Exchange for Physical (EFP) Trades

Two counterparties who both hold futures positions but actually want physical commodity exposure don't have to unwind their futures on the open exchange and then separately arrange a physical deal. Instead they can privately agree to an exchange for physical (EFP): one side hands over the physical commodity, the other transfers an equivalent futures position, at a price they negotiate between themselves, and report it to the exchange afterward. It swaps futures risk for physical risk (or vice versa) in one step, off the public order book.

Why traders use them

A refiner who is long crude futures as a hedge, and a trader who has excess physical crude to deliver, both benefit from an EFP: the refiner converts its futures hedge into the physical barrels it actually needs, and the trader converts unwanted physical inventory into a futures position it can manage more easily, without either side pushing the market by trading a large block on-exchange.

Worked example

A trading firm holds 100 long WTI futures contracts (1,000 barrels each) as a proxy hedge but actually needs the physical oil for a refinery delivery next week. It finds a producer with 100,000 barrels of physical crude to place. The two agree an EFP: the firm delivers its 100 futures contracts to the producer, the producer delivers 100,000 barrels of crude to the firm, at a negotiated basis to the futures settlement price — both sides get the position they actually wanted, and only the completed EFP (not the negotiation) is reported to the exchange.