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What is Spot FX?

May 25, 2020June 20th, 2024No Comments

In the United Kingdom, the average daily reported foreign exchange turnover is approximately 3 trillion US Dollars. The top three most frequently traded currency pairs are EUR/USD, GBP/USD, and USD/JPY. Spot FX trades account for 28% of the overall FX conversion volumes, with the remaining 72% comprising FX swaps, Non-deliverable forwards and forward contracts*.

The term ‘spot’ in FX trade denotes an immediate settlement transaction, implying that the trade occurs ‘on the spot’. It involves the simultaneous buying and selling of one currency against another, typically with a 3-business-day settlement window (the day it was booked + two days), unless specified as ‘tod’ for today or ‘tom’ for tomorrow instead.

Spot trades that are booked with a value date on the same day (“tod”) have a cut-off time, so if you intend to convert currency for a same-day international payment, ensure the trade is booked and settled before the respective currency pair’s cut-off time to avoid payment delays.


How Does a Spot FX Trade Work with Rutland FX?

At Rutland FX, you can obtain a quote for a spot FX trade by either logging into our platform or by contacting your account executive via phone or email. We always ensure that you know your exchange rate before committing to a trade. If you are satisfied with the rate, you can book the trade directly on the platform or instruct your account executive to book it on your behalf.

Once the trade is booked, the transaction details will appear in the “Conversions” tab in your account. Additionally, you will receive an email notification confirming that your conversion has been successful. To settle the conversion, you can find all necessary details either in the transaction receipt email or within the “Balances” tab of the platform.

What Does Rutland FX Charge?

Rutland FX does not charge any fees for FX trades. Our revenue is generated from a mark-up on the exchange rates we offer. The margin applied to your account from the mid-market rate is based on several variables such as but not limited to:

  • Annual Volume: The total volume of trades conducted over a year.
  • Average Trade Size: The typical size of each individual trade.
  • Number of Payments: The frequency of outbound payments and the ratio between outbound payments to conversions.
  • Currencies: Some exotic currencies, such as IDR or UGX, may have a larger mark-up due to reduced liquidity.
  • Account Management: Persistent late settlement of trades will increase the risk profile of your account. As a result, this may incur a higher spread.
  • Major Events: If you trade around major events such as non-farm payrolls or other significant economic events, such as interest rate decisions, the spread may be wider to accommodate for enhanced exchange rate volatility.

Due to these variables and others, it is difficult to provide a definitive answer. However, the best way to get a precise understanding of the cost is to request a callback and discuss your requirements with our sales team. It’s also worth noting again that the exchange rate you receive will always be clearly and transparently provided to you before you commit to a trade.

When is a Spot FX Trade Used?

Businesses and individuals with the requirement to conduct cross-border payments that need to arrive with their recipient as quickly as possible generally use spot FX trades. For example, a UK-based recruitment agency that places a candidate outside of the UK may receive a fee in a currency other than GBP. In this scenario, the agency will want to make a spot FX trade to convert that currency back into GBP to pay for their operational costs in the UK.

Some financial institutions, notably hedge funds and proprietary trading firms, employ spot FX trades differently. Unlike businesses and individuals fulfilling payment obligations, these institutions sometimes use spot FX trades as a way to get exposure to exchange rate movements with the aim of making a profit. They can also use spot trades to hedge out the currency risk of a short-term trade.

For example, if a UK-based hedge fund wanted to buy shares in a US company, they need to settle for those shares in US Dollars, so a conversion of GBP into USD takes place. However, if their shares increase in value but the exchange rate moves against them, it will negatively impact the profit on the trade. As a result, the hedge fund might book a spot FX trade in the opposite direction to hedge out the currency risk of the trade until they sell the shares.

What if I Don’t Settle a Spot Trade in Time For The Cut-off?

Spot trades will have one of three value dates:

  • “Tod” (Today): This means you’re booking the currency for immediate conversion and should settle the trade at your earliest convenience.
  • “Tom” (Tomorrow): This indicates booking the currency for the next business day; settle the trade by or before the cut-off time on the following business day.
  • “Spot” (Today+2 days): This represents the longest settlement window before the trade is considered a forward contract. Settle the trade by the cut-off time on the third day.

If a spot trade is not settled by the cut-off time on the settlement date, our back office will automatically swap your trade to the next available settlement date to give you extra time to settle. If the funds you send to settle your trade arrive after the cut-off time, any instructed payments linked to the spot FX conversion won’t be dispatched until the next trading day.


Still not sure?

If you are still unsure or have any further questions, please call us on 0203 026 0112 or request a callback below to discuss your requirements.