Exchange of Futures for Physical (EFP)

Exchange of Futures for Physical (EFP)

An Exchange of Futures for Physical (EFP) is a privately negotiated transaction in which two parties swap a futures position for the corresponding physical asset (or vice versa). The deal is agreed bilaterally, then registered with the exchange. The transaction’s volume is reported to the exchange, but the negotiated price and many commercial details remain private.

How EFPs work

• Two counterparties agree out-of-market to exchange a futures contract for the underlying physical asset (or the reverse).
• After agreeing terms (quantity, delivery date, price), the parties register the transaction with the relevant exchange so it counts toward trading volume and clearing.
• The exchange records the trade volume and updates open interest; the private price and contractual details are not publicly disclosed.
• Variants:
• Exchange for Product/Physical — often refers to commodities.
• Exchange for Swap (EFS) — used when a futures position is exchanged for a swap contract.
• FX EFP — simultaneous transactions in spot (cash) and futures FX markets to effect an ex‑pit swap outside the central limit order book.

Typical uses and participants

• Primarily used by large commercial and institutional participants (producers, refiners, merchants, large traders).
• Common in commodities markets (e.g., oil, agriculture) where physical delivery logistics and large lot sizes make on‑exchange execution impractical or market‑moving.
• Purposes include:
• Opening or closing futures positions without going through the public order book.
• Swapping how exposure is held (physical vs futures).
• Hedging production or consumption needs while minimizing market impact.

Example

A refinery needs to secure supply for the future while a producer prefers holding futures:
* Producer holds one million barrels of oil; refiner buys 1,000 futures contracts (1,000 barrels per contract) to secure supply.
* They privately agree that the producer will deliver one million barrels physically at a future date while receiving the futures position from the refiner.
* The transaction is registered with the exchange (volume is reported); the negotiated price is kept private. Result: the refiner locks supply and closes a futures position; the producer converts physical inventory into a futures position.

Advantages

• Reduces market impact: large, offsetting trades avoid moving the public price when executed bilaterally.
• Efficiency: faster, cleaner transfers for big transactions than working through the order book over time.
• Flexibility: lets participants manage inventory, hedge exposures, or reallocate positions to match operational needs.
• Useful when market depth is insufficient to absorb a single large order.

Risks and considerations

• Counterparty and operational risk tied to privately negotiated delivery arrangements.
• Physical settlement involves logistical complexity (storage, inspection, transport, delivery specifications).
• Lower transparency: negotiated prices are private, which can be a concern for market surveillance and price discovery.
• Regulatory and exchange rules apply to registration, reporting, and allowable ex‑pit transactions.

Physical settlement vs. cash settlement

• Physical settlement — the actual underlying asset is delivered to fulfill the contract. It requires handling, transport, inspection and is less liquid and more operationally complex.
• Cash settlement — counterparties exchange a net cash amount based on the contract’s final price; no physical delivery or logistics are required.

Bottom line

EFPs let large market participants privately swap futures positions and physical assets to meet commercial needs while minimizing market disruption. They are a practical tool for managing exposure and inventory in commodity and other physically settled markets, but they carry operational, counterparty and transparency considerations that participants must manage.