Trading Practices - Stop Logic

An Exchange for Physical (EFP) is a privately negotiated, non-competitive futures trade transacted apart from the public auction market of a futures exchange but submitted for clearing through a futures Clearing House. The term EFP is used with all futures contracts except interest rate transactions and agricultural commodity transactions. In the case of interest rates, the term used is Exchange Basis Facility (EBF). For agricultural commodities, the term used is Exchange for Risk (EFR). EFPs, EBFs and EFRs can be executed with any CME® contract.

EFP, EBF and EFR trades involve a futures contract and a spot commodity or cash position. The parties involved agree privately upon a price for a simultaneous exchange or transfer of "spot for futures" or "cash for futures" and then report the terms of this agreement to the Clearing House. The counterparties must follow strict Exchange rules in conducting such trades, and in certain cases these trades must be approved in advance by the Clearing House. EFPs, EBFs and EFRs are not official trades until the Clearing House has matched and cleared them, and the first payment of settlement variation and performance bond has been confirmed.

FX EFPs can be conducted with both spot currency and currency forward transactions.

Eurodollar EBF trades can be transacted with U.S. Treasury instruments, Eurodollar Time Deposits, Forward Rate Agreements (FRAs), Interest Rate Swaps, Collateralized Mortgage Obligations (CMOs) and Investment Grade Debt, and other instruments. Swap EBF trades can be transacted with U.S. Treasury instruments, Interest Rate Swaps, Collateralized Mortgage Obligations (CMOs) and Investment Grade Debt, and other instruments.

For equity index EFPs, acceptable cash instruments include certain standardized stock baskets and certain Exchange Traded Funds (ETFs).

Acceptable cash sides for EFRs with agricultural futures are limited to the specific underlying commodities, with additional requirements for EFRs with respect to Random Length Lumber contracts. For weather futures, acceptable cash instruments are selected Over-the-Counter (OTC) weather swaps.

FX Futures	Both currency spot and forward transactions are acceptable.
Interest Rate Futures	Fixed income instruments with risk characteristics and maturities that parallel the instrument underlying the futures contract. With regard to Eurodollars, this could include, but is not necessarily limited to, money market instruments, Treasuries, Agencies, investment grade corporates, forward rate agreements, mortgage instruments including collateralized mortgage obligations and interest rate swaps.
Equity Index Futures	Stock baskets must be highly correlated to the underlying index with an R ² =.90 or greater. Further, these stock baskets must represent at least 50% of the underlying index by weight; OR, include at least 50% of the names of the underlying index. The notional value of the basket must be fairly equal to the value of the futures component of the trade. Exchange Traded Funds are acceptable provided that they mirror Stock Index products traded on the Exchange.
Commodity Futures	For Dairy products, Live Cattle, Feeder Cattle, Lean Hogs and Pork Bellies, acceptable cash sides are limited to the specific underlying commodities (e.g., Live Cattle for Live Cattle Futures); however, they need not be deliverable grades of the particular commodity. In the case of the Exchange's Random Length Lumber futures, the cash side may only be deliverable species dimension lumber with variances for grade/size. Also, with respect to Random Length Lumber, the buyer of the cash commodity 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.

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

Benefits

Convenience of private negotiation.
Can be used with numerous cash instruments and commodities.
For Eurodollars and Swaps, can be ideal for two parties seeking a Eurodollar or Swap futures transaction against a specific cash interest rate instrument.
Risk management provided by the Clearing House.
Offers straightforward trading method for parties with complementary objectives.
Designed to assist institutional trading needs.

For further information, please see the EFP FAQ (PDF).