Uncleared margin rules (UMR) require hedge funds and asset managers to calculate their average aggregate notional amount (AANA) each year to re-assess if they are above or below the threshold that activates the margin requirements of UMR. All non-cleared (be that truly bilateral or intermediated) FX forwards, NDFs, swaps and options positions count towards the annual AANA calculation on a gross basis. 

All centrally cleared positions are, however, exempt from the AANA calculation.

Clients could choose to trade listed FX futures and options instead of OTC positions to remove all of the gross notional from the AANA calculation, but for clients who prefer to establish or initiate their trades in the OTC market, there is a solution that allows them to trade on OTC liquidity but ultimately hold the risk as a cleared FX futures contract. An exchange for related position (EFRP) allows a client to trade on OTC liquidity, subsequently close out the OTC position, and then re-establish the risk in a cleared FX futures that is exempt from the AANA calculation.

EFRPs always involve a related position component corresponding to the asset underlying the Exchange contract such as an OTC position, and can be used in several different ways. “Standard” EFRPs enable a client to originate an OTC position against their chosen liquidity provider (LP), then at some later stage (same day or thereafter), offset and close out their OTC position and re-establish it in cleared FX futures. 

Immediately offsetting exchange for physicals (I/OEFPs), meanwhile, are a specific type of EFRP that allow the originating order to be in OTC terms/executed in OTC liquidity, then immediately offset (flattening the position and the risk in the OTC market) and re-established in FX futures – leaving the risk in FX futures at CME Group for both the liquidity provider and end user client. In this immediately offsetting approach, the initiating and subsequent offsetting OTC legs are not required to pass through to the customer who received the listed FX contract as part of the EFP – all that is required is for both parties to have an OTC cash account in order to execute.

EFRPs are bilaterally, privately negotiated transactions that allow clients to utilize OTC relationships, lean on OTC liquidity, and ultimately end up with centrally cleared FX positions with the notional excluded from the AANA calculation. In EFRP transactions, the client chooses which liquidity provider(s) to contact to discuss and negotiate a price – essentially like an RFQ in the OTC market today.

As a basic example of a “standard” EFRP:

• Trade 1: Hedge Fund A executes a buy of OTC FX forward EUR/USD 125,000,000 notional with LP 1: 
  • Hedge Fund A later requests a price from LP 1 for an EFRP to close the OTC FX forward position and establish a position in FX futures.
  • Price for the EFRP is privately negotiated and agreed to on a bilateral basis, allowing LP 1 to book and submit an EFRP to CME Group.

For the client, this results in:

• Trade 2: Client A executes a sell / unwind of their OTC FX forward position, and establishes a CME FX future position.
• Trade 3: EFRP submission to CME Group done by LP 1, resulting in Client A holding 1,000 lots (EUR 125,000,000) of cleared EUR/USD FX futures.

EFRPs do not have any minimum size threshold and require reporting to CME Group as soon as possible, but no later than the end of the business day on which the EFRP was executed. Full details on the rules surrounding EFRPs can be found here, which includes everything a participant needs to understand with a useful FAQ and more details on the unique aspects of Rule 538.

EFRPs enable clients to trade on a disclosed, relationship basis with chosen liquidity providers in the OTC market, but ultimately hold the position as a centrally cleared FX futures position that is exempt from the AANA calculation. FX futures at CME Group span over 40 currency pairs, including majors, EUR crosses, and NDF pairs.

• FX futures EFRPs: up +196%*
• EFRP activity: in >25 currency pairs
• Most active currency pairs, ranked by EFRP ADV: 1) GBP, 2) EUR, 3) JPY, 4) AUD, 5) NZD, 6) MXN, 7) CAD

*as of December 2022

If you would like to discuss any of the topics detailed above, please contact fxteam@cmegroup.com or MarketReg.Outreach@cmegroup.com for more information.

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