# Norbert's Gambit



## StefanGucci (Dec 31, 2017)

Hi all,

I am moving some of my current investments to TD Direct (transferring as cash....$CAD).

Based on the asset allocation I am going with, I will have about CAD$300,000 allocated to US equities. This will be spread between three RRSP accounts (me, wife, spousal).

From what I have read, at this amount it becomes worth it to go with ITOT over XUU.

-Am I correct that I will have to do the NG technique in each account separately? 
-I have read different things, but is there a T+2 or T+3 timeline to do the switch? I also read about wash trading at TDDI...is this applicable to the process (or does it eliminate the need to do NG)?
-Am I correct in saying that I am at short term currency risk if there is a T+x delay? Also, in the long term, if CAD climbs above $0.80 at the point of selling ITOT? 
-Am I better off just sticking with XUU given that the valuation of CAD is currently quite low vs USD compared to long term historical values?

Thanks for the help.


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## james4beach (Nov 15, 2012)

Something you might want to keep in mind is that there are tax-related impacts of putting that 300K into US domiciled investments, if they are stored in American fund structures (like ITOT or VTI).

Owning more than 60K USD of US based assets will require your estate to file a US federal estate tax return upon death. It also exposes you to other changes the Americans might make to estate tax law, for example, you might end up with new tax liabilities that surprise you in the future:
https://www.taxtips.ca/personaltax/usestatetax.htm

You're doing this in an RRSP, which exempts you from this, but be aware that if you exceed 100K USD of US based assets outside of an RRSP, then you also have to file a T1135 every year
http://www.advisor.ca/tax/tax-news/understanding-the-new-t1135-151683

Personally, I prefer the Canadian domiciled US index funds. This avoids the two potential complications mentioned above. It also makes it easier to buy and sell amounts when CAD is your main currency, and no need for FX or gambits. Various Canadian ETF vehicles are available: ZSP, XUS, XUU, VFV.

From a currency valuation matter it makes no difference whether you buy the US index priced in USD or in CAD. The performance in CAD will be identical as long as the funds don't use currency hedging.

ZSP is my fund of choice for this purpose, because it has a longer track record than the other Canadian funds, it's huge ($4 billion net assets) and holds the individual US stocks instead of just wrapping an American ETF.


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## StefanGucci (Dec 31, 2017)

Thanks for the reply James.

Just to be clear, I have sufficient space in RRSP for the US holdings, so I would not be looking to do this in TFSA or taxable accounts at all.

Regarding currency risk, it is also understood that the valuation change over time will be the same. What I meant was that when I do go to cash out the ITOT in the future and convert that cash back to CAD, I may come out ahead or behind on the original holding amount versus the FX rate at the time of purchase.

I will read up on the funds that you noted...any recommendations on international and emerging markets? I was planning on holding IEFA and IEMG, but may go back to XEF and XEC if I decide on a fully Canadian domiciled portfolio.


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> ... You're doing this in an RRSP, which exempts you from this, but be aware that if you *exceed 100K USD of US based assets* outside of an RRSP, then you also have to file a T1135 every year ...


Not quite ... exceeding $100K CAD for the cost of foreign assets, at any time during the tax year - means the T1135 has to be filed. 
https://www.taxtips.ca/filing/foreign-asset-reporting.htm

Interestingly, it looks like holding Canadian stock in a US brokerage taxable account would be included in the criteria.


Cheers


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## Butters (Apr 20, 2012)

This site here agrees with ITOT over XUU
https://www.canadianportfoliomanagerblog.com/cutting-up-a-3-etf-portfolio-into-a-5-etf-portfolio/

LOOK AT THE COMMENTS ON THAT SITE, People may have similar questions and he has a link to a PDF explaining some foreign tax stuff!

On $300,000 you would save $694 EVERY YEAR (compared to XAW.to probably XUU is a few basis better)
He might have other interesting blogs for you as well.


He also has a Video to do the NG with TD
https://youtu.be/BwUyQm60F_k

I think you would need to do it in all 3 accounts.

James probably gave you some good tax advice, my portfolio is 10% your size so I don't worry about that yet, and I have an accountant to tell me when it will


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## Spudd (Oct 11, 2011)

You would definitely have to do the gambit separately in all 3 accounts. 

The wash thing no longer applies at TD since they created separate USD and CAD RRSP's, now you have to call in to journal it across. And you have to wait 2 days before you can sell, because it needs to settle first. You are at short-term currency risk if you use a regular stock, but not if you use DLR/DLR.U. On the way back to CAD, you are at currency risk either way. 

XUU and ITOT will provide the exact same returns because XUU is unhedged. This means when it's time to change it back to CAD, it will be worth exactly the same in CAD regardless of which one you have chosen. But in the meantime, you will lose out in withholding taxes on XUU but not on ITOT.


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## StefanGucci (Dec 31, 2017)

Hi Butters, thanks for your response. 

I checked out the links that you provided, it really helps to quantify the amount of savings achieved by holding in US ETFs. 

In addition to the initial 300k, I expect to be contributing 30 or 40k per year to US and international ETFs within RRSP accounts, so the annual savings are not insignificant, versus the simplicity/convenience of the option noted earlier by James.

Regarding the need to file a T1135, I am reading that it is NOT a requirement for RRSP and TFSA accounts...see link below.

https://www.canada.ca/en/revenue-ag...rting/questions-answers-about-form-t1135.html

So apart from doing Norbert's Gambit, is there really any additional complexity involved from an investing or tax preparation perspective?


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## humble_pie (Jun 7, 2009)

Spudd said:


> You would definitely have to do the gambit separately in all 3 accounts.



at TDDI, yes






> The wash thing no longer applies at TD since they created separate USD and CAD RRSP's, now you have to call in to journal it across. And you have to wait 2 days before you can sell, because it needs to settle first. You are at short-term currency risk if you use a regular stock, but not if you use DLR/DLR.U.



this urban myth of having to use the DLRs has gotten way out of hand, imho. PWL is a financial house that touts ETFs supremo, it's small wonder that they would channel only the DLR ETFs, although the principal gambit strategy has always been to use an ultra-liquid interlisted common stock to get the job done instantly & cheaply.

TD is a good broker for an instant gambit. It's hnecessary to phone to execute the sell side. For this instant gambit sell order, the big green has settled down on a flat $43 fee, after years of different approaches.

like many online brokers built on ISM - a mainframe leased from IBM - the TD needs to manually send notice to its compliance department that a gambit sell order is a legitimate operation because the client has already bought the pertinent stock, even though the system cannot recognize the purchase because it's sitting in the opposite currency account.

it's this manual notice that causes the big green - not unfairly - to seek compensation. A $43 fee includes technical support from the representative who will be executing the sell side order, as well as the "instant" journal. By now - after several years of uproar - the TD has trained all their representatives how to carry out instant gambits. Clients should find all TD representatives knowledgeable, cooperative & helpful.

the advantage of using a liquid interlisted common stock as the carrier stock is zero ETF fees. Also the DLRs do not work when gambitting from USD to CAD, as only DLR.U is pegged. Since the USD to CAD traveller has to run a split-second market risk anyhow, he might as well use a no-fee stock strategy instead of a slightly fee-padded strategy like the DLRs.

there is a technique to successful gambit trading when using ultra-liquid interlisted common stocks such as RY or TD. There are dozens of threads & hundreds of posts in cmf forum that spell out how to do this.


.


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## gardner (Feb 13, 2014)

humble_pie said:


> Also the DLRs do not work when gambitting from USD to CAD, as only DLR.U is pegged.


I remain baffled by this assertion. DLR and DLR.U are the same CUSIP and are pegged equally to the $US, less the ETF fees and buy/sell spreads.



> Since the USD to CAD traveller has to run a split-second market risk anyhow, he might as well use a no-fee stock strategy instead of a slightly fee-padded strategy like the DLRs.


I have done USD->CAD via DLR several times and have not found it problematic. It is true that you wind up holding the US-linked DLR while the C$ currency might fluctuate for 3 days while the buy settles, or for an hour while you wait on the broker's phone line, so the trade is not as instant as going the other way, but the amount of currency movement in the short period is unlikely to be a show-stopper, and if something did happen to the currency to make you want to back out, you could sell the DLR.U back to $US cash and wind up back where you started.

With a cross-listed Canadian stock, the difference is that the TD or RY is effectively "pegged" on the C$ side so that going USD->CAD, the first (buy) trade is the one that effectively carries out the currency swap, whereas with DLR, it is the second (sell) trade that does the currency swap.

When I gambit, I am attempting to escape the usurious 150-250 bps exchange fees and a 20 bps currency movement or 0.5 bps ETF fee is noise.


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## humble_pie (Jun 7, 2009)

gardner said:


> I remain baffled by this assertion. DLR and DLR.U are the same CUSIP and are pegged equally to the $US, less the ETF fees and buy/sell spreads.



the above is not correct. Only DLR.U is pegged. You can see this for yourself by pulling up charts since inception of both DLR & DLR.U. You will easily be able to observe that DLR has risen into the $13 range while DLR.U remains steady since inception just under $10. The latter is true because DLR.U is pegged.

if you check with horizons betaPro - creators & vendors of the DLRs - you will be informed that only DLR.U is pegged.


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## humble_pie (Jun 7, 2009)

gardner said:


> I have done USD->CAD via DLR several times and have not found it problematic. It is true that you wind up holding the US-linked DLR while the C$ currency might fluctuate for 3 days while the buy settles, or for an hour while you wait on the broker's phone line.



it's not a question of whether USD/CAD "might" fluctuate. In reality, CAD fluctuates every 60 seconds. One could check out xe.com

re doing an instant stock gambit with a broker that requires a phone call for the sell side, "wait on the broker's phone line for an hour" is a poor technique.

a better technique is to plan the timing of the gambit carefully. Choose an environment that includes calm, quiet markets, no news anwhere especially not in your chosen carrier stock or its sector, no looming X dates, no earnings announcements.

next, line up quotes in both markets. A very slightly rising market is best (consult advanced one-minute charts.) Set up the buy side order but do not send it. Instead, phone the broker.

once he or she answers, explain what you are doing. As soon as you are both on the same page, a knowledgeable representative - at the TD for example - wlll start to prepare the sell side order.

next, send your online buy order. The second it's filled, the rep will release the sell order he has already prepared. 

it's a nice little dance step. A pas de deux.


.


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## StefanGucci (Dec 31, 2017)

Thanks for the responses folks...I will do some more reading on the $43 "instagambit" suggested by humble_pie :witless: Seems like I have a lot to learn.

Honestly, this will be an infrequent thing with a relatively large amount so I would generally be happy minimizing the FX losses, without getting into trying to optimize the timing, etc. In fact, I was initially debating going with the Canadian domiciled funds for convenience (as James suggests above), but now see that the foreign witholding differential makes it worthwhile to to to USD within my RRSP.


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## gardner (Feb 13, 2014)

humble_pie said:


> it's not a question of whether USD/CAD "might" fluctuate. In reality, CAD fluctuates every 60 seconds.


In reality it fluctuates continuously, of course. The point is that it MIGHT fluctuate a significant amount in relation to your needs, and MIGHT fluctuate against your favour, in the timeframe.

I am not arguing that you can't do instant Norbert trades, only that doing non-instant trades is not some kind of cess-pit of unmanageable risk.


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## gardner (Feb 13, 2014)

humble_pie said:


> the above is not correct. Only DLR.U is pegged.


Do you deny that DLR and DLR.U have the same CUSIP and are, in all real senses, the exact same thing as one another?
Since there is only one CUSIP and one tradeable commodity, and it is pegged to the $US, then both DLR and DLR.U are tied to the price of US$.



> You can see this for yourself by pulling up charts since inception of both DLR & DLR.U. You will easily be able to observe that DLR has risen into the $13 range while DLR.U remains steady since inception just under $10.


This only demonstrates that the CAN$ value of DLR varies, which is not at issue in any way. Of course the value of US$ varies in CAN$.


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## humble_pie (Jun 7, 2009)

StefanGucci said:


> Thanks for the responses folks...I will do some more reading on the $43 "instagambit" suggested by humble_pie :witless: Seems like I have a lot to learn.
> 
> Honestly, this will be an infrequent thing with a relatively large amount so I would generally be happy minimizing the FX losses, without getting into trying to optimize the timing, etc.




it's just come to my attention that the TD no longer allows instant gambit trades in registered accounts. An investor executing a gambit pair trade in registered account would have to buy the carrier security first, then wait T+2 days for settlement, then request the carrier stock be journalled to opposite currency account, then sell.

going from CAD to USD in registered account at the big green would therefore mean an investor would have to use the DLRs.

going from USD to CAD in reg'd at the big green is more problematic. Not sure yet how to solve this problem.


.


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## houska (Feb 6, 2010)

Sorry to reopen after 7 mos, but this seems like the best place.
I need to close a real estate transaction in US$ in a few (2-4 mos, tbd). I have the money in hand in C$ and want to mitigate my currency risk. 

In the past, I've several times happily done a Norbert's gambit using HSBC InvestDirect, DLR/DLR.U, in amounts around $25k. HSBC reps have been clueless about instant gambits, but it's been OK for me to buy DLR, wait 3 days, journal over, sell DLR.U, and get my money 3 more days later, so I've never forced the issue.

My initial thought for this transaction was to do a "half-gambit", buying DLR for C$ now, journalling over any time after 3 days, and then do the other half later, selling DLR.U when the real estate deal actually closes and I need the U$. But the amount is over $500k and it seems DLR liquidity issues might be more relevant at this scale, and whatever fees DLR charges, irrelevant for holding for 3 days, might add up over 2-4 mos. 

What would more experienced people suggest?

a) Don't worry about it, do it as originally proposed (buy and hold DLR, sell DLR.U when needed. BTW this is nonregistered account)
b) Use DLR, the liquidity is fine, just sell DLR.U for actual U$ right after journalling to avoid DLR holding fees (a "conventional, but not instant gambit")
c) Use RY or TD instead, which will mean spending time up front to educate/handhold HSBC reps how to do an instagambit, i.e. sell RY in U$ right after buying in C$, before T+3, so as to avoid market risk 

Thanks!


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## Spudd (Oct 11, 2011)

Why would you want to hold DLR for 2-4 months, when you could just hold USD cash for no fees? i.e. I vote against option a. Plus you could probably get a tiny bit of interest on your USD cash by putting it in a USD HISA or MMF.

Between options b and c, I'm not familiar with your brokerage so I can't weigh in on that.


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## gardner (Feb 13, 2014)

Personally, I would not want to hold DLR for longer than necessary -- a few days for the settlement, but not for months. I would sell to currency and put it in a HISA.

You going to do the whole 500K in one gambit, or spread it out in lots of 100K or something?


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## AltaRed (Jun 8, 2009)

I'd complete the transaction as soon as I could and have the cash in hand. Whether to do all $500k or not might depend on DLR trading volume I'd think. DLR volume today was 112k shares (~$1.5 million). If that is typical, I think I'd break it up into at least 2 transactions.


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## houska (Feb 6, 2010)

Thanks all. Seems volume is almost always >100k shares (sometimes several times that). Sounds like best low-risk but low-annoyance strategy is convert in batches of ~$200k using DLR/DLR.U, not sweating the 3 day delay before journalling over, but then getting out of DLR.U into cash (HISA) rather than holding, so that's what I'll do.


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## james4beach (Nov 15, 2012)

I don't think DLR has enough liquidity to do anything like $500k in one shot. Today for example, about 15 minutes into trading, both vehicles have only moved around 6,000 shares. That barely allows for a $60k gambit. You'd probably have to let carefully designed limit orders sit for about an hour to accomplish anything near $200k. Because the FX pair keeps fluctuating I think it might be pretty difficult to translate anything more than $100k unless you do some careful limit order management.

It's possible, yes, but I don't think the trades will be that easy to make.


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## humble_pie (Jun 7, 2009)

houska said:


> I need to close a real estate transaction in US$ in a few (2-4 mos, tbd). I have the money in hand in C$ and want to mitigate my currency risk ... What would more experienced people suggest?




all things considered, if i were in your position i would investigate using a currency exchange house such as Knightsbridge.

there have been several cmf forum threads over the years from clients exchanging CAD into USD at knightsbridge, a small toronto-based currency exchanger specializing in USD. The rate forum members report for amounts such as yours is always spot rate. This is the most beneficial FX rate, one that cannot be beaten by any currency gambit strategy.

another advantage of a currency house is that the exchange will be done instantly. CAD goes in & USD comes out immediately. No waiting 3 days for DLR journalling.

previous cmffers have said they were highly satisfied with knightsbridge. We've been told that there are related services, for example knightsbridge should be able to rapidly deliver the new USD to a local US bank account you might have already established, close to your new property interest.


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## fireseeker (Jul 24, 2017)

james4beach said:


> I don't think DLR has enough liquidity to do anything like $500k in one shot. Today for example, about 15 minutes into trading, both vehicles have only moved around 6,000 shares. That barely allows for a $60k gambit. You'd probably have to let carefully designed limit orders sit for about an hour to accomplish anything near $200k. Because the FX pair keeps fluctuating I think it might be pretty difficult to translate anything more than $100k unless you do some careful limit order management.
> 
> It's possible, yes, but I don't think the trades will be that easy to make.


Are you sure trades won't get done in dark pools (and therefore not be reported)?
I have increasingly noticed trades I have made not showing up in TSX reporting, although I suffer no price disadvantage.
One example is HFP, which many days only trades 2,000-5,000 shares. The last time I bought it, there was no public record of the trade (I checked the TSX transaction list and the reported volume). I assume the market maker stepped in to take the other side, but did not do it through the TSX.
I am no expert in these matters. But I am certain ETF trades are being completed without moving the market or even being reported. 
For DLR, the spreads are tight. So my _guess_ is that a larger trade would still get done at the bid/ask price.


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## humble_pie (Jun 7, 2009)

re the size of a gambit order, many experienced traders turn to knightsbridge or XE dot com as the currency amount to be arbitraged approaches $100,000.

what about larger orders at balky or awkward gambit brokers? all can still work out. Many big institutions are utilizig the DLRs & the ETF vendor firm - Horizons - is said to be ready to support a large order. Everything will depend on the quality of a broker's trading control desk.

what i would do is, i would allow more than 3 days for a single large gambit operation, in case the strategy does not start properly on the first day. I'd begin by entering the Buy order for DLR with an all-or-none restriction. 

once the order has been entered, i'd wait a couple of hours. If it has not filled by then, i'd ask a licensed rep to status the order, including calling trading control if necessary. It might be necessary to re-jig one's bid price.

although you won't be allowed to speak to trade control yourself, nevertheless you will probably be able to piece together what is going on from the relayed messages & from the detailed quote data, including sizing of lots bid & asked.

it could easily take several hours to fill an AON order. If order fails on the first day, then one should try the following day.

.


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## AltaRed (Jun 8, 2009)

I thought AON orders were long gone from the TSX?


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## fireseeker (Jul 24, 2017)

AltaRed said:


> I thought AON orders were long gone from the TSX?


Yes. AON is more none than all.
https://www.canadianmoneyforum.com/showthread.php/47914-Online-trading-quot-All-or-None-quot-feature?highlight=all+OR+none


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## houska (Feb 6, 2010)

humble_pie said:


> all things considered, if i were in your position i would investigate using a currency exchange house such as Knightsbridge.
> 
> there have been several cmf forum threads over the years from clients exchanging CAD into USD at knightsbridge, a small toronto-based currency exchanger specializing in USD. The rate forum members report for amounts such as yours is always spot rate. This is the most beneficial FX rate, one that cannot be beaten by any currency gambit strategy.
> 
> ...


Thanks, this is very helpful. I've used Knightsbridge before in the ~$10k range. If they can get close to spot for $500k+, that would be a preferable solution. 
The reality is that while I'm financially independent, I continue to work at a high per diem as a consultant. I don't want to pay 50(+-)bps implied convenience fee, but (as some other posters have helpfully noted as a suggestion - thanks), a solution where I need to phone customer service to check on order status and chivvy them along ain't going to happen since that's time I can monetize some other way. Thanks for the great feedback!


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## james4beach (Nov 15, 2012)

fireseeker said:


> Are you sure trades won't get done in dark pools (and therefore not be reported)?
> I have increasingly noticed trades I have made not showing up in TSX reporting, although I suffer no price disadvantage
> . . .
> For DLR, the spreads are tight. So my _guess_ is that a larger trade would still get done at the bid/ask price.


I think you're right. The bid/ask spread was very tight. It's true that not every trade will show up in TSX reporting. Actually, TSX only carries about half of Canada's trading volume. These other exchanges and even big dark pools (like TriAct MatchNow) carry increasing levels of Canadian volume.

I can't speak for every brokerage but I know that TDDI has pretty good order routing. I've seen my orders zip around to all kinds of exchanges, Alpha, Chi-X, TriAct dark pool. Assuming you're with a large brokerage of similar quality, yes it's worth trying a large order with DLR.

But I'd definitely run the smaller experiment before doing the full amount. Also make sure you that you aren't subject to US substantial presence test / US Person status, as this will then trigger painful reporting requirements for holding Canadian ETFs such as DLR.


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## humble_pie (Jun 7, 2009)

regardless of the technicalities of how a large special order gets filled, i am assured that at least one broker whose trade control desk is highly skilled, will go to special lengths to work a client's large order, regardless of whether canadian exchanges respect AON orders or not.

the above may apply only to certain clients, though, not to all clients.

we have always witnessed institutions working large DLR orders. The vendor has always stated that it will maintain a position to support large orders.


in any event, i for one would never consider trying to use slow, awkward, fee-nipping DLRs for large currency arbitrage trades. My first choice for a large arbitrage, as mentioned, would be to query currency houses, including knightsbridge & XE dot com, where i would be looking for spot rate or only a few pips.

my 2nd choice would be a gambit trade using RY or a similar ultra-liquid stock as the gambit carrier. Five thousand shares of royal bank are doable as gambit pairs, although the trader wouldd have to carefully define his day & his trading moment. 5000 shares of RY would easily convert CAD $500,000 into USD.

.


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## james4beach (Nov 15, 2012)

I agree humble that RY (or TD) could handle a 500K conversion. Avoid the first hour of trading and the last 30 mins of trading, and choose a quiet/stable period.

knightsbridge & XE dot com sound like good ideas, though I've never used them.


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## james4beach (Nov 15, 2012)

There's been an interesting change on DLR and DLR.U settlement, at least at TDDI. Today I bought some DLR.U and noticed that the Activity screen shows settlement tomorrow. I phoned to confirm and it seems they just changed this last week.

*DLR orders now settle at T+1*

This is very interesting and speeds up the gambits. To convert my USD to CAD, now I can do the following (entirely online)

Monday: buy DLR.U in the US account, using USD
Tuesday: settles after market close
Wednesday morning: transfer shares to Cdn account
Wednesday: sell DLR in Cdn account


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## james4beach (Nov 15, 2012)

This played out according to the schedule I posted above. I started the conversion on Monday, and then this morning (Wednesday) was able to journal the shares online, without having to phone in. They were immediately available in the new account, so I sold DLR and completed the conversion.

The final step (selling today) will settle Thursday.

Because of the faster T+1 settlement, this means I can also trade using this money today. If I buy a stock, the cash from DLR will be settled Thursday whereas the new ETF trade settles on Friday.


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## Tostig (Nov 18, 2020)

james4beach said:


> This played out according to the schedule I posted above. I started the conversion on Monday, and then this morning (Wednesday) was able to journal the shares online, without having to phone in. They were immediately available in the new account, so I sold DLR and completed the conversion.
> 
> The final step (selling today) will settle Thursday.
> 
> Because of the faster T+1 settlement, this means I can also trade using this money today. If I buy a stock, the cash from DLR will be settled Thursday whereas the new ETF trade settles on Friday.


Have you ever tried trading an inter-exchange stock on the same day? It's faster than doing this over four days with DLR and DLR.U.


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## james4beach (Nov 15, 2012)

Tostig said:


> Have you ever tried trading an inter-exchange stock on the same day? It's faster than doing this over four days with DLR and DLR.U


Yes I have, but with TD, you have to phone in and ask one of the agents to do the trades for you.


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