To the Members of the Law and Compliance Division of the Futures Industry Association and Other Interested Parties:
The attached Uniform EFP Transactions Agreements (“EFP Agreements”) have been developed by the Executive Committee of the Law and Compliance Division of the Futures Industry Association (“FIA”) in consultation with the Managed Funds Association ("MFA"), the Futures and Options Association ("FOA"), and several U.S. and U.K. exchanges. It is designed to simplify and facilitate the documentation of exchange of futures for physicals (“EFP”) transactions by establishing a common approach to the legal and commercial obligations of the parties to an EFP transaction.
The EFP Agreements are intended to be standardized documents. Although persons using the Agreements may customize or modify them, they are expected to note the changes conspicuously, such as by prominently highlighting additions and deletions or by making any changes in a separate schedule. Failure to do so may constitute an implied representation that the document is, in fact, the Uniform EFP Transactions Agreement and that it has not been modified in any respect. (Customer Version, footnote 1; Trader Version, footnote 1)
The creation of a standardized EFP Agreement required addressing many regulatory and business issues concerning the unique elements that constitute a bona fide EFP transaction. The Commodity Futures Trading Commission ("CFTC") and the exchanges have adopted rules and interpretations relating to various aspects of EFP transactions which are not necessarily uniform. Therefore this memorandum, which explains the drafters’ reasoning behind certain provisions, is not a guide to or an explanation of all legal or regulatory issues related to specific EFP transactions or contractual relationships. Persons interested in using the EFP Agreement should consult with their legal counsel and any other advisors they deem appropriate before doing so, and should familiarize themselves with the specific requirements of the relevant exchanges.
Like the International Uniform Execution Services (Give-Up) Agreement ("Give-up Agreement"), the EFP Agreement is presented in two formats: (i) the Trader Version, which is designed to be used where the Customer has authorized a trading advisor or other third party to effect EFP transactions for the Customer’s account; and (ii) the Customer Version, which should be used where there is no third-party advisor. As with the Give-up Agreement, all transactions conducted under the EFP Agreement are always subject to Applicable Law (as defined in Section 1 of each version of the EFP Agreement) while the contractual relationship between the parties, as embodied in the EFP Agreement, will be governed in each case by the governing law chosen by them. (Customer Version §11, Trader Version §13)
However, the EFP Agreement differs in numerous respects from the Give-Up Agreement, some of which are described below.
- EFPs, by their nature, do not involve the execution of an order on an exchange. Rather, an EFP involves the privately negotiated exchange of positions in a cash (“physical”)commodity for an opposite position in a related futures contract, at prices agreed to by the parties. Thus, provisions of the Give-Up Agreement relating to the placement and execution of orders are not applicable to EFP transactions and have been omitted from the EFP Agreement. For the same reason, the EFP Agreement does not include references to an executing broker.
- The CFTC and exchange rules establish certain documentation requirements for EFPs. The EFP Agreement accordingly requires each party to create, maintain and provide upon request all documents required by Applicable Law, including documents relating to the cash transaction in the physical commodity. (Customer Version §1; Trader Version §1)
- The EFP Agreement includes certain limited representations and warranties relating to the Customer’s and, where applicable, the Trader’s authority to enter into the EFP Agreement and EFP transactions. (Customer Version §2; Trader Version §2)
- It is anticipated that most EFP dealers will be self-clearing or affiliated with a clearing broker. Thus, the problems that could arise from the failure to clear the futures component of an EFP are most likely to arise, if at all, because of the failure or refusal of the Customer's Clearing Broker to accept the trade. Accordingly, it was not thought to be necessary to include Dealer’s clearing broker as a party to the EFP Agreement. However, persons who wish to add the Dealer’s clearing broker as a party are free to do so.
- Where a Dealer is self-clearing, the EFP Agreement makes clear that nothing in the Agreement is intended to impose additional obligations on the Dealer in its capacity as a clearing broker. (Customer Version §4; Trader Version §4)
- In a give-up transaction, failure of a Customer’s Clearing Broker to accept a give-up trade potentially exposes the Executing Broker to risk. Accordingly, the Give-Up Agreement authorizes the Executing Broker to take certain steps (such as clearing the trade for the Customer or liquidating the position) if the Customer’s Clearing Broker does not accept the trade.
- The Trader Version can be used in circumstances where the Trader is acting for more than one Customer of a clearing broker and contains a provision relating to multiple customers. In such a case, the name and/or account number of each Customer should be listed on the Appendix or on a separate schedule to the EFP Agreement. (Trader Version §11)
- An Appendix has been made a part of the Agreement on which the parties will supply contact information and Customer identification. Customers may be identified by name or, where permitted, by account number at their respective Clearing Brokers.
Should you have any questions or wish to discuss any aspect of the Agreement, please do not hesitate to call any member of the Executive Committee of the Law & Compliance Division of the FIA.