> For the complete documentation index, see [llms.txt](https://docs.variational.io/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.variational.io/omni/trading/swaps.md).

# Swaps

Swaps are a linear derivative instrument designed to track the total return of an underlying asset. Swaps source liquidity from traditional financial institutions to offer deeper liquidity and flatter funding rates than perps. They are similar in many ways to perpetual futures, but differ in some key areas. A comparison table is given below:

|                                  | Swap                                                                                                                      | Perpetual Future                                                                                                                             |
| -------------------------------- | ------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------- |
| **Instrument Type**              | Linear derivative                                                                                                         | Linear derivative                                                                                                                            |
| **Objective**                    | Seeks to track the total return of an asset over time                                                                     | Seeks to minimize the tracking error between the perp price and the underlying index price                                                   |
| **Settlement Asset**             | USDC                                                                                                                      | USDC                                                                                                                                         |
| **Index Price**                  | The price of the underlying asset; used as a reference price only and serves no purpose otherwise                         | The price of the underlying asset; used to compute the funding rate. The funding formula encourages the mark price to follow the index price |
| **Leverage**                     | Yes                                                                                                                       | Yes                                                                                                                                          |
| **Counterparty**                 | Traded bilaterally                                                                                                        | Often centrally cleared on an exchange                                                                                                       |
| **Funding**                      | Real traditional-market financing costs (e.g., benchmarked to SOFR for USD indices)                                       | Highly variable and determined by supply and demand                                                                                          |
| **Trading Hours**                | To start, markets will not be 24/7 and will have open / closed hours. Over time markets will extend trading hours to 24/7 | 24/7                                                                                                                                         |
| **Source of Liquidity**          | TradFi institutions                                                                                                       | Crypto exchanges                                                                                                                             |
| **Expiry**                       | Perpetual                                                                                                                 | Perpetual                                                                                                                                    |
| **Dividends & Cash Adjustments** | Yes                                                                                                                       | Yes (on Variational but not generally)                                                                                                       |
| **Margin**                       | Isolated only until 24/7 trading is available                                                                             | Isolated or cross margin                                                                                                                     |

### Underlying Indices

Each swap market tracks an index sourced from Variational's traditional-finance liquidity partners. Depending on the asset class, the index references either a spot market or exchange-listed futures:

* **Spot-referenced markets** (precious metals, FX) — the index is the spot price of the underlying asset, and the cost of carry is charged as daily [funding](#swaps-funding).
* **Futures-referenced markets** (equity indices and other commodities) — the index is derived from the underlying futures contracts. Futures expire, so index exposure must periodically roll from an expiring contract to the next one, as described below.

The [instrument reference table](#instrument-reference) lists the underlying market, roll schedule, financing benchmark, and trading hours for every listed swap.

#### Futures Rolls

Futures-referenced indices are constructed so that a roll never gaps the index and has no P\&L impact on open positions. Two schemes are used:

**Equity indices** (e.g., US500, TWI) are priced off the front-month futures contract, discounted to a spot-equivalent value using a fair-value basis that accounts for interest and expected dividends. Shortly before the contract expires, the pricing reference switches to the next contract. Both contracts discount to the same spot-equivalent value, so the switch itself does not move the index; the cost of carry is instead charged as daily funding, and dividends are passed through as [cash adjustments](#dividends).

**Commodities other than precious metals** (e.g., USOIL, COPP) have no cash spot market to discount to, so the index is built as a linearly weighted blend of the two nearest listed contract months (the "front month" and "second month") that rolls continuously from one contract to the next:

```
Index = w × (front-month price) + (1 − w) × (second-month price)
```

The front-month weight `w` starts at 100% when a contract becomes the front month and decreases linearly in calendar time, stepping down at each daily close. The contract carries its final day of weight on its roll date — shortly before its expiration or first notice date (see the [Instrument Reference](#instrument-reference) for each market's schedule) — and on the following trading day the second month takes 100% and the next cycle begins. On any given day, `w` equals the number of calendar days remaining through the roll date (inclusive), divided by the contract's total calendar days as the front month. Because the interpolation runs on calendar days, the Friday close steps the weight by three days' worth to cover the weekend — mirroring the tripled Friday [funding](#swaps-funding) payment.

Because the two contracts trade at different prices, each daily re-weighting shifts the index by a small, predictable amount overnight. That shift is offset by the daily funding applied to open positions (see [Swaps Funding](#swaps-funding)): for example, when the futures curve is in [backwardation](https://www.cmegroup.com/education/courses/introduction-to-ferrous-metals/what-is-contango-and-backwardation), the index gradually rolls down onto the cheaper second-month contract, and long positions receive a compensating funding credit each day (shorts pay). The reverse holds in contango.

{% hint style="info" %}
**Worked example: UKOIL, September 2026.** The Brent November 2026 contract [expires on September 30](https://www.ice.com/products/219/Brent-Crude-Futures/expiry), so UKOIL's roll rule (see the [Instrument Reference](#instrument-reference)) puts its roll date on September 24: expiration − 5 calendar days = September 25, a business day, then 1 business day earlier = September 24. The previous (October 2026) contract expired on August 28, and the same rule shows the weekend branch: August 28 − 5 calendar days = August 23, a Sunday, so move back to Friday August 21, then 1 business day earlier = August 20 — its roll date.

November 2026 therefore runs as the front month from August 21 (100% weight) through September 24 (its last day of weight) — 35 calendar days. The weight on any day is the calendar days remaining through the roll date, divided by 35: for example, on September 17 there are 8 days remaining (September 17–24), so `w = 8/35 ≈ 23%` — the index is \~23% November and \~77% December. Each daily close steps the weight down by 1/35 (Friday's close by 3/35, covering the weekend), and the nightly funding credit or charge equals that weight step times the current front-to-second-month spread. On September 25 the index is fully on December, and the December/January cycle begins.
{% endhint %}

For clarity, under both schemes **there is no discrete roll event** — the index never gaps on a roll date, unlike dated futures contracts, and holding a position through a roll has no P\&L impact from the roll itself.

### Swaps Funding

Swaps accrue funding once per day, applied at the market's daily close (17:00 ET, Monday to Friday) on positions held through the close.

Funding rates are set per market and reflect the real cost of financing the underlying asset in traditional markets:

* **Equity indices** — the overnight interest rate of the index's currency (e.g., SOFR for USD indices), adjusted by a spread.
* **FX** — the overnight interest-rate differential between the two currencies, adjusted by a spread.
* **Precious metals** — the implied cost of borrowing or lending the precious metal against USD overnight.
* **Other commodities** — the daily carry of the underlying futures curve, equal to the daily weight step times the front-to-second-month spread (see [Futures Rolls](#futures-rolls)); it can be positive or negative depending on contango or backwardation.

Long and short rates are published separately and are generally *asymmetric*. Typically, longs pay funding and shorts receive it, but either side can pay or receive depending on market conditions — for example, longs earn funding in a commodity market in backwardation.

These rates are derived from the actual financing terms Variational receives from its traditional-finance liquidity partners, keeping swap funding anchored to real market rates rather than the supply-and-demand dynamics of perp funding.

Because the underlying markets are closed on weekends, one funding payment per week is tripled to cover the weekend days: on *Friday* for equity indices and commodities, and on *Wednesday* for FX and precious metals (following those markets' T+2 (two business days after the trade date) settlement convention). Similarly, the funding payment before a market holiday may incorporate the upcoming closed days. Each market's current rates and funding schedule can be viewed by hovering over the funding rate in the app.

{% hint style="info" %}
The Secured Overnight Financing Rate (SOFR) is a broad benchmark interest rate for U.S. dollar-denominated loans and derivatives. It reflects the cost of borrowing cash overnight backed by U.S. Treasury securities as collateral.
{% endhint %}

### Dividends

Qualifying markets whose underlying assets pay dividends pass them through: long positions receive the dividend amount and short positions pay it. Dividends are applied **at the close of the last weekday before the ex-date**. Note that payouts may be subject to applicable withholding taxes.

For index swaps, dividend adjustments occur whenever underlying constituent stocks pay dividends — so they typically arrive as small, frequent payments or charges throughout the year rather than lump sums.

### Closed Hours

Swaps currently do not trade 24/7. Most markets trade 23/5, but some markets may have shorter and non-continuous trading sessions per day, following the underlying exchange's schedule. All markets close on weekends; on the underlying exchange's holidays, hours may deviate from the standard schedule (e.g., a shortened session or no trading at all).

Trading is paused while markets are closed; market/limit/trigger orders, TP/SLs, and liquidations will not process until the market is reopened. Each market's standard open hours are listed in the [instrument reference table](#instrument-reference) below.

### Instrument Reference

| Market | Underlying Reference                   | Roll Schedule                                                                                                         | Financing Benchmark                 | Standard Open Hours (ET, Mon-Fri)       |
| ------ | -------------------------------------- | --------------------------------------------------------------------------------------------------------------------- | ----------------------------------- | --------------------------------------- |
| XAU    | Spot gold (XAU/USD)                    | —                                                                                                                     | Implied metal borrow/lend rate      | 00:00-17:00 & 18:00-23:59               |
| XAG    | Spot silver (XAG/USD)                  | —                                                                                                                     | Implied metal borrow/lend rate      | 00:00-17:00 & 18:00-23:59               |
| XPT    | Spot platinum (XPT/USD)                | —                                                                                                                     | Implied metal borrow/lend rate      | 00:00-17:00 & 18:00-23:59               |
| XPD    | Spot palladium (XPD/USD)               | —                                                                                                                     | Implied metal borrow/lend rate      | 00:00-17:00 & 18:00-23:59               |
| USOIL  | NYMEX WTI Crude Oil futures (CME.CL)   | Front month rolls off 5 business days before its first notice date                                                    | Futures curve carry                 | 00:00-17:00 & 18:00-23:59               |
| UKOIL  | ICE Brent Crude futures (ICE.BRN)      | Front month rolls off 1 business day before (expiration − 5 calendar days, moved earlier to a business day if needed) | Futures curve carry                 | 00:00-17:00 & 20:00-23:59               |
| COPP   | COMEX Copper futures (CME.HG)          | Front month rolls off 2 business days before its first notice date                                                    | Futures curve carry                 | 00:00-17:00 & 18:00-23:59               |
| US100  | CME E-mini Nasdaq-100 futures (CME.NQ) | Reference switches 5 business days before expiration                                                                  | SOFR                                | 00:00-17:00 & 18:00-23:59               |
| US500  | CME E-mini S\&P 500 futures (CME.ES)   | Reference switches 5 business days before expiration                                                                  | SOFR                                | 00:00-17:00 & 18:00-23:59               |
| TWI    | SGX FTSE Taiwan Index futures (SGX.TW) | Reference switches 1 business day before expiration                                                                   | SOFR                                | 00:00-01:45 & 02:00-17:00 & 20:45-23:59 |
| EURUSD | Spot EUR/USD                           | —                                                                                                                     | EUR/USD overnight rate differential | 00:00-17:00 & 18:00-23:59               |

Hours above are the standard schedule: all markets are closed on weekends, and on the underlying exchange's holidays a market may be closed or trade shortened hours. All financing benchmarks are adjusted by a spread — see [Swaps Funding](#swaps-funding).