Tuesday, February 17, 2015

Currency Exchange with Norbert’s Gambit at BMO InvestorLine

Hidden costs in currency exchange are bigger than most people realize. To exchange large amounts of Canadian and U.S. dollars, I use a version of the “Norbert Gambit” by buying and selling Royal Bank stock in different currencies. The exact procedure is different at every discount broker. I use BMO InvestorLine and recently had to change my procedure slightly.

You may ask why I don’t just use my broker’s currency exchange system. The answer is cost. The last I checked, if I started with C$10,000, converted to U.S. dollars, and then converted back again, I’d have been left with about C$9700 or about C$300 less. For C$100,000, the round trip cost was about C$1150. By doing the currency exchange myself using Royal Bank stock, I can bring these costs down to an average of about C$50 on C$10,000 and about C$100 on C$100,000. These are average costs because Royal Bank stock prices can move around in the few minutes I hold them, but the movement will help me about as often as it will hurt me.

Below is the detailed procedure I follow at BMO InvestorLine to sell an ETF traded in Canadian dollars and buy a U.S. ETF traded in U.S. dollars. This can be used for trading stocks as well. It’s fairly simple to modify the procedure to go in the opposite direction (U.S. ETF to Canadian ETF). I offer no guarantee that it will work for you. I find I have to change my procedure occasionally to adapt to changes in my discount broker’s behaviour.

1. Check that the next three trading days are the same in the U.S. and Canada. I don’t proceed further unless this is true. It takes three days for trades to settle. If the settlement date is different in the U.S. and Canada, this can cause a short position and lead to an interest charge.

2. Sell Canadian ETF. Perform all four trades in steps 2 to 5 one immediately after the other on the same day, making sure to get the currency right for each trade.

3. Buy RY stock in Canada. I use the number of Canadian dollars I want to exchange for U.S. dollars. This can be more or less than the proceeds from selling the Canadian ETF.

4. Sell RY stock in the U.S. This should be the same number of shares as I purchased in step 3.

5. Buy U.S. ETF. This purchase of the U.S. ETF uses the proceeds of the U.S. RY sale as well as possibly some U.S. cash that had been in the account.

6. Send a message requesting that the long position in Canadian RY and short position in U.S. RY be “flattened” before the trades settle. BMO InvestorLine has a “MyLink” system for sending email-like messages to their representatives. This is the part of my procedure that has changed most recently. BMO InvestorLine’s “system automatically flattens the holding one business day after settlement.” This leads to a 21% daily interest charge later in this month or next. The interest is usually for only one day, but it is three days if the settlement is on a Friday, and the account flattening happens the following Monday.

7. Set a Calendar reminder 45 days later to check if I was charged interest. It can take a long time for spurious interest charges to appear because they show up on a fixed day every month.

8. If interest was charged for the so-called short position, send a message asking that the spurious interest charge be removed. I used to send this message almost every time and got cheerful compliance. They were a little more snarky recently and asked “if you notice a long/short, contact us to have the shares flattened before the settlement date. You may call or write back to us.”

9. If interest was charged, set another calendar reminder 5 business days later to confirm that the interest charge was removed. The interest charge has always been removed for me, but in theory, I might have to do another round of messaging and checking later whether the problem is fixed.

All this may look like a lot of work, but it isn’t too bad at all. Laying it out in all this detail makes it seem worse than it is. It’s definitely worth it to me to save hundreds of dollars.


  1. You might want to add: 10. Update your ACB tracker with the buy/sell transactions as input for your next tax return.

    After all, this is a normal trade, even if one transaction was done in CAD and the other in USD. It is perfectly OK to claim the capital loss incurred in doing the gambit. If you happened to sell with a capital gain, so much the better.

    The tax treatment makes the gambit even more attactive compared to a "normal" currency exchange, IMO.

    1. @Holger: That's interesting. I considered adding a 10th step about recording information for taxes, but didn't because I worried about the procedure seeming complicated at only 9 steps, never mind 10. You're right, though.

  2. Holger has a good point. I forgot to do his step 10 and got called on it by Revenue Canada.

  3. At least having to send an e- mail is better than having to call a trader at TD Waterhouse to manually journal the shares over. TD will also charge $43 for the personal contact unless you ask them nicely to only charge $9.99 if you or they sell the shares.

    1. @Grant: You're right. Overall, I find the process at BMO tolerable compared to some other brokers.