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CME Advisory: EFRPs Better Be Bona Fide

 

♦CME Advisory: Off-Market EFRPs Will Be Scrutinized♦

In an amended Market Regulation Advisory Notice that became effective yesterday, CME Group tightened the screws on Exchange for Related Position (EFRP) transactions that are not up to snuff.

As reported by Gary DeWaal on March 11 in his Katten Muchin Rosenman LLP  Bridging the Week newsletter, the amended notice warned of greater scrutiny for ERRPs with off-market prices.

EFRPs must be transacted at commercially reasonable prices agreed by the parties, provided such prices conform to the applicable futures or option price increments. Q&A 11 of the advisory warns that “EFRPs executed at off-market prices are more likely to be reviewed by Market Regulation to determine the purpose for the pricing.”

In addition, DeWaal noted the danger of transactions being deemed as transitory. “All EFRP transactions must involve the bona fide transfer of the cash commodity underlying the exchange contract, or a by-product, related product or an over-the-counter instrument,” DeWaal wrote. “A liquidation of the related position that occurs simultaneously or close-in-time without the parties incurring market risk will likely cause the EFRP to be deemed a prohibited transitory EFRP.” Read the full article here.

This is a complex area of trading, and regulatory missteps can be costly. Our course “Noncompetitive Trading: EFRPs and Block Trades” provides content and context that is critical for traders engaging in these permissible noncompetitive trading activities.