Exchange for Physical (EFP)
Chapters in this video
- 0:00 The golden rule: open, competitive execution
- 1:51 EFP definition: privately negotiated off-exchange swap
- 2:58 Fiona and Hank: the two-leg mechanics in practice
- 4:37 The reporting trap: private does not mean secret
- 5:20 The illegality trap: permitted exception, not violation
- 6:01 EFRP family: exchange for risk and options-for-options
- 6:51 One last cement: handshake, swap, then report
- 7:28 Rapid-fire exam recap
What this video covers
- Why an exchange for physical (EFP) is a permitted exception to the open, competitive execution rule, not an illegal off-exchange trade
- The precise definition of an EFP: a privately negotiated, off-exchange, simultaneous swap of a futures position for the matching cash or physical position on opposite sides of the market
- How the two legs move together: the cash buyer sells the futures, and the cash seller buys the futures, at one mutually agreed price
- Why commercials and hedgers use EFPs: to avoid legging two separate markets and to achieve a clean bilateral swap in a single move
- The critical reporting requirement: an EFP must be reported to the exchange afterward for clearing and surveillance, even though it is privately negotiated
- How an EFP fits into the broader exchange for related position (EFRP) family, alongside exchange for risk and exchange of options for options
- The exam's two biggest trap answers: calling an EFP prohibited or non-reportable, and confusing privately negotiated with hidden from regulators
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