Synthetic EFP Rates

An Exchange for Physical (EFP) allows the swap of a long or short stock position for a Single Stock Future (SSF). 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. The EFP transaction is one where you sell the stock and buy it back for future delivery by buying the SSF future, or you buy the stock and sell the SSF.

There are several reasons to use this type of transaction:

1. 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.
2. 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.
3. 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.

The tables above highlight the highest (investment opportunity) and lowest (borrowing opportunity) synthetic EFP rates available in the market. These synthetic rates are computed by taking the price differential between the SSF and the underlying stock, netting dividends, to calculate an annualized synthetic implied interest rate over the period of the SSF. 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.