Wednesday, April 11, 2018

Updated Currency Exchange Method at BMO InvestorLine

There is now a more recent update of the method I use for exchanging currency at BMO OnvestorLine.

I recently changed the procedure I use to convert large sums between Canadian and U.S. dollars at BMO InvestorLine. The method I use saves a lot of money compared to using the InvestorLine foreign exchange system. The latest change I made eliminated an annoying interest charge that I had to ask to be reversed.

Most people don’t realize how expensive it can be to exchange currency. The extra charge banks and brokerages add gets hidden in the exchange rate. To see this extra charge, start by taking a sum in Canadian dollars, say C$10,000, and finding out how many U.S. dollars you can get. Then see what this U.S. amount would get going back to Canadian dollars.

Many people might guess they’d get their original C$10,000 back, but they’d be wrong. In a recent test I did at BMO InvestorLine, I’d get back C$9754, for a loss of C$246 in two currency exchanges. That’s $123 per exchange. Starting with C$100,000, the cost worked out to $464 per exchange. I use a method called “Norbert’s Gambit” to reduce these costs to about C$25 and C$50, respectively.

Norbert’s Gambit begins with finding a stock that trades with low spread in both Canada and the U.S. One such stock is Royal Bank (ticker: RY in both countries). To go from Canadian dollars to U.S. dollars, I start by buying RY in Canada with the Canadian dollars. Then I sell the RY in the U.S. to get U.S. dollars. Two days later when the trades settle, I’ve completed my currency exchange. To go from U.S. dollars to Canadian dollars, I do the reverse: buy RY in the U.S., and then sell RY in Canada.

As always, there are details that can trip you up. One detail is that even though I never sell stock I don’t own, InvestorLine doesn’t record it this way. If I’m going from Canadian to U.S. dollars, I end up with a positive number of RY shares in the Canadian side of my account and a negative number of RY shares in the U.S. side.

InvestorLine automatically “flattens” my account to get rid of the positive and negative numbers of RY shares, but always one business day late. Then they charge me interest on the phantom short sale. I’ve done this a dozen or more times, and I get charged 21% annualized for the day (or 3 days if it runs over a weekend). For a C$100,000 exchange, this is about US$40 interest per day. InvestorLine has reversed this interest charge every time after I ask them to, but having to ask is annoying.

Some people report that they don’t see these interest charges. I can think of two explanations. One is that InvestorLine doesn’t charge less than $5 interest per month in margin and cash accounts. So, smaller exchanges might not generate more than $5 interest. Another possibility is that these people manage to get InvestorLine to flatten their accounts on the correct day.

I used to send messages to InvestorLine on their internal message system asking them to flatten my account on settlement day, but this never worked. Now, I call them on settlement day and ask them to flatten my account. This seems to work.

Below is the detailed set of steps I follow going from a Canadian to U.S. dollars. Just substitute “U.S.” for “Canada” and vice-versa for how I convert currency in the other direction. I offer no guarantee that my method will work for you, because your accounts may be set up differently from mine and InvestorLine changes their systems periodically.

1. Check that the next two trading days are the same in the U.S. and Canada. It takes two days for trades to settle. If a holiday closes stock markets in only one country during that time, my trades would settle on different days. I don’t proceed further unless all settlement will all happen on the same day. If the settlement date is different in the U.S. and Canada, this can cause a short position and lead to an interest charge that I can’t get reversed.

2. Buy RY stock in Canada. If the Canadian dollars are coming from the sale of some Canadian ETF, I make that trade immediately before buying RY stock; there’s no need to wait for the first trade to settle. The amount of RY stock I buy doesn’t have to exactly match the proceeds from the first sale. I can buy more RY if my account was already holding some Canadian dollars, or I can buy less RY if I want my account to be left with some Canadian dollars. I make sure to account for trading commissions because the cash level InvestorLine shows doesn’t deduct commissions until two days later when the trades settle. I make sure the trades in step 2 all take place on a Canadian exchange and in Canadian dollars.

3. Sell RY stock in the U.S. This should be the same number of shares of RY as I purchased in step 2. If I’m planning to use the resulting U.S. dollars to buy a U.S.-listed ETF, I make that trade immediately after selling the RY stock; there’s no need to wait until the RY trade settles. Once again, I make sure to account for trading commissions. I make sure the trades in step 3 all take place on a U.S. exchange and in U.S. dollars. Note that I place all the trades in steps 2 and 3 on the same day.

4. On settlement day two business days later, I call InvestorLine and ask them to “flatten” my account. “Flattening” means moving RY shares from the Canadian side of my account to the U.S. side of my account to cancel the negative number of RY shares. For some reason, InvestorLine representatives insist that I don’t need to request account flattening because their system does it automatically. I tell them that I get charged interest every time because the system is a day late. They insist this isn’t true, even though it’s happened to me more than a dozen times.

5. Set a Calendar reminder 45 days later to check if I was charged interest. InvestorLine has one-day delays between certain actions and when they take effect or become visible in my account. If the flattening is done either early or late, one side of my account will seem to have a short position. Just in case the account flattening didn’t happen exactly on settlement day, I check if I was charged interest. However, it can take a long time for spurious interest charges to appear because they show up on the 21st of the month.

6. If interest was charged for the so-called short position, send a message asking that the spurious interest charge be removed. I get a different response every time I do this, but they have always reversed the charge.

7. 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 whether the problem is fixed.

Because I’ve included so much detail, this may look like a lot of work, but it isn’t too bad at all. It’s definitely worth it to me to save hundreds of dollars.


  1. Any advantage to using a bank vs DLR.U/DLR.U.TO?

    1. @Tim: The main advantage is smaller spreads to reduce costs. The disadvantage is the possibility of the bank stock (RY in my case) changing price in the couple of minutes between transactions. This disadvantage is greater for brokerages where they make you wait for trades to settle (2 days) before you can sell the RY.

  2. I did this at RBC for a long time (minus the phone calls). I’ve just moved that account to interactive brokers and it’s amazingly easy and cheap to do large exchanges with an actual forex transaction. The biggest downside is that you may have a 60-day hold on withdrawing the proceeds unless you use a wire transfer to send the deposit to them.

    I can usually work around that with the standing balance. For regular large exchanges it could also be worth paying the wire fee since the total cost would be the same or cheaper compared to anything else.

    1. @Richard: Investorline did forex transactions for me a couple of times when I was exchanging more than $200k. I'm not sure what the threshold is before they'll do this. Despite the apparent complexity of the method I use, it doesn't take long, and is cheap enough that I'm happy with it.

    2. The current bid/ask spread at IB would result in a loss of $3.18 on a $100,000 exchange (round-trip). The actual commission would be $2.52 for one trade, although it might rise if you're converting several million dollars.

      I'm fairly confident no other broker will top that any time soon :)

      It's also nice to be able to quickly enter a single order on my phone. I could do it before but I always felt a bit of pressure navigating the screens to enter the second trade!

      And if the timing of the transfers doesn't line up (and you have enough assets in the account) you can carry a margin balance at interest rates around 3% or less. The initial margin requirement on a $100,000 conversion would be around $2,400, although that could grow rapidly if there is a large change in the exchange rate.

    3. @Richard: That's tough to beat. I only make 1 or 2 currency exchanges per year, but if something happens that makes me want to leave InvestorLine, I'll keep IB in mind.

  3. Good advide. A few comments:

    (1) Justin Bender and Dan Bortolotti have issued a series of white papers on the PWL Capital website describing step-by-step how Norbert's gambit works at CIBC, Scotia, TD, RBC and BMO. Well worth a read for folks new to the procedure.

    (2) Another plus of using Norbert's gambit is that the difference is a capital loss that can be claimed in taxable accounts. Currency exchange fees are just lost money.

    (3) @Tim: Cross-listed stocks like TD, RY, NTR, BMO, BNS or CM usually offer a smaller bid-ask spread than DLR due to a higher trading volume. This saves you a few more $$ during the conversion process.

    1. @Holger: Good points. Justin and Dan did an excellent series on Norbert's gambit. For BMO Investorline, I prefer my slightly different approach.

    2. Question with respect to (2). If I transfer the USD into an RSP account then I don't get to claim any capital losses, correct?

      Question with respect to (3), instead of purchasing DLR, I can save a little more by purchasing one of the big banks (I'd be purchasing around $50K)?

      Thanks for the post.

    3. @Journeys: I don't claim to be a tax expert, but you're right that you have to be careful transferring assets into an RRSP, RRIF, TFSA, RESP, RDSP, or DPSP because I think you lose the capital loss.

      Yes, you typically lose less in bid-ask spreads with inter-listed bank stocks compared to DLR, at the risk of having the stock move against you while you're holding it.

  4. (1) should also check if that it's not going over an ex-div date or earnings report or something.

    Echoing Tim's question, any advantage using a bank?
    For USD to CAD, I would agree is better.
    But for CAD to USD, my understanding is that DLR locks in the exchange rate on the buy side (CAD), so the journal and sell time don't matter as much.

    1. @aB: I'm not too worried about intra-day moves in RY over a couple of minutes even on an ex-div date or earnings day, but this could certainly become an issue if you're at a brokerage requiring a 2-day delay between transactions.

      As I said to @Tim, the advantage is the smaller spread. As you said, the disadvantage is the possibility of RY moving against you while you hold it.

  5. Hi Michael,
    Thanks for writing up these instructions. I've used this in my BMOIL RRSP account with much success without calling in to flatten (about 10k).
    Have you done this in a non-registered account?

    1. @Anonymous: I've done this in RRSPs and non-registered accounts. In some cases, BMOIL doesn't charge interest if the amount is very small. When they do charge interest, it doesn't appear until about the 22nd of the month. I'm guessing many account holders might not even notice.

    2. Do you know of any tax implications when performing the trades in a non-reg account from capital gains? I'd guess doing the trades on the same day should minimize/avoid such issues.
      - Joe

    3. @Anonymous: The usual capital gains rules apply. Specifically for the security you use for the exchange (RY in my case), you bought it at one price and sold it at another. That creates a capital gain or loss. Typically, this gain or loss is very small, as you say.

  6. I believe you get charged interests if you use the converted currency to buy another stock right away. When I didn't, I was never charged an interest.

    1. Anonymous: That could be the pattern; it's hard to tell. But they have no business charging interest because there is never a short position.