ICE Futures U.S. proposed to amend its guidance regarding exchange for related position transactions to make clear that swaps that will settle or forward contracts that may settle through EFRPs will not be considered to be part of prohibited transitory EFRP arrangements where the swap or forward contract is “subject to market risk that is material in the context of the transaction.” For example, said IFUS, under its new guidance parties could agreed to enter into an OTC transaction that settled through an exchange for swaps on a specific future date that referenced a specific futures contract settlement price on a specific date or on the average prices of a specific futures contract over a defined period. Likewise, a forward contract could be entered into that calls for delivery “of a carbon emission certificate [that] may be priced at a premium or discount to a subsequent state/government auction price and may include an option to settle the delivery obligation by executing an [exchange for physical] after the auction price is determined.” Because, in both examples, the initial related position transaction was subject to “material market risk” the agreement to settle the transaction later through an EFRP “would not render the [EFRP] transitory,” said IFUS. IFUS submitted its proposed guidance to the Commodity Futures Trading Commission on October 4.
Compliance Weeds: A transitory exchange for related position is one where the execution of the EFRP is contingent – either by express agreement or otherwise – upon the execution of another EFRP or related position transaction, and where the combined transactions result in the offset of the related position without the parties incurring market risk. All transitory EFRPs are currently prohibited by both CME Group and IFUS, and other designated contract markets. However, “immediately offsetting” exchange for physical transactions are authorized for foreign currency, subject to strict conditions that have been modified over time. (Click here for details regarding CME Group’s immediately offsetting FX EFRP requirements in the article, “CME Group Overhauls EFRP Rule and Guidance; Clarifies Roles of Executing and Clearing Firms and Provides New Relief” in the September 25, 2016 edition of Bridging the Week and here for a discussion of the relevant IFUS requirements in “ICE Futures U.S. Issues Amendments to Rule and New Frequently Asked Questions Related to EFRPs” in the August 17, 2014 edition of Bridging the Week.) CME Group and IFUS both have observed that, in connection with an immediately offsetting foreign currency EFP, the offsetting physical transaction is not contingent on the EFP in any way. (Click here, e.g., for background in the article, "Lord Voldemort Hovers Over the Futures Industry: CME Prohibits All Transitory Exchange of Futures for Related Position Positions by Name" in the April 14, 2014 edition of Between Bridges.) IFUS’s current proposal carves out from the prohibition against transitory EFRPs certain transactions where an offset to the related position is contemplated by the parties at the time an initial transaction is entered into, but where the parties incur market risk on the initial related position.