Daily Cut-Off

What Is the Daily Cut-Off?

In the forex market, the daily cut-off is a specified point in time set by a forex dealer to stand as the end of the current trading day and the beginning of a new trading day. This is done for administrative, logistical, and financial reasons including accounting and bookkeeping, data integrity, and interest credits or debits.

Understanding the Daily Cut-Off

Although the forex market trades 24 hours a day, the market and its intermediaries require a specified beginning and end to each trading day. This allows them to properly record trade dates and define settlement periods. It also establishes a moment in time where dealers will make or take payments based on comparative interest rates of the currencies being traded.

Because the forex market is decentralized and is not based on a physical or even virtually distinct location where trading is regulated, each individual forex dealer must implement this cutoff themselves. There is no regulation about when or how this should happen. For the purposes of data integrity and comparability across charting platforms, dealers naturally establish a daily cut-off similar to the change of the day in a meaningful time zone. But what is meaningful to one clientele may not be as meaningful to another, thus the differences between one dealer's chosen daily cut-off and another dealer.

The daily cut-off date is important in that it sets the value date for the specific trade. Because spot trades are settled T+2, the trade date is required. For example, in the scenario above, the trade done at 4:50 p.m. will have a settlement date of Jan. 2, assuming Jan. 1 and Jan. 2 are not weekends, and the trade done at 5:10 p.m., will settle the following business day. So, despite the trades being just 20 minutes apart and on the same day they will settle on separate days. 

Most currencies will have a daily cut-off of late afternoon eastern time that roughly corresponds to midnight in the U.K. or Europe. However, some emerging market currencies will cut-off earlier in the day, especially for those trades that are non deliverable. 

Example of the Daily Cut-Off

For example, let's say a forex dealer specified that the daily cut-off was 5 p.m. every day, and a trader placed two forex trades on the evening of Dec. 31 — one at 4:50 p.m. and another at 5:10 p.m. Since the daily cut-off is 5 p.m., the first trade would be booked as taking place on Dec. 31, while the second would be recorded as a Jan. 1 trade, taking place in a new calendar year, since it took place after the daily cut-off. Imagine another trader made the exact same trades at the exact same times, but with a different forex dealer who used a daily cut-off time one hour earlier. In this example, the first trader has records establishing trades in two different calendar years, while the second trader has both trades in the same calendar year. Such a distinction may be arbitrary, but as this example points out, it could have meaningfully different tax consequences.