Exchange for Physicals

An Exchange for Physical (EFP) is a transaction in which you sell stock and buy it back for future delivery by buying a Single Stock Future (SSF), or you buy the stock and sell the SSF.

exchange for physicals

FEATURES

An EFP lets you swap a long or short stock position for a Single Stock Future (SSF), combining the two legs into one EFP transaction. SSFs have an interest rate built into their price that is determined competitively by numerous market participants. Like Repos and Reverse Repos in the debt markets, EFPs provide a cheap and efficient financing vehicle.

    • If you carry a long stock position on margin, the EFP gives you the opportunity to reduce your financing cost because you will likely be able to sell the stock and buy the forward at a premium that is lower than your margin rate.
    • If you are short the stock, you receive interest on the credit balance generated by your short sale, but this interest is less than the premium you would receive by selling the SSF and buying back the short stock.
    • If you have excess cash in your account and would like to earn a higher return, you could buy stock and sell it forward at a premium higher than the interest your cash generates.
    • Increased leverage; SSFs have only a 20% margin requirement.
    • Ability to sell SSFs short on a downtick.

You must post margin when you carry a futures contract. The margin is 20% of the value of the underlying stock and IB pays interest on all SSF margins.

All SSFs are settled through the Options Clearing Corporation, an AAA-rated entity, making any interest earned through implied interest safer than with many other interest earning alternatives. IB displays the EFP spread on an annualized basis net of dividends for easy comparison with broker interest rates.

Risks

Security Futures are not suitable for all investors. The amount you may lose may be greater than your initial investment.