Understanding Prohibited Transitory EFRPs

Transitory EFRPs arise when the execution of one EFRP is contingent upon the execution of another EFRP, or related position transaction, between the same parties and where the transactions result in the offset of the related positions without the incurrence of market risk that is material in the context of the related position transactions.

Example of Prohibited Transaction

Two participants agree to enter into a swap and, as part of the same negotiation, agree to immediately offset that swap by transacting an Exchange For Swap (EFS), so they only retain an economic exposure to the future.

This would be a transitory EFRP and is not permitted.  

While the time-period between two EFRP transactions, or an EFRP transaction and an offsetting related position transaction, is a factor in assessing whether it is a transitory EFRP, the legitimacy of the transactions will be evaluated based on whether they have integrity as independent transactions exposed to market risk that is material in the context of the transactions.

Example of Legitimate and Non-Transitory Transaction

Two participants agree to enter into an uncleared OTC swap on June 1. Three weeks later, on June 21, Participant A is concerned about the credit risk of Participant B. Participant A approaches Participant B and agrees to transact an EFR which has the economic effect of cancelling the original swap, and leaving both participants with a cleared futures.

This would be a legitimate use of an EFR because the two transactions were independent and exposed to market risk.

This is part of a course on EFRPs. For official regulatory guidance on EFRPs, reference the applicable Market Regulation Advisory Notice.

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