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Exchange for Related Positions (EFRP) transactions include Exchange for Physical (EFP), Exchange for Risk (EFR) and Exchange of Options for Options (EOO). All these transactions are privately negotiated trades transacted outside of the competitive marketplace but submitted for clearing through the CME Clearing House.

An EFRP may be executed in any CME, CBOT, NYMEX or COMEX product subject to any guidelines applicable to that specific product.

How EFP, EFR and EOO Trades Work

An EFP transaction involves a privately negotiated and simultaneous exchange of a futures position for a corresponding position in the underlying physical.

An EFR transaction involves a privately negotiated and simultaneous exchange of a futures position for a corresponding Over the Counter (OTC) swap or other OTC derivative in the same or related instrument.

An EOO transaction involves a privately negotiated and simultaneous exchange of an Exchange option position for a corresponding OTC option position or other OTC contract with similar characteristics in the same or a related instrument.

The counterparties must follow the requirements of Rule 538 (Exchange for Related Positions) and any applicable CFTC regulations in conducting such trades, and in certain cases these trades must be approved in advance by the clearing house. EFPs, EFRs and EOOs are not official until the trades have been matched and cleared by the Clearing House.

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Generally acceptable related position instruments EFRPs include, but are not limited to, the following:

• Foreign Exchange Contracts: Instruments considered acceptable as the related position side of an FX EFRP transaction may include spot, forwards, FX or cross-currency basis swaps, OTC FX options, swaptions, non-deliverable forwards (“NDFs”), currency baskets and Exchange Traded Funds (“ETFs”). The historical correlation between the related position instrument and the corresponding currency pair or index component of an EFRP must be 80% or greater. The acceptability of instruments settled in a currency other than those comprising the underlying pair should be addressed with Market Regulation staff prior to engaging in the transaction.
• Interest Rate Contracts: Fixed income instruments with risk characteristics and maturities that parallel the instrument underlying the exchange contract are acceptable. Such instruments include, but are not necessarily limited to, money market instruments, Treasuries, Agencies, investment grade corporates, forward rate agreements (FRAs), mortgage instruments including collateralized mortgage obligations (CMOs) and interest rate swaps and swaptions.
• Stock Index Contracts: Stock baskets must be highly correlated to the underlying index with a historical correlation to the index of 90% or greater (r ≥.90). Further, these stock baskets must represent at least 50% of the underlying index by weight or must include at least 50% of the stocks in the underlying index. The notional value of the basket must be approximately equal to the value of the corresponding exchange contract. ETFs are acceptable provided that the ETF mirrors the relevant Exchange stock index product.
• Agricultural Contracts: For Dairy Products, Live Cattle, Feeder Cattle, Lean Hogs and Pork Bellies, the acceptable related position component of an EFP is limited to the specific underlying commodity (e.g., Live Cattle for Live Cattle futures); although the related position need not be deliverable grade of the particular commodity, there must be a reasonable level of correlation with the associated futures. In the case of Random Length Lumber futures, the related position must be deliverable species dimension lumber, variances are permitted with respect to grade/size and tally. Additionally, with respect to Random Length Lumber, the buyer of the cash lumber must retain ownership of the transferred product for personal use or resale to customers and may not resell the product either directly or indirectly to the original seller.
• For all other agricultural futures contracts, the related position must involve the commodity underlying the futures contract or a derivative, by-product or related product that is reasonably correlated to the futures being exchanged. The related position in an EFR or EOO may be an agricultural commodity swap or other agricultural OTC instrument, but in all cases must comply with any applicable regulatory requirements prescribed by the CFTC.
• Commodity Index Contracts: For exchange contracts based on Commodity Indexes, (e.g., Goldman Sachs Commodity Index (GSCI), Dow UBS Index), acceptable related positions include ETFs provided that the ETF mirrors the relevant Commodity Index product traded on the Exchange.
• Energy Contracts: For energy contracts, the acceptable related position component for an EFP is limited to the specific underlying commodity ( e.g. Natural Gas for Natural Gas Futures); although the related position need not be deliverable grade of the particular commodity, there must be a reasonable level of correlation with the associated futures. The related position in an EFR or EOO may be an energy swap or OTC swap/option instrument.
• Metals Contracts: For metals contracts, the acceptable related position component for an EFP is limited to the specific underlying commodity ( e.g. Gold for Gold Futures); although the related position need not be deliverable grade of the particular commodity, there must be a reasonable level of correlation with the associated futures. The related position in an EFR or EOO may be a swap or OTC swap/option instrument. Exchange Traded Funds ("ETFs") are acceptable provided that the ETF mirrors the relevant Exchange metal product.

In all cases, the cash sides must be comparable with respect to quantity, value or risk exposure to the futures or options utilized.

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Benefits of EFPs, EFRs and EOOs

• Convenience of private negotiation
• Customization of delivered product
• Reduction or elimination of basis exposure
• Risk management provided by the Clearing House
• Offers straightforward trading method for parties with complementary objectives

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How an EFRP is Reported

1. Both parties to the trade must have an account at a Futures Clearing Member (Clearing Member or FCM).
2. Subsequent to the negotiation of the EFRP, details must be provided to the relevant FCM for reporting to the Exchange.
3. Clearing Member Firms post transaction to Exchange through Front End Clearing (FEC) or ClearPort
4. For information regarding the submission of EFRPs using Front End Clearing, please contact Clearing Services at 312.207.2525 or via email at ccs@cmegroup.com.
5. For information regarding the submission of EFRPs using CME ClearPort, please contact CME ClearPort Market Operations at 1-800-438-8816 or via email at CustCare@cmegroup.com

To learn more please read the most recent Market Regulation Advisory Notice on Rule 538 (Exchange for Related Positions)

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