Washing Trades In A Canadian Registered Account

By Gord Nuttall AAA

When investors buy and sell stocks that settle differently from the base currency of their brokerage account, they’re subject to foreign exchange rates - one for selling and one for buying. In fact, trading in a currency different from the account’s base currency adds unnecessary costs that investors could avoid if they washed their trade. Washing your trades is the activity of buying and selling foreign investments within a short time period (usually the same trading day) and asking the brokerage to wash the trade, which essentially nullifies the exchange fees.

For example, Canadian RRSP brokerage accounts that can buy and sell USD stocks, which settle in U.S. dollars, are subject to two different exchange rates – one for buying and one for selling. This may not seem like a big deal, but without washing the trades, the exchange costs required to convert the sold securities temporarily to USD funds and before buying another USD-based security are absorbed by the investor.

Same-Day Currency Conversion Costs
Let’s examine the difference between the following trade scenarios of USD stocks in a self-directed RRSP. Without asking the brokerage to wash the trade, the initial buy transaction is made at the “buy” rate, and the other transaction will be made at the "sell" rate, resulting in an additional cost of nearly $200 for currency exchange. See the following example for placing an order to sell US$10,000 worth of shares:

  1. The order is executed and US$10,000 is deposited into the RRSP account.
  2. The account converts the proceeds to Canadian currency at 1.04 (sell rate) totaling C$10,400.
  3. Within the same day, place another order to buy US$10,000 worth of shares.
  4. The C$10,400 (line 2 above) is converted to USD at 1.06 (buy rate), totaling US$9,811.24.
  5. The investor needs to deposit US$188.68 into the account to activate the buy order.
  6. The buy order is executed.

Since the above trade transactions were not washed, the investor was forced to pay an additional US$188.68 for the currency conversions. On the other hand, requesting the brokerage to wash the trades, both transitions are converted using the same exchange rate – a net zero spread to the investor, as in the following example:

  1. Place an order to sell US$10,000 worth of shares.
  2. The order is executed and US$10,000 is deposited into the RRSP account.
  3. During the same day, place another order to buy US$10,000 worth of shares from the RRSP account.
  4. The buy order is executed.
  5. Inform the brokerage to wash the trades.

Washing the trades eliminated the cost between the two different exchange rates.

Most Canadian brokerages don’t permit holding foreign currency in RRSP accounts, which is when washing your trades becomes useful. One of the wash rules is that both transactions (buy and sell) must be executed and filled on the same day. In reality, this isn’t a guarantee; the buy trade and sell trade are frequently on different days, so how could one take this cost-saving concept and apply it to portfolio trades that span more than one day? USD-based money market funds are the answer.

Use Money Market to Extend Trading Period
If a trader sells USD stocks today, but keeps the settled amount in USD currency to buy USD stocks in the future, he/she can simply purchase a U.S. Money Market Fund. It’s a safe and secure fund that allows holding USD cash and liquidating it quickly if needed.

Let’s examine how to wash trades that span over one day:

  1. Place an order to sell US$10,000 worth of shares.
  2. The order is executed and US$10,000 is deposited into the RRSP account.
  3. On the same day as line 1, buy US$10,000 of a TD USD Money Market Fund.
  4. The buy order is executed.
  5. Inform the brokerage to wash the trades.

At this time you have simply liquidated your USD securities and are keeping the proceeds in a USD-based fund until a later date when you decide to purchase a USD security again.

  1. Place an order to sell US$9,999 of U.S. Money Market.
  2. The order is executed and US$9,999 is deposited into the RRSP account.
  3. On the same day as line 1, buy US$9,999 of your chosen USD-based security.
  4. The buy order is executed.
  5. Tell brokerage to wash the trades.

TD U.S. Money Market was used to bridge the gap between the two trades, essentially washing two trades on the same day – twice. Sometimes a minimum amount is required to buy a TD U.S. Money Market initially (i.e. US$1,000), which is the reason for keeping $1 in the TD U.S. Money Market. The $1 balance will allow you to wash trades with foreign proceeds of less than $1,000 in the future.

Brokerages
To take advantage of this concept, shop around for a brokerage that allows washing trades. TD Waterhouse, for example, washes your trades automatically, meaning you don’t even have to call. Washing your trades is only required if the brokerage doesn’t allow holding foreign cash in your RRSP or TFSA account. Registered accounts with Questrade (which are dual-currency) hold both U.S. and Canadian currencies, so washing your trades isn’t required. Depending on the volume of U.S. stock trading you do within your RRSP, you’ll want to call a few brokerages and ask them how the trade-washing process works. Do they use TD U.S. Money Market? By what time do I have to call in to get my trades washed? Are the entire amounts (both buy and sell) subject to exchange fees or just the difference between the two? Those are a few sample questions that will help you get brokerages to describe exactly how the process works and whether it will meet your needs.

The Bottom Line
For Canadian RRSP accounts, washing same-day trades and using money market funds to bridge the gap over a multi-day trading period saves investors the exchange fee and will help their bottom line while rebalancing securities. Brokerages have different logistics to ensure this happens, so call them to ensure you are getting the best offering for you and your situation.

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