Accrual Conventions for Financing and Borrow Fees

A margin loan or a stock-borrow fee is usually quoted as an annual percentage rate, like "5% financing" or "2% borrow." But an annual rate has to be converted into a daily charge somehow, and the convention used to do that — how many days are assumed to be in the "year," and how the actual number of days held is counted — changes the real cost even when the quoted rate looks identical.

The two things that vary

First, the day-count basis: does the calculation divide by 360 days a year (Actual/360, common in US money markets and much broker financing) or 365 (Actual/365, common in many other financing agreements)? A 5% annual rate charged on an Actual/360 basis works out to a slightly higher effective annual cost than the same 5% quoted on an Actual/365 basis, because the daily charge is $\text{rate} \times \text{days held} / 360$ rather than $/365$ — dividing by the smaller number produces a bigger daily charge for the same nominal annual rate.

Second, how many calendar days actually get charged over a weekend. Most financing and borrow-fee arrangements charge interest for every calendar day a position is held, including weekends and holidays — so a position held from Friday close to Monday open typically accrues three days of financing charge, not one, even though only one trading day elapsed. This is easy to miss when reconciling a P&L series that otherwise only marks positions on trading days.

Worked example

A trader borrows $1,000,000 of a hard-to-borrow stock to short, quoted at a 6% annual borrow fee on an Actual/360 basis, and holds the position over a weekend — Friday to the following Monday, three calendar days. The daily rate is $6\% / 360 = 0.01\overline{6}\%$ per day. Over three days that's $0.01\overline{6}\% \times 3 = 0.05\%$ of notional, or $1{,}000{,}000 \times 0.0005 = 500$, i.e. $500 in borrow fees accrued for what shows up as a single trading-day P&L mark on Monday's statement. Had the same 6% been quoted on an Actual/365 basis instead, the three-day charge would be $6\%/365 \times 3 \approx 0.0493\%$, or about $493 — a small but real difference purely from the basis convention, before any change in the borrow rate itself.

What this means in practice

If you're modeling financing costs or short-borrow economics, always confirm both the day-count basis (360 vs 365) and whether weekends and holidays accrue — brokers and prime brokerage agreements differ, and a strategy with meaningful leverage or a persistent short book will see the difference compound over a year into a nontrivial performance drag that a naive "annual rate divided by 252 trading days" calculation will get wrong in both directions.