So the interest from carry trades is not actually interest earned. The gain is embedded into the tom/next swap for each day, where you say oh hey, I'm willing to exchange this trade with a value date of T+2 for one with T+3 and, for example, since I'm long the higher yielding currency I get to roll open the trade at a discount. But I don't think there is an actual interest payment in the dealer market, rather the interest is discounted or premiumed into the swap.
I've noticed that brokers seems to handle that discount/premium carry for daily rollovers two ways:
Method 1: 'Interest' payment and charge: OANDA, Interactive Brokers, Forex FS, etc...
The broker pays some pre-set 'interest' payment or charge each day which is a substantial markup to the actual tomorrow/next swap rate. It appears as a separate line item, and the brokers include it in a 1099-INT.
See: https://www.interactivebrokers.com/e...st&p=schedule1
Method 2: Discount/premium: GFT, GAIN, etc..
See: http://documents.gftforex.com/Tomorr...dure_US_FX.pdf
What is actually happening in group 1 is that Interactive Brokers is profiting from the tom/next swap via the mark up, and swapping the swap, with the tom/next swap with dealers and large participants and then doing a much worse swap with you. However, what's interesting is that the group 1 shops magically convert the second swap into an interest payment or debit in their accounting system, when really you are re-entering the position at a discount when the roll re-opens.
In group 2, it's a little clearer that you are getting a swap on a swap:
See
http://www.tradersexchange.com/resou...mnextproc.html
This is likely why the CFTC is classifying retail FX brokers as swap execution facilities:
http://www.fxweek.com/fx-week/news/2...cftc-s-chilton
So, this then brings up a slew of other interesting questions:
How can both broker have such disparate treatments for the same thing?
The treatment from group 2, which seems to be the correct way of doing things, seems to result in capital gain, assuming section 1256 election for non-delivered spot fx trades, from the roll premium/discount.
A simple example, let's assume AUD/USD is at parity and stays at parity for the whole week, so we can eliminate market changes and focus on the carry. Let's say the carry results in a 2 pip daily gain.
Buy $1,000,000 AUD/USD Day 1 @ 1.0000 @ 10 AM on Thursday (Position open) with Monday value date
Tom/Next Swap (either with broker or direct if large enough player)
Sell $1,000,000 AUD/USD Day 1 @ 1.0000 @ 5 PM Thursday (Roll close) with Monday value date
Buy $1,000,000 AUD/USD Day 1 @ 0.9998 @ 5 PM Thursday (Roll open) with Tuesday value date
Tom/Next Swap (either with broker or direct if large enough player)
Sell $1,000,000 AUD/USD Day 1 @ 1.0000 @ 5 PM Friday (Roll close) with Tuesday value date
Buy $1,000,000 AUD/USD Day 1 @ 0.9998 @ 5 PM Friday (Roll open) with Wednesday value date
Sell $1,000,000 AUD/USD Day 1 @ 1.0001 @ 1 PM Monday (Roll close) with Wednesday value date
I made 1 pips of profit on exchange rate fluctuation and 4 pips on the rollover from the swaps, and it seems they are both capital gains under 1256 election
Yet, group 2 gives zero indication of this differentiation, and group 1 seems to be converting the tom/next swap gain into an interest gain, obfuscating the true nature of the payment!
I've noticed that brokers seems to handle that discount/premium carry for daily rollovers two ways:
Method 1: 'Interest' payment and charge: OANDA, Interactive Brokers, Forex FS, etc...
The broker pays some pre-set 'interest' payment or charge each day which is a substantial markup to the actual tomorrow/next swap rate. It appears as a separate line item, and the brokers include it in a 1099-INT.
See: https://www.interactivebrokers.com/e...st&p=schedule1
Method 2: Discount/premium: GFT, GAIN, etc..
See: http://documents.gftforex.com/Tomorr...dure_US_FX.pdf
What is actually happening in group 1 is that Interactive Brokers is profiting from the tom/next swap via the mark up, and swapping the swap, with the tom/next swap with dealers and large participants and then doing a much worse swap with you. However, what's interesting is that the group 1 shops magically convert the second swap into an interest payment or debit in their accounting system, when really you are re-entering the position at a discount when the roll re-opens.
In group 2, it's a little clearer that you are getting a swap on a swap:
See
http://www.tradersexchange.com/resou...mnextproc.html
This is likely why the CFTC is classifying retail FX brokers as swap execution facilities:
http://www.fxweek.com/fx-week/news/2...cftc-s-chilton
So, this then brings up a slew of other interesting questions:
How can both broker have such disparate treatments for the same thing?
The treatment from group 2, which seems to be the correct way of doing things, seems to result in capital gain, assuming section 1256 election for non-delivered spot fx trades, from the roll premium/discount.
A simple example, let's assume AUD/USD is at parity and stays at parity for the whole week, so we can eliminate market changes and focus on the carry. Let's say the carry results in a 2 pip daily gain.
Buy $1,000,000 AUD/USD Day 1 @ 1.0000 @ 10 AM on Thursday (Position open) with Monday value date
Tom/Next Swap (either with broker or direct if large enough player)
Sell $1,000,000 AUD/USD Day 1 @ 1.0000 @ 5 PM Thursday (Roll close) with Monday value date
Buy $1,000,000 AUD/USD Day 1 @ 0.9998 @ 5 PM Thursday (Roll open) with Tuesday value date
Tom/Next Swap (either with broker or direct if large enough player)
Sell $1,000,000 AUD/USD Day 1 @ 1.0000 @ 5 PM Friday (Roll close) with Tuesday value date
Buy $1,000,000 AUD/USD Day 1 @ 0.9998 @ 5 PM Friday (Roll open) with Wednesday value date
Sell $1,000,000 AUD/USD Day 1 @ 1.0001 @ 1 PM Monday (Roll close) with Wednesday value date
I made 1 pips of profit on exchange rate fluctuation and 4 pips on the rollover from the swaps, and it seems they are both capital gains under 1256 election
Yet, group 2 gives zero indication of this differentiation, and group 1 seems to be converting the tom/next swap gain into an interest gain, obfuscating the true nature of the payment!