attracts swap fees. This is shown under the ‘Swap’ column on your trading account statement. The swap fee can be calculated as below:

Swap rate x Volume x Contract Size x Number of Nights

What does the swap fee consist of?

The swap fees for the cash products consist of the following two important components:

  • Overnight financing charges covering the borrowed money required to open your position, outside the initial margin you’ve paid, and
  • A fair value price adjustment, an adjustment made to the product’s pricing based on the fair market value of the underlying security.

Why do the CL-OIL (futures contract) and USOUSD (Cash product) have such a large price difference currently?

Due to the uncertainty about future demand for oil because of the slowdown of growth across the world resulting from COVID-19, we are seeing CL OIL future contracts trade at higher prices than the USOUSD cash price than ever before.

As a result, the overnight swap fees in cash products have become much higher as compared to past weeks.

What are the main factors for the significant difference in prices across the two products?

The main factors contributing to the vast differences are as below:

  • Between May and June WTI oil futures contracts, there is currently a price difference of approximately $6.30. When CL-OIL futures rolled over from May to June contracts on 17th of April, the price gapped up by the same magnitude.
  • USOUSD or the cash WTI oil product is priced differently. In order to minimize price disruption and remove the impact of large price differences between the contract months, the USOUSD’s price ‘spreads out’ the price difference over the course of the next 28 days, until the next futures contract expiration.

Why is the current swap charge on USOUSD so high?

This is largely due to the fair value product adjustment applied to curb the large price gap in futures contracts.

As the price gap between May and June contracts is approximately $6.30. That translates to $6300 per standard lot. USOUSD is now pricing off the June futures contract.

The price of USOUSD and CL-OIL will merge when it approaches June contract expiration on 15/05/2020. To achieve this, we expect USOUSD’s price to increase by approximately 23c or US $225 per contract per day, in addition to any market related price movements.

This 23c or US $225 is incorporated in USOUSD’s swap charges. Together with overnight financing charges, we expect USOUSD’swap fees to be substantially higher than historical standards for an extended period of time.

We strongly recommend that you monitor positions carefully and maintain a sufficient account surplus throughout the lifetime of your positions in the account. If you do not wish for your position(s) to incur higher swap rates, you should close your position prior to the daily rollover to avoid any unprecedented charge in the account.

Please consider the implications carefully and trade cautiously during this volatile period.

If you have any queries, feel free to contact us at [email protected].

Kind regards,

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