EFP Explained


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An Exchange-for-Physical (EFP) is a financing transaction where two parties simultaneously exchange the underlying equity and its related Single Stock Futures (SSF) at a negotiated spread. The EFP buyer commits to buying the related SSF and selling the underlying equity and the EFP seller commits to selling the SSF and buying the underlying equity. The negotiated spread eliminates the individual stock and futures market exposure, with the total dollar value of the equity and futures transactions being roughly equivalent – the sole difference being the implied cost of carry (interest less estimated dividends) incorporated in the SSF price.

Light Horse MS acts as agent for the EFP buyer and/or seller for both legs of the transaction. Light Horse MS prints, reports and delivers the equity to and from customer accounts via the industry standard DTCC mechanism. Light Horse MS prints, reports and delivers the listed futures to and from customer accounts via the OCC’s well established clearing infrastructure. The Securities Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) rules govern the OneChicago exchange and the Financial Industry Regulatory Authority (FINRA) oversees exchange and broker activity. At the settlement of the futures position, the EFP buyer and seller will hold a futures position until the predetermined expiration with the clearinghouse (the OCC) as the sole counterparty.

At expiration of the futures contract, the short Single Stock Futures holder is required to deliver the underlying security to the OCC in exchange for the cash equivalent of the equity position value. The OCC simultaneously delivers the underlying equity to the long SSF holder in exchange for the cash equivalent of the equity position value. The OCC guarantees the delivery of both the cash and the underlying security at expiration.

Nowhere along this process are the customers exposed to Light Horse MS as counterparty. The settlement and clearing process is supported by Light Horse MS’s clearing partners. Once the transaction has settled in the customer account, expiration delivery is guaranteed by the AAA/AA+ rated OCC. EFPs are subject to standard equity and futures clearing and settlement risks.