A Tom-Next swap, short for “Tomorrow-Next,” is a mechanism in trading that allows traders to extend the settlement of a spot position by one more day without taking physical delivery of the currency. In the spot forex market, transactions typically settle in two business days. However, many traders hold positions overnight, which means they need to adjust the value date to avoid actual delivery. This adjustment happens through a Tom-Next swap.

Here’s how it works: at the end of the trading day, the trader’s open position is closed for settlement “tomorrow” (Tom) and simultaneously reopened for settlement on the following day (Next). This process effectively rolls the position forward by one day. The difference in interest rates between the two currencies involved determines the swap rate or rollover charge applied to the position.

If the trader holds a currency with a higher interest rate, they may earn a positive swap. If they hold a lower-yielding currency, they’ll pay a negative swap. The amount credited or debited depends on the size of the position and the interest rate differential.

Tom-Next swaps are essential for traders who maintain open positions overnight. They help prevent physical currency delivery while accounting for interest rate differences between currencies, ensuring the smooth continuation of positions across trading days.