Conversion and your account currency

A result is produced in a currency 

Every instrument settles in a currency, and which one it is was settled by the instrument long before any account came near it. A currency pair settles in the second of its two currencies, the one the price is quoted in. A shares CFD settles in the currency of the venue the share is listed on. An index CFD settles in the currency the index is calculated in.

An account, meanwhile, is denominated in exactly one currency. The balance is a quantity of it, the margin held is expressed in it, and every statement line is reported in it. Two currencies are therefore in play whenever an instrument's settlement currency and an account's denomination differ, and they differ frequently. Conversion is the step that reconciles them, and it runs in a fixed order: the result is calculated in full in the settlement currency first, then converted, and the converted figure is the one that reaches the balance. The order is what makes conversion a second cost rather than a different result.

Where the rate comes from, and where the cost sits 

A conversion is a transaction in the currency market, and it meets a two sided quote exactly as any other transaction does. A credit sitting in the settlement currency has to be sold in order to buy the account currency, so it converts at the side of the quote that applies to a seller. A debit has to be funded the other way round, so it converts at the other side. In both cases the rate applied is worse than the reference rate in the middle, and the difference is the cost. Nothing is deducted and no separate line appears, which is the mechanism a spread uses: the charge is delivered by the price rather than presented as a fee.

Two conventions exist for stating it. Some arrangements publish a percentage added to a named reference rate, so the markup is legible and can be checked line by line. Others apply their own two sided quote in the conversion pair and state no markup, so the cost is real but has to be inferred by comparing the rate received against a reference rate at the same moment. Practitioners disagree about which is the more transparent, and both positions have a point: a published percentage is checkable only against a rate nobody outside the firm observes at the instant of the conversion, while an applied quote is unlabelled but uses the same mechanism as every other price on the platform.

The two cases repay reading together, because the arithmetic does something readers often expect it not to. A conversion is not a share of the profit that disappears when a position loses. It applies to the size of the amount converted, in whichever direction that amount points, so it takes a slice off a credit and adds a slice to a debit. The two slices are the same size, which is what makes conversion a cost rather than a variable.

Four lines get converted, not one 

The realised result is the obvious candidate and it is not the only one. Anything booked in a currency the account does not hold passes through the same step, at the same kind of rate, at the moment it is booked.

• The realised profit or loss on a position, converted once, when the position closes.
• Commission, where the rate is quoted in a currency other than the account's denomination. It converts as each side is charged, so a round turn carries two conversions rather than one.
• The daily financing adjustment on a position held past the cut off. It is calculated in the currencies of the instrument, then converted, and it recurs for as long as the position stays open.
• Adjustments the instrument passes on, such as the dividend adjustment on a shares or index CFD, calculated in the currency the underlying payment was made in.

None of those is large on its own, which is an observation about their structure rather than a reassurance about their total. A conversion cost is proportional to the amount converted, so it is small on a small line and it recurs on every line there is. A position held across many financing adjustments meets a conversion on each of them as well as on its result.

Margin is a related case and it is not a cost at all. The requirement is calculated against the notional value of the contract, in the instrument's own currency, then expressed in the account currency so it can be held against the balance. That expressed figure moves as the conversion rate moves, without the position changing, which is why margin held against a foreign currency instrument is not a fixed number over the life of a position. Nothing has been charged. The same requirement has been restated at a different rate.

Two different things are called the base currency 

One term does two unrelated jobs here, and the collision causes more confusion than the mechanism it describes. In a currency pair, the base currency is the first of the two, the one being priced, and the quote currency is the second, the one it is priced in. In an account, the base currency means the denomination of the account itself. The two meanings share a name and nothing else, and both appear in ordinary documentation without qualification.

The place it bites is contract specifications. A specification naming the currency a contract is denominated in describes an instrument, while an account document using the same phrase describes an account. Where a sentence is ambiguous the test is what it is about, because an instrument has a settlement currency, an account has a denomination, and no document means both at once.

Which instruments trigger a conversion 

Whether a conversion happens at all is a property of the pairing between an instrument and an account, not of either alone, so the same instrument converts for one account and not for another. Across the five asset classes the pattern is consistent enough to state plainly.

• Currency pairs settle in the quote currency, the second of the two. A pair whose quote currency matches the account's denomination needs no conversion, one whose quote currency does not will convert, and the first currency of the pair has no bearing on it.
• Shares CFDs settle in the currency of the listing venue, so positions held across several exchanges settle through several different currencies.
• Index CFDs settle in the currency the index is calculated in, which follows the market the index measures rather than the account trading it.
• Commodities and metals are conventionally quoted against one dominant currency, so accounts denominated in that currency convert on them rarely and accounts denominated in anything else convert on all of them.
• ETF CFDs settle in the currency of the venue the fund is listed on, which is not always the currency of the assets the fund holds.

Shares CFDs are therefore the class where a conversion appears most often, for a structural reason rather than an incidental one: listings span more venues, and so more currencies, than any other class. Currency pairs are the class where it is most predictable, because the quote currency is written into the instrument's own name and is known before anything is opened.

Which denominations an account can be opened in is a matter for the account terms rather than for any instrument. At YAL the base currencies an account can be denominated in are USD, EUR, AED.

Why the same instrument costs two accounts different amounts 

This is the part that surprises readers who compare costs carefully. The published cost of an instrument, its spread and its commission, is a property of the instrument and the terms it is traded under, and it is identical for two accounts trading the same instrument in the same size. What is not identical is what those costs come to once expressed in the currency each account is denominated in. A charge quoted in a currency the account does not hold arrives having passed through a conversion. The same charge quoted in the account's own currency has not.

The difference in that block is small in absolute terms, and it is not an extra charge that anybody levies. It is the cost of a conversion the second account needs and the first does not. That is the whole of the point: a total cost figure is incomplete until the account currency is named, because the same instrument, in the same size, on the same published terms, produces two different totals for two differently denominated accounts.

Where practitioners disagree 

The first disagreement is about denomination. One convention holds that an account denominated in the currency most of its positions settle in removes the conversion step on those positions entirely, which is arithmetically true and simple to verify on a statement. The argument against is that it relocates the cost rather than removing it, because a holder whose own currency is a different one still meets a conversion somewhere, outside the trading ledger and at whatever rate applies wherever it happens. A second argument against is exposure: the denomination of an account is itself a position of a kind, since a balance in one currency is worth a changing quantity of another whether or not a trade is open. Both arguments concern where the cost sits, not whether it exists, and this page knows nothing about any reader's circumstances and puts forward no denomination for anyone.

The second disagreement is about accounting, and it matters for anyone reading a comparison table. One tradition counts conversion as a trading cost, since it is unavoidable for the instruments concerned and lands on the same statement as everything else. Another treats it as a treasury cost, since it follows from how an account is denominated rather than from how an instrument is priced, and folding it into a per trade figure makes two accounts look different when the dealing terms are the same. Published comparisons follow both conventions without always saying which, which is one reason two honest tables can disagree about the cost of an identical trade.