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Learn why traders use futures, how to trade futures, and what steps you should take to get started. Insightful and thought-provoking content related to today’s emerging financial technology. US markets for grains and grain futures. OTC derivative contract position, in the case of an EFR. Exchange-listed futures component of an EFP or EFR or the Exchange-listed option component of an EOO. Rather, it is mediated through a privately-negotiated off-exchange transaction. The futures leg of the EFRP is reported to the Exchange and is cleared by CME Clearing, like any Exchange-listed product.
Beyond this, the Exchange plays no direct role in facilitating the trade. Notably, the two parties to the EFRP, and not the Exchange, remain responsible for subsequent maintenance and bookkeeping of the physical asset exposure or OTC derivative position entailed in the cash leg of the trade. What Makes the Related Position Related? An EFRP may be transacted at any time, at any price that is both mutually agreeable to the counterparties and commercially reasonable. EFRP is away from prevailing market levels, then the counterparties may be required to demonstrate that the price is indeed legitimate. 3 Absent extenuating circumstances, submission is expected to be made on the same day the trade is executed.
The assets or OTC derivatives entailed in the EFRP’s cash leg are presumed to be held in suitable accounts established by the counterparties, and are not reported to the Exchange. An EFRP often involves, on one side, a dealer who quotes bid and offered markets in such transactions and, on the other side, a customer of the dealer. Where the dealer has an affiliated futures commission merchant, the dealer typically requires the customer to carry both a futures account in which the EFRP’s futures leg is booked and a securities account or bank account in which the cash leg is booked. The signal feature of any futures contract is the centralized, competitive, all-to-all market in which it trades and in which price discovery occurs. Since before the 1920s the Exchange’s rules have allowed noncompetitive, privately negotiated EFP trades as an accommodation to grain elevator operators, millers, and processors for whom the basis spread between the futures price and the spot price of grain at the location of business is a pivotal commercial concern. An EFRP serves to facilitate not only hedging but also arbitrage trading, because it ensures that the basis relationship between the futures contract price and the price of the contract’s underlying commodity is preserved, irrespective of the transaction’s size. Price uniformity — The buyer and seller of the futures contract may use an EFRP trade to ensure they can execute a large transaction at a single price.
Trade facilitation — In a futures market that is historically illiquid — or for a transaction that takes place at an hour of day when an otherwise liquid futures market is relatively inactive — the buyer and seller of the futures contract might use an EFRP to ensure they can execute the trade at all. EFRP trades in futures contracts for which the delivery terms specify a range of eligible deliverable grades and qualities, or a variety of allowable delivery locations. Consider a bank treasury dealer in spot FX who finds herself long FX and short futures, while a bank customer happens to be long futures and short spot FX. As mentioned above, one of the attractions of an EFRP trade is that it ensures a uniform price spread between the cash leg and the futures leg, regardless of size of trade.