The CME Group self-certified amendments to its rules and guidance related to exchange for related position transactions that, among other things, make clear that firms executing or clearing EFRPs must exercise “due diligence” to identify situations where a customer’s EFRP transactions may be “non-bona fide,” and permit EFRPs to contain multiple exchange components that may not have the same market bias. CME amendments also permit any third party, not just members, to facilitate as principal the related position component of an EFRP; make clear that the related position associated with an exchange of an exchange-traded option for an option transaction must be an over-the-counter option and that all account statements confirming EFRPs must “uniquely” identify such transactions (e.g., not just identify them generically as Ex-pit); and authorize commodity trading advisors, account controllers or other persons acting on behalf of another person not to have to pass along to an ultimate customer the initiating and offsetting foreign currency leg of an immediately offsetting foreign currency EFRP. In connection with EFRPs involving equity index contracts, CME Group eliminated the requirement that the related position component have a historical correlation to the index of 90 percent or greater and replaced it with a requirement that related position stock baskets simply be “highly correlated” to the index, without referencing a specific percentage. Absent objection by the Commodity Futures Trading Commission, CME Group’s new rule and guidance will be effective October 4.
Compliance Weeds: For EFRPs, one party must sell the exchange contract and buy approximately the same quantity of the related position (or the market exposure associated with the related position), while the other party must buy the exchange contract and sell the same approximate quantity of the related position or associated market exposure. The related position must be the cash commodity associated with the exchange contract or a by-product, a related product or an over-the-counter derivative instrument of such commodity that is reasonably correlated to the exchange contract. EFRPs must result in a real transfer of a cash commodity between the parties or a legal binding agreement between the parties governing the related position consistent with prevailing market conventions. Transitory EFRPs – where one EFRP is contingent on the execution of another EFRP or related position transaction and where the overall transaction results in the liquidation of the related position without either party incurring market risk – are strictly prohibited