The term "swap" in the forex market, is a credit or debit resulting from daily interest rates. Swap is interchangeably used with the term "rollover rate" as well.
When a trader holds a position (each lot left overnight, for example), his account is either credited or debited interest, the amount based on the currency rates at the time in question. Major currencies don't usually yield interest rates as high as cross currencies (which are currency pairs that do not include the US dollar), thus you'll find many traders diversify their portfolios -- and collect greater interest -- by trading in cross currencies.
Due to religious reasons (under the Shariah Law), Muslims are prohibited to earn or pay interest (which is called "riba"). The rule goes deep into the Islamic culture and system of laws, with interest being seen as usury and a practice imposed by the rich on the poor.
Be that as it may, forex trading is a business that attracts many Muslims around the world, and with Islam practiced by about one-quarter of the earth's population, it is obviously a pool of customers that cannot and should not be ignored. Forex brokers offer these traders accounts with no overnight interest, which is known as a no swap forex account.
There's no money lost here: usually instead of interest being paid, a flat fee is charged. Although initially available only to Muslims (to avoid abuse by non-Muslims or non-practicing Muslims), these Islamic or swap free forex trading accounts can now more easily be opened by anyone, no matter what their religion is.
Manipulation of the system does continue, however. It's not resentment that non-Islamic traders sometimes voice, saying a no swap forex account is patently unfair. These people are generally not aware that Islamic accounts carry charges that standard accounts are not subject to. If it is not a flat fee as mentioned above, it might be higher spreads, or limitations on the duration that a position can be kept open.
A typical no swap account charges a fee of $10 per standard lot, and traders can hold the positions for an unlimited time. Here is one of the potentials for abuse: if the no swap account has a set fee, but no time limit, the work-around or loophole available is simply that opening positions are left for very extended periods.
Obviously, at one point, it will see a profit and any swaps charged by the banks will have to be absorbed by the trading provider. Similarly, a trader can open an Islamic account and (with a different forex company) a standard account. Taking a short position on the no swap and a long position on the other, any losses incurred are cancelled out.
About the Author:
Interbank FX (http://www.ibfx.com/) offers a
no swap forex account. Art Gib is a freelance writer.
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174
Date Published :
Jan 3 2009