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Further information

For further information on EFP’s please refer to the ASX 24 Operating Rules in conjunction with ASIC Market Integrity Rules (ASX 24 Market).

What is an EFP?

An Exchange For Physical (EFP) is an off-market transaction which involves the swapping (or exchanging) of an over-the-counter (OTC) position for a futures position. The OTC transaction must be for the same or similar quantity or amount of electricity, or a substantially similar commodity or instrument. The OTC side of the EFP can include electricity swaps, swap options, caps, and other such instruments traded in the OTC market.

In order for an EFP transaction to take place, the OTC side and futures components must be “substantially similar” in terms of either value and/or quantity.

EFPs may be negotiated either via ASX 24 Participants or directly, one counterparty to another. They must be registered through an ASX 24 Full Participant.

The net result is that the OTC position (and the inherent counterparty credit exposure) is transferred from the OTC market to the futures market. EFPs can also work in reverse, i.e., a futures position can be reversed and transferred to the OTC market.

Uses and Benefits

An EFP transaction has a number of uses and benefits for energy market participants:

  • Counterparty credit exposure may be reduced when an existing swap position is reversed and replaced with a futures position. In so doing, an EFP allows counterparties to release “credit”, clearing the way for further OTC trading.
  • Reduced balance sheet and margin requirements: by netting OTC positions against opposing futures positions, margin and credit support requirements can be reduced. Note that an EFP transaction will result in a large negative variation margin call for an entity which transacts the futures leg of an EFP if the EFP futures price is struck at an “out of market” price.
  • Off-market: EFPs are negotiated and traded between counterparties off-market, with price and volume details not being reflected “on the screen”. EFP futures prices are not considered in the end of day price settlement process.
  • 24-Hour Trading: EFP transactions can be negotiated around the clock but must be registered between 7:00 am to 5:00 pm during Exchange business days.

Mechanics

I. Parties to an EFP

An EFP can either be negotiated directly between two wholesale counterparties (“wholesale” for the purposes of Corporations Law) or facilitated by an ASX 24 Participant (broker). Under either circumstance, the transaction must be registered with the Exchange through an ASX 24 Full Participant. ASX 24 Full Participants registering EFP transactions have the responsibility of confirming and maintaining records of details of the EFP transaction.

Details of EFP transactions required for registration with the Exchange include:

  1. The futures quantity
  2. The futures price
  3. Acknowledgment from the client that a materially similar OTC transaction has been transacted as part of the EFP
  4. The identity of the counterparties’ ASX 24 Clearing Participant

II. Pricing

The pricing of particular EFP transactions may depend on a number of key parameters including:

  • The valuation of OTC credit exposures
  • Cash-flow funding (cost-of-carry) considerations (e.g., positive or negative variation margins and funding of initial margin requirement)
  • The terms and conditions attached to the underlying OTC transaction, including the strike price
  • The current futures price

Given the number of variables involved, EFP transactions will typically trade at a discount or premium to the original swap (OTC) price. Parties considering transacting an EFP should seek independent financial advice from a licensed financial advisor before doing so.

III. Documentation

Counterparties to an EFP transaction must have:

  • Executed Client Agreement Forms and acknowledged Risk Disclosure Statements with organisations (brokers) licensed to deal in futures/derivatives
  • Opened an account with an ASX 24 Clearing Participant

ASX 24 Participants must obtain or have the right to access documentation confirming the details of the OTC component to an EFP transaction.

IV. Costs

The electricity futures contracts registered with ASX 24 via an EFP transaction will incur the standard per contract side Exchange fee.

In addition to the relevant Exchange fee, the counterparties to an EFP will typically incur brokerage and clearing fees.

ASX does not charge an EFP registration fee.

The Exchange for Physical trading mechanism is also available for Cap Futures and exchange traded Options.