How Eurex and 360T are Unlocking the Power of EFPs in the FX market

The FX market is constantly evolving, and traders and investors are always seeking new tools to help them efficiently manage risk and optimise their trading strategies. One tool that is growing in popularity is the Exchange for Physical (EFP) transaction.

Here, we delve into Eurex’s EFP offering and its accessibility through OTC FX platform 360T, which enables a seamless electronic trading experience.

What is an EFP?

An EFP is a simultaneous transaction that combines an over the counter (OTC) FX-instrument and an exchange-traded FX future. It is unique in that both legs of the trade are in the same currency pair but are executed in opposite directions.

For example, an EFP could involve selling an FX spot and buying an FX future in the same currency pair, giving participants the best of both worlds. EFPs are typically traded bilaterally between clients and their bank by voice or chat. However, when it comes to Eurex’s EFP offerings, they can also be traded electronically through the 360T platform.

This allows clients to put their liquidity providers in competition to improve execution results, as well as streamlining their EFP workflows through direct order management system (OMS) integration - just as they can with OTC FX. When a client engages in an EFP, they are essentially exchanging their OTC FX position for an FX futures position.

How EFPs are Bridging the Gap Between OTC and Listed FX Markets

EFPs are playing an increasingly crucial role in the FX market as they provide an efficient mechanism to transfer a position between OTC and listed FX future markets.

They offer a bridge between the two realms, allowing active traders to view them as a spot to international monetary market (IMM) swap with the far leg centrally cleared. For buy-side participants, EFPs act as a translation layer between OTC and listed FX, providing a mechanism to use OTC liquidity while leveraging the advantages of central clearing.

For example, a client who holds an FX spot position as a result of a trade with OTC counterparts may wish to convert that exposure into an FX future.

They can engage in an EFP with their bank by simultaneously selling the spot and buying the future. Once that is complete, the original spot position is offset by the new spot leg, effectively transforming the client’s spot position into a futures position.

The Benefits of EFPs

Versatility is at the heart of EFPs, which serve a multitude of use cases. By combining the highly liquid OTC FX markets with the benefits of standardised and centrally cleared FX futures, benefits include:

• Liquidity: EFPs allow traders to trade with OTC liquidity when building a futures position.
• Efficiency: They provide an efficient way of transferring positions between OTC and listed FX markets, streamlining the process and mitigating against risk.
• Portfolio optimisation: EFPs are a valuable tool when it comes to optimising portfolios, allowing participants to manage capital, credit and uncleared margin rules efficiently.
• Allocating capital: EFPs can be used to optimise capital allocation by shifting exposure between OTC and futures markets.
• Futures-only EFPs: It has become increasingly common for EFPs to be used to create futures positions without having an existing OTC position. This can be done by executing against OTC benchmarks such as the London 4pm fix.
• Risk management: EFPs can be used to hedge against risk and optimise risk management strategies. EFPs support capital efficiency by moving OTC positions into clearing, allowing firms to manage their level of uncleared derivatives exposure effectively.

The 360T interface

The collaboration between Eurex and 360T for EFPs presents an efficient and streamlined process for any participant.

Since OTC FX platform 360T enabled electronic EFPs alongside OTC FX products, OTC users have been able to enjoy their familiar OTC toolset and integrations for their EFP trades too, bringing the benefits of electronic trading to an EFP market that has previously relied on voice or chat channels for execution.

For FX futures relationship trading models in 360T, the primary benefit for EFP clients is the ability to put multiple liquidity providers in competition electronically for each order.

This functionality significantly simplifies their best execution requirements, making the execution process more efficient and transparent.

Conclusion: A Powerful Tool for Modern FX Trading

EFPs have emerged as a valuable tool for participants in the FX market. They allow traders to efficiently manage their positions, optimise their portfolios and seamlessly bridge the gap between OTC and exchange-traded FX instruments.

Clients are already harnessing the power of EFPs to replicate their OTC trading capabilities when dealing in FX futures. And by combining Eurex’s EFP offering with the 360T interface, leveraging the benefits has never been easier.

Interested to hear more about Eurex's fully cleared FX solutions leveraging your long-standing OTC relationships? Request a call back with one of their FX experts to get information on the Eurex FX service offer and visit their website.