Norbert’s Gambit at CIBC: A case study

Norbert’s gambit is an excellent way to reduce the cost of converting Canadian and US dollars, but not every brokerage makes it easy. Recently Justin Bender helped a client of our DIY Investor Service with a large currency conversion inside an RRSP at CIBC Investor’s Edge. It saved the client hundreds of dollars, but it was a complicated transaction and we thought other CIBC investors would benefit from learning the steps.

The difficulty stems from the fact that CIBC does not allow you hold US dollars in registered accounts. Whenever you buy or sell US-denominated securities, the brokerage forces you to convert the currency with the usual spread.

In the example below, the goal was to convert approximately $100,000 CAD to the equivalent in USD, and then use the proceeds to purchase a US-listed ETF. The prices and exchange rates were current at the time Justin made the transactions. For simplicity, we’ve rounded some numbers and ignored the $6.95 trading commission that applied to each trade.

Step 1

When doing Norbert’s gambit, we use the two versions of the Horizons U.S. Dollar Currency ETF (DLR / DLR.U). So Justin first bought 10,000 shares of DLR, which was trading at $10.17 CAD:

10,000 x $10.17 CAD = $101,700 CAD

Step 2

He then called CIBC Investor’s Edge and asked to speak with a trader (the regular customer service reps will not be able to help with this step). He asked the trader to sell 10,000 shares of DLR.U, which was trading at $9.97 USD:

10,000 x $9.97 USD = $99,700 USD

Since CIBC does not allow you to hold US cash in an RRSP, the brokerage automatically converted  those USD back to CAD at their sell rate of 1 USD = 1.0132 CAD:

$99,700 USD x 1.0132 = $101,016 CAD

At this point, the investor started with $101,700 CAD and now has $101,016, for a loss of $684 CAD because of the forced conversion.

Step 3

Next Justin placed an order for $99,700 USD worth of a US-listed ETF. Now CIBC made another forced currency conversion, this time taking the $101,016 CAD and converting it to USD at their buy rate of 1 USD = 1.0242 CAD:

$99,700 USD x 1.0242 = $102,113 CAD

Step 4

Once again Justin phoned CIBC, and this time asked the trader to apply “FX netting” to the USD trades. Sometimes this procedure is called “exchange rate matching” or “washing the trades.” Whatever term the brokerage uses, the idea is the same: they retroactively apply the same exchange rate to both the buy and sell transactions. So instead of converting the $99,700 USD at the 1.0242 CAD buy rate in Step 3, they will apply the same 1.0132 sell rate applied in Step 2:

$99,700 USD x 1.0132 = $101,016 CAD

Now the investor has effectively paid $101,016 CAD for the US-listed ETFs, not the $101,700 CAD we started with. That’s a savings of $684 CAD, which cancels out the loss suffered in Step 2. The currency spread “comes out in the wash.”

In the end it cost the client $101,700 CAD to purchase the US-listed ETF, when it would have cost $102,113 CAD without the FX netting. That’s a savings of $413 CAD (not including commissions) on the transaction. On smaller transactions, the brokerage’s currency spread would have been even higher, and the relative savings that much bigger.

Call before you dig

If you’re going to try this at home, make sure you call the brokerage to request FX netting as soon as possible after making the trades. The trader Justin spoke to said it had to be done before 3 pm EST on the same day. You may even want to call CIBC before you place the first DLR trade and confirm they will do this for you: don’t be surprised if the person you speak to doesn’t understand what you’re trying to do.