A client who has an exposure to the S&P 500 Equal Weight Index via OTC derivatives, ETFs / ETNs that tracks the S&P 500 Equal Weight Index or cash baskets may use the Exchange for Related Positions (EFRP) mechanism to transition to E-mini S&P 500 Equal Weight futures.

Acceptable related positions to the EFRP transaction are highly correlated stock baskets that represent at least 50% of the underlying index by weight or includes at least 50% of the stocks in the underlying index, as well as ETFs or ETNs that track the index underlying that tracks the S&P 500 Equal Weight Index or another highly correlated index.

What makes the CME Group rules around EFRPs especially useful is that even the S&P 500 parent index and other imperfect but highly correlated baskets can qualify as a related position for the S&P 500 Equal Weight Index.

An EFRP (Exchange for Related Positions) is the simultaneous exchange of a futures contract for a corresponding physical or OTC position meeting the exchange requirements.

An EFP allows investors to convert between futures and ETFs, ETNs (Exchange Traded Note) or baskets of the underlying index constituent stocks that tracks the S&P 500 Equal Weight Index, without exposure to intraday market execution. In an EFRP, two parties agree to exchange equivalent but offsetting positions in an Equity Index futures contract and a related OTC derivative position. In either transaction type, one party is the buyer of the futures and seller of physical shares, S&P 500 Equal Weight Index ETFs/ETNs or OTC positions, and the other is the seller of the futures and buyer of the physical shares, ETFs/ETNs or OTC positions.

Because both sides of the EFRP track the same or similar benchmarks, an EFRP is market neutral. As such, the pricing of the EFRP is quoted in terms of the basis between the price of the futures contract and the level of the underlying index.

Further information on the EFRP mechanism is set forth in the Market Regulation Advisory Notice on EFRPs.

Using BTIC (Basis Trade at Index Close) functionality at CME Group means a client can transition their position to EWF at a “known basis” to the respective official cash indices’ close.

Assume the equity index basis is +58 on the EWF. During the trading day prior to the cash close, the customer agrees to buy the BTIC at a price of +58. 

Once the official cash index prices for that day are determined, the client will receive a price confirmation for the BTIC transaction.  The resultant trade on the EWF outright futures will be the cash index price + the traded BTIC prices agreed to earlier in the day. 

For example, if the official closing price was 6,768 for the S&P 500 Equal Weight indices. The BTIC trades would result in EWF contracts being cleared at 6,826 (6768 + traded basis of +58).

Thus, the participant will have bought 384 EWF at a price of 6,826.

If the client was holding a cash basket, they can also use BTIC to transition from cash to futures by buying the BTIC and selling the cash basket market on close “MOC”.  BTIC is analogous to net asset value (NAV) trading, buying EWF BTIC and selling a U.S. equity ETF at NAV on the same day gets you the same economics.

Visit Basis trade at Index Close (BTIC) to learn more about BTIC transactions.

Assume the client’s current position is long 200 E-mini S&P 500 futures (CME ticker: ES) and the client would like to transition to the E-mini S&P 500 Equal Weight contract (CME ticker: EWF). 

If the S&P 500 Index (SPX) price is 5,200, this would equate to a notional of $52M (cash price (5,200) * multiplier (50) * number of contracts (200). The EWF has a different price and notional per contract relative to ES. If the SPW is trading at 6,768 the notional per contract is $135,360 (price (6,768) * multiplier (20)). Thus, to maintain the same notional of $52M, the investor will need to trade 384 contracts of the EWF in this example.

^{Source: CME Group}

An investor that is currently long 200 units of S&P 500 futures can use the “roll” to transition their position to the E-mini S&P 500 Equal Weight futures. This can be done by trading the roll in the EWF Jun/Sep calendar spread and holding the existing contracts of S&P 500 futures to expiration.

For example, if the investor sold 384 units of the June E-mini S&P 500 Equal Weight futures contract and bought 384 units of the E-mini S&P 500 Equal Weight September futures contract via trading the “roll,” the investor would have the following position:

Long 200 E-mini S&P 500 June futures

Short 384 E-mini S&P 500 Equal Weight June futures

Long 384 E-mini S&P 500 Equal Weight September futures

The resulting futures positions will effectively transition the investors index exposure from the S&P 500 Index to the S&P 500 Equal Weight Index at the futures expiration on the U.S. market open on the third Friday in June. When the Jun/Sep roll trade in the S&P 500 Equal Weight futures is transacted, the short 384 S&P 500 Equal Weight June futures contracts will offset the long 384 S&P 500 Equal Weight September futures contracts and the investor will still be long the 200 ES June futures contracts. In other words, a neutral exposure to the EWF and this index exposure remains in place until both the ES and EWF June contracts expire on the third Friday in June. Post expiry, the resultant position will now be the long 384 S&P 500 Equal Weight September futures contracts going forward.

The transition point for the index exposure will be the market-on-open auction that underlies the futures expiration. Note that all constituents of the S&P 500 Equal Weight Index are circumscribed within the S&P 500 Index, and therefore the same individual stock component auction price will be used in calculating the Index Special Opening Quotation (SOQ) levels used to expire both the ES and EWF contracts.

The same logic can be applied if the investor is currently short E-mini S&P 500 futures. In this case, one would buy the June contract in the E-mini S&P 500 Equal Weight futures while selling the September contract in the E-mini S&P 500 Equal Weight futures.

Footnote: An Exchange for Related Position (“EFRP”) transaction involves a privately negotiated off-exchange execution of an Exchange futures or options contract and, on the opposite side of the market, the simultaneous execution of an equivalent quantity of the cash product, by-product, related product, or OTC derivative instrument corresponding to the asset underlying the Exchange contract.