In a move designed to strengthen the exchange's competitive position--by making commodity futures as useful as possible to participants in the over-the-counter (OTC) markets--the Chicago Board of Trade recently expanded its EFR pilot program. Previously comprised of CBOT rice and oats contracts, it added its wheat contracts to the list of eligible contracts for EFR trading. The expansion became effective January 2, 2003, the day the first EFR trade occurred.
CBOT Chairman Nickolas J. Neubauer said, "Market participants today are using very savvy and sophisticated trading techniques in the cash and futures markets. I am pleased to see our customers using this program that makes it easier for OTC market participants to employ the CBOT's agricultural futures to manage their price risk. This is the first of what we hope will be many future trades in our EFR program that will attract end users to our futures markets and enhance our already deep pool of liquidity."
An EFR is made up of two related transactions, an OTC transaction and a futures transaction. The EFR trade involves the exchange of futures contracts for a related OTC contract in much the same way that futures are exchanged for physical commodities in a traditional EFP (Exchange-for-Physical) trade. OTC derivatives eligible for the EFR transactions are contracts executed outside the regulated exchange environment whose value is dependent on or derived from the value of the underlying commodity.
The counterparties to the EFR must be under separate control and the buyer or seller of the futures contract must be the seller or buyer of the OTC contract. The EFR transactions are executed ex-pit, in a similar manner to Exchange-for-Physical transactions.
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