Norbert's gambit - Can$ to US$ or vice versa

[jf]

I did my first gambit today as well.

Since I haven't seen E*Trade-specific posts regarding NG yet, I thought I'd write it down in the hope that other people might benefit from it.

First of all, I don't have a Short Margin account. Here's what I did:

1) From my USD account, I went thru the steps of buying RY on the NYSE. I went up to the point where all I have to do is hit proceed to execute the trade.

2) I then called E*Trade. The customer rep said that he can transfer shares over to the CAD side of the account. However, he said he can NOT sell it. I asked "Why?" and I explained that other brokerages do it. After repeating my explanation, he said that it can probably be done by a registered broker, so he passed me over to one.

3) The registered broker was very nice and accomodating. What she said was that if I don't have RY on the CAD side yet, she could open an INTRADAY position for the same number of shares that I have on the USD side. BUT I have to have the shares in the USD side first before she can initiate the intraday position on the CAD side (I think creating an intraday position involves the transfer of the shares). She also said that it takes approximately 10-15 minutes before the shares are reflected on the CAD side. I saw the 10-15 minute gap between the buy/sell transactions as some minor risk but I also liked the idea that I can execute the sell order on the CAD side myself.

4) I said: "I'm ready to buy right now, as we speak. If I execute the order now, how soon can you see it reflected in my USD account?". She said "As soon as you see it on your side, I should be able to see it on mine.".

5) So I executed the order and she saw it right away. She then initiated the intraday position on the CAD side. She also said that the transfer of shares have to be marked as "permanent" so that it does not go back to the USD side at the end of the day.

6) It did not take 10 minutes (it was probably 3-5mins) before I saw the same number of shares on the CAD side. I sold it right away and I now have C$ showing on my CAD account.

So the result is that I was able to execute both the buy/sell orders myself. All E*Trade did was to transfer the shares and initiate the intraday position... I think this is the main difference compared to the other posts I've seen here.

Bottom line? Using this method (all market orders, BTW), I was able to convert my USD at approximately 1.0510 (at a time when the bid/ask at IB was around 1.0557/1.0559). I called earlier in the morning to see how much ETrade would convert it on the spot and they said they would use a rate of 1.0297. In dollar terms, my rough calculations say that I got approximately C$21 more for every US1K that I converted.

I'm still using the free trades as a new account holder at E*Trade so I did not pay commissions. I also made sure that there are no additional commisions and the broker said there will be none because I executed the trades myself.

-jf

[Icarus]

Is anyone using this gambit in their RRSP accounts? If so, is a short/margin account possible in an RRSP, or are you using cash accounts?

[jf]

Icarus,

As far as I know, you can not have USD account inside an RRSP. So if the money is already inside your RRSP, then I don;t know of a way to do it.

HOWEVER, if the money is still outside your RRSP (new contributions, for example) then I believe there are options. For example, let's say you have C$ OUTSIDE your RRSP and you want to contribute that and will eventually use that money to buy US stock/ETF (e.g. VTI).

One way to do it would be to contribute the C$ to the RRSP then once inside the RRSP you can buy VTI. This will of course get the FX vig.

Another way that MAY (haven't tried it) work is to do Norbert's gambit to convert C$ to U$. Then, in your USD cash account (still outside RRSP), buy VTI. Since this is in your USD account, then no FX vig. Once the transaction has settled, you can then contribute VTI to your RRSP "in kind".

Again, I haven't tried this but I will do so next week. I spoke with an ETrade rep and he said it is OK and there is no FX conversion that will take place. However, there will be FX conversion "in paper" for you RRSP receipt. The FX rate they will use for the receipt will be "end of day" rate (the same rate they would have used had you bought VTI direct from your RRSP. ETrade also told me that there is no charge for them to process "in kind" contributions.

There are still some questions in my mind, specially with regards to record-keeping/accounting/reporting to CRA both on the RRSP and on the taxable account side.

-jf

[puhlaya]

Has anyone performed the gambit at ETrade, using short margin accounts?

I saw jf's posting of his experiences, but I'll be doing it a little differently since I can short the stock on the US side...

Anyhow, if anyone has any "important info" not covered here yet, please let me know! (The volatility lately does have me a little worried about doing the gambit, but we'll see if things settle down...)

[jf]

puhlaya,

FWIW, I don't think you'll run into any problems. The way I see it, the short margin account will even make it a lot easier since you don't have to call them to do the transaction; you just have to make sure they journal it over on settlement day.

I'll be doing this gambit approximately once every 6 months to convert some proceeds from my employer stock purchase plan so I think I will convert my cash accounts to short margin accounts to make things easier.

I'd be interested to know how your experience goes. Please post it once you've executed it.

-jf

[puhlaya]

Have given "Norbert's Gambit" a go today.

Sold 500 shares of Encana (ECA) for 62.98 on the NYSE in a USD "short margin" account at TDWH and as soon as that order was filled (moments later), bought 500 shares on the TSX in a CAD "margin" account for 66.08.

I plan to call on Wednsday (+3 days from now) to ask for the shares to be moved from the CAD account to the USD account and will post the outcome at that time.

Hi all,

Just getting ready to do my first gambit at E*Trade. From reading this thread I think I get the picture:

1) Short stock on the NYSE
2) Buy (same) stock on the TSE
3) Call T+3 to have the CDN stock journaled over to the USD side to cover the short.

E*Trade offers a few options on the trade screen:

(a) Buy
(b) Sell
(c) Sell Short
(d) Buy to cover

I use (c) when I'm doing the short on the NYSE. When I go to buy the stock on the TSE, should I use a regular buy order, or a buy to cover?

(Not even sure if the buy to cover would work since it will be on different exchanges/currencies - I wonder if E*Trade's system would barf on that one, or would charge me the vig?)

Any thoughts?

[jf]

OK, so my first gambit finally settled. Now, I'm not sure how one goes about reporting this to CRA. Here are the details from the transaction slips from E*Trade:

Net USD amount: 5,090.98 (BUY transaction)
Net CAD amount: 5,330.01 (SELL transaction)
Bank of Canada noon rate at transaction date: 1.0546

So, is it as simple as

Code: Select all


CAD equivalent for USD transaction (this is the BUY transaction)
  = (USD amount)  x  (BoC noon rate)
  = 5,090.98 x 1.0546
  = 5,368.95

Buy - Sell
  = 5,368.95 - 5,330.01
  = 38.94   LOSS



So, how do I report this loss to CRA? Is it a capital loss? Also, is it correct to use BoC noon rate as of transaction date?

TIA,

-jf

[IdOp]

So, how do I report this loss to CRA? Is it a capital loss? Also, is it correct to use BoC noon rate as of transaction date?

I'm not a tax expert, but based on the info you posted, it looks like you have a capital loss, which you'd report on Schedule 3 of your year-2007 tax return. Regarding the exchange rate, my (non-professional) understanding is that for forex you can use either the average exchange rate for the year as published by CRA after the year is over, or you can use the rate in effect at the time of the transaction. Once you pick a method, it's best to stick with the same method in the future, so it doesn't look like you're gaming the sytem. Personally, I use the "at time of transaction" method, because it provides better certainty to my tax planning, and it makes more sense to me. I also use the daily BoC closing rate, but that's just me, I don't see any reason why they would not accept the noon rate. It shouldn't make any difference in the long run, so pick one and stick to it if using this method. There is also a question: should one use the rate on the settlement day? I don't know the answer, but since it would decrease convenience, and increase tax uncertainty at the time of the transaction, I prefer to use the transaction date's rate.

[Katou]

If or when we reach Parity.

Will it still be better to use this "Technique" to convert Cnd$ to US $ or would it just be as simple as going to your local bank and buying US$ at par!!

Thanks

[Shakespeare]

If or when we reach Parity.

The vigorish the banks charge will still exist.

[jf]

Katou,

I think that you would still get FX vig regardless of the exchange rate. Your C$ will be able to buy more U$, yes... BUT you will still get FX vig.

-jf

edit: typo

[Katou]

Thanks ...I have never done this technique. We have just opened accts. with
BMO IL .

Approximately how much could a person expect to pay in Bank Fees to convert $100K Cnd to US$ these days !

Thanks...

[jf]

My calculation says that E*Trade's FX vig is around 1.8-2%.

You say you are converting 100K. In dollar terms, you will save anywhere from 1,800 - 2,000. Now, stop for a moment and think about that.

Added: If this is indeed a capital loss (as I asked above), then that is something that can be used to offset cap gains as well.

[Katou]

Absolutely +- $2,000 is quite a savings.

1-Would it be better to have a US$ Acct at BMO IL if we plan on using this technique?

2-Would the approach described in this post be any different with BMO IL ? Everyone here seems to be using TD WH !!

3-We have no Stocks or ETF at this time...so any thoughts on a good Security to use for this technique!

Thank You...

[Norbert Schlenker]

You need both a Canadian $ and a US $ account. You may have both already. Call and ask.

BMOIL works just fine. Make life easy for yourself by ensuring that both C$ and US$ accounts allow short selling.

Use any security that's reasonably liquid on both sides of the border. Since the introduction of $10 flat rates no matter the order size for many accounts, it is no longer critical to look for a stock that has a high price. I would look first at Nortel, RIM, Royal Bank, that sort of big heavily traded household name.

[IdOp]

The amount of forex vig varies with the broker being used, the type of account, and the amount to be converted. At a TD-W President's account, I believe the vig on $100k may be about 49bp, or $490. You really need to get a quote and compare that to the real-time exchange rate at the same time. (And repeat as necessary until the statistics are convincing.)

[jf]

The amount of forex vig varies with the broker being used, the type of account, and the amount to be converted.

Yes, you are right.

The 1.8 - 2% I mentioned above are the results of an experiment I did (mentioned in another thread) and also a direct quote from E*Trade. I asked for a quote for 25K USD -> CAD. They gave me a quote of 1.0297 to convert the 25K on the spot. So I said "No, thank you."

I did my first NG on 5K USD the same day. I got approximately 1.0510.

So, in my case, the difference was 0.0213 or 2.13%.

[Katou]

Not sure if im getting this right!

Check with BMO IL today. The kind lady i spoke to said there is no additional fees to convert Cnd$ to US$ from my Cnd$ Acct. to my US$ Acct.

The only cost is the "Exchange Rate" between the two currencies .

I got a quote today on their web site.It would cost me $103,400 CND to buy $100,000 US so exchange cost of $3,400. But no additional fee!

Is this technique used to saved the $3,400 Exchange Rate cost??

Thank-you...

[AltaRed]

The only cost is the "Exchange Rate" between the two currencies .

I got a quote today on their web site.It would cost me $103,400 CND to buy $100,000 US so exchange cost of $3,400. But no additional fee!

Embedded in that is the spread BMO IL makes off the transaction. What you were quoted equates to 1.034/0.9671. That compares to 1.0308/0.9701 for the BoC noon rate today. They are making money off the difference.

[Katou]

AltaRed....

How would one go abouts saving that spread or the Ex rate difference of $3,400 !!

Is that what this technique is about!

Regards

[AltaRed]

AltaRed....

How would one go abouts saving that spread or the Ex rate difference of $3,400 !!

Is that what this technique is about!

Regards

No, the technique is about saving embedded commission costs to exchange the currency. The forex exchange rate is real. Example: At an intra-day currency exchange rate of 0.95, you can buy a $100 stock in Canada with $100 CAD or the same interlisted stock in New York at the same instant for $95 USD assuming there doesn't happen to be any variation in bid/ask in the 2 exchanges at the time.

[active]

It looks like with BMO Investerline you can do this all without the Journal over part or any calls to anyone

You can hold a stock on the Canadian side but on the new order screen you have the option to pick the market on a pulldown menue and the option to pick the settlement currency on a pulldown menue.

I entered BMO, which I bought for the Canadian side, and I can put an order in for the US Market and settlement in US$ and the screen shows estimate proceeds without deductions other than the trading fee. I did not do the actual trade.

[Katou]

Active....You seem to be right.I tried it also in our BMO IL acct. and it showed a $9.95 Trading Fee Only.

I called them he said that we would also be charged there"Exchange Rate" witch at the time was $1.11 for $10K so $110.00 cost to exchange.

[Norbert Schlenker]

Katou, you need to be careful.

I too use BMOIL and I am confident that I could do this trade on their website, paying only two $9.95 commissions. But it takes only one tiny mistake when entering the order to end up in a situation where the bank gets its vig. For example (and I don't have the website up at the moment but I believe it will work this way), let's say I have ~CAD100k, I want ~USD100k, and I'm going to use Potash.

So I buy 1000 POT on the TSX, a trade that goes through without any trouble at all. If I look at my holdings after the trade is confirmed, I will see a position that says I'm long 1000 POT.

There's a menu item to the left of the position that will let me sell it. I pick Sell and a trade ticket order window comes up. I have to fill in only one field - my phone number - and push Sell in order to get to the site to ask for the trading password, because everything else is defaulted. That includes the size (1000, which is what I want), order type (market by default, not necessarily wise), the exchange to trade on (Canada by default, not what I want), and the settlement currency (CAD, definitely not what I want).

I have to pop both the exchange to US and the settlement currency to USD to get what I really want. If I miss both, I end up out of Potash, probably at a loss, and with CAD. If I miss one but not the other, I will end up with a mess and am absolutely certain to pay an FX conversion fee because I messed up. Do not make a mistake.

Even if you flip both those boxes, it's possible that the software will stop you. (I can't test this because the market isn't open as I write.) That's because what the website shows you is a representation of what's in the account and, for all we know, underneath there are actually two separate accounts. (I believe this is not the case at BMOIL because they use Nesbitt as a back office and AFAIK Nesbitt accounts are not separate by currency. At TD and CIBC, I know that the accounts are separated.) So the website may stop you (and would stop you at TD/CIBC).

If the website does stop you for that reason, then you may have to resort to my original advice, i.e. short selling POT even though you are visibly long. Once again, the website may stop you, because your account has to be coded ahead of time to allow short selling - and almost nobody has it coded that way.

This is not a simple process to understand for many people. If you don't understand it exactly, you can make a mistake which will cost you just as much as if you ask the broker to convert the currency outright, i.e. about 1% either way at most brokers. The broker also makes it hard for you because they want to collect that 1%. Converting CAD->USD or USD->CAD takes money out of their pockets, so they have an interest in making it hard.

I don't want to discourage you. This is worth serious bucks if you're converting a serious amount of money and well worth it. Just be careful.

Good luck.

[Katou]

Even if you flip both those boxes, it's possible that the software will stop you. (I can't test this because the market isn't open as I write.)

Thank You "Norbert" for you're detailed step by step process...

I wonder if their would be a way to test this on BMO IL web site...maybe on a small amount ,or maybe a dummy buy!!

Any Ideas

Regards