Cryptocurrency Futures Exchange for Physical (EFP) Transactions
What is an EFP?
Exchange for Physical (EFP) transactions are privately negotiated trades between two counterparties allowing them to simultaneously transfer a futures position for an equivalent spot market position or vice versa.
What else do I need to know about EFPs?
- Governed by Exchange Rule 538.
Examples of an equivalent spot market position may include but are not limited to physical cryptocurrency, cryptocurrency ETFs and NDFs, etc.
No minimum trade size; price increments must be in appropriate tick size, $5 per bitcoin or $0.50 per ether.
Must be executed at commercially reasonable prices that are mutually agreed upon by the parties to the transaction.
The futures leg should be reported as soon as possible but not later than the end of the business day on which the EFP was executed.
Anyone can trade (no eligible party restriction).
Parties to an EFP are required to prepare and maintain all documents in connection with both the futures and related physical cryptocurrency position pursuant to CFTC Regulation 1.35.
Participants to an EFP can negotiate directly or can use a broker to help find the other side of the trade.
Benefits of an EFP Transaction
- Added convenience of private negotiation.
Risk management with CME Clearing, one of the world’s leading central counterparty clearing providers.
Tried, tested and straightforward trading method for parties with complementary objectives.
Available at all times, including weekends.
How would this work for cryptocurrency?
Clients can use the mechanism to efficiently transfer their cryptocurrency exposure from a physical to a futures position depending on their specific goals. Working through a broker or directly with each other, two parties agree to trade cryptocurrency between themselves; the two parties also agree to exchange an equivalent position in our Bitcoin/Ether futures that is opposite in direction to their respective physical cryptocurrency transaction. The spot market transaction can be bi-laterally negotiated and consummated on an OTC platform while the futures piece is cleared through CME Direct.
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Why enter into a cryptocurrency EFP transaction? |
Who can benefit? |
How can an EFP help? |
|---|---|---|
|
Monetize a long cryptocurrency position | Miners, Commercials, All |
By selling physical cryptocurrency and buying an equivalent futures position, clients are able to free-up capital and yet maintain exposure to cryptocurrency price movements. |
|
Unwind a futures – spot cryptocurrency spread trade | HFs, Props, CTAs, Retail |
Clients who are trying to benefit from a price dislocation between the spot and futures markets can use an EFP to close out the position and lock-in the spread. |
|
Manage cryptocurrency exposure during weekends/holidays | All |
Futures trade electronically 23 hours a day from Sunday at 5:00 p.m. CT to Friday 4:00 p.m. CT. To manage risk when we are closed, clients can trade cryptocurrency in the spot market and EFP to futures. |
|
Cover a short cryptocurrency position |
OTC Desks, HFs, CTAs, Props |
A client who is short cryptocurrency and whose borrow has been called can use an EFP to access cryptocurrency to deliver against the short physical position and still remain short through the futures market. |
| Source cryptocurrency to lend out |
OTC Desks, HFs, CTAs, Props |
Clients who do not have cryptocurrency inventory to lend out can use an EFP to source physical cryptocurrency, lend it, collect the lending fee and maintain market neutrality. |
| Protect a cryptocurrency loan | OTC Desks, Miners, All |
Clients who have loaned out their cryptocurrency inventory can use an EFP to hedge the risk of their cryptocurrency not being returned. |
|
Improved capital efficiencies | Miners, All |
A key benefit of futures is the leverage they offer. By using an EFP, clients are able to free up capital for use in other alpha-generating strategies. |
Example
Party B agrees to sell 50 bitcoin to Party A and buy 10 bitcoin futures from Party A (economically, both parties are risk neutral). Additionally, the two parties agree to a spread of $5 between the spot and futures price.
If bitcoin is at $90,500 Party B receives $4,525,000 on the sale of bitcoin to Party A. Simultaneously, Party B buys the futures contracts from Party A at a price of $90,495 ($90,500 - $5).
For the futures contract, Party B would need to maintain, at least, 24% margin* or $1,085,940. The difference between the bitcoin sale price and the margin that needs to be posted is freed up capital and may be used by Party B as needed.
By using an EFP, Party B benefits from the leverage offered through the futures contract and is able to free up $3,439,060 while still maintaining exposure to bitcoin.
*Represents exchange minimum, subject to change, clearing firms may require a higher amount
How do I get started?
- Establish a clearing account with one or more of the two plus dozen FCMs (Futures Commission Merchants) currently supporting the contracts.
- Download CME Direct platform.
- Register for ClearPort.
- Assign traders and brokers.
Why use our futures for cryptocurrency exposure?
- No need to establish a wallet; eliminates hacking risk.
Easily convert cryptocurrency exposure to USD.
No actual movement of cryptocurrency.
Do not need possession of cryptocurrency to sell (or to borrow cryptocurrency to sell short).
Price transparency, leverage, liquidity and capital efficiencies.
Trade on a regulated, established Exchange.
- USD-settled contracts to reliable benchmark rates.
View our suite of Cryptocurrency products.
All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.
