EXCHANGE OF FUTURES FOR PHYSCIAL (EFP)

The demanding commitments and costs that buyers and sellers must endure when conducting exchange delivery prompts most exchanges to offer their trade and industry hedgers several alternate mechanisms to settle outstanding futures positions. The Exchange of Futures for Physical, or EFP, is the most widely used of these mechanisms as it enables delivery without resorting to the expense, inconvenience and rigidity of the strict exchange delivery procedures.

EFPs enable buyers and sellers to swap a position in the futures market for a physical position in the physical market by submitting a notice to the exchange. EFPs can also be used to either initiate or liquidate a futures position.
allow flexibility in the choice of delivery location and product specification, both of which may not necessarily conform to the futures contract;
allow traders a choice of trading partner rather than a randomly matched partner (as occurs in the exchange delivery process); and
encourage the physical supply chain to operate as normal without large amounts of the underlying product being delivered across the exchange.

Essentially, EFP mechanisms make DGCX commodities futures much more user-friendly and are tailor-made to suit buyer and seller requirements more efficiently.

ALTERNATIVE DELIVERY PROCUDEURES

In the hour after the expiry of a DGCX commodities derivative contract being allocated to sellers, the exchange will duly advise each party. For futures contracts, the exchange will randomly match all open positions. Buyers should consider the example of a buyer in location X being matched with a seller also in location X. It may not make sense for the seller to make delivery of the underlying product to the point of delivery or for the buyer to go to the point of delivery to collect it. An ADP allows the buyer and the seller 48 hours to speak with one another and perhaps simply to decide to transfer the rebar from the seller’s premises to the buyer’s premises in Abu Dhabi.

They may decide to transfer the rebar of different diameters than the exchange specification, or indeed a different but price-correlated steel of the same value as the futures contracts.

As with EFPs and EFSs, there are strict ADP rules that govern such transactions. Details of these rules, and more examples of ADPs in action, can be found on the DGCX website.



The development of sound commodity financing tools is a central part of the process of physical delivery. This is why Trust Securities DMCC, as a member of DMCC, offers an innovative and exciting product – the Dubai Commodity Receipt (DCR) - to facilitate the growth of commodity trade finance and risk management

DCRs are negotiable warehouse receipts that improve the financing of commodity trade while combating fraud. The DCR system is a mechanism for the creation of warehouse receipts for goods stored in Dubai, but it is also a facility within which these receipts can be transferred among members of the system and used to obtain finance from other members. These transactions are made on an electronic, web-based platform which ensures efficiency, speed and security.

In order to transact business on the DCR system, a trader, warehouse operator, collateral manager, inspection company or bank must first have been approved by DMCC as a DCR Member. DMCC-approved issuers issue DCRs online and, once issued, a DCR can be viewed online by the trader, transferred to another trader or pledged to a bank as security for a loan.

DGR is an electronic vault receipt system that provides members with real-time access to various forms of gold, either as bars, scrap, coins or jewellery stored in a DMCC-approved vault. An approved vault operator or collateral manager issues a DGR upon the deposit of gold by a trader. DGRs are negotiable instruments and can be endorsed by way of transfer to another trader or pledged and endorsed by way of security to a participating bank in order to obtain financing. A participating bank may request the gold, which is the subject of the DGR, to be tested and verified by an approved testing facility

DGR offers financiers the opportunity to transform credit risk into market risk, generate new profit streams, access new sources of finance and attract additional trade participation