Exchange for Physical (EFP)

An 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.

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.

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. Before trading security futures, please read the Security Futures Risk Disclosure Statement.

Long Stock Comparison

Hold 1 share long of Microsoft for 60 days with 25% of the stock value held in cash as margin, or enter into an EFP to sell the stock and buy an SSF.

Hold The Stock Long
Borrowing Cost on 75% Leverage 75%1 x $26.96 x 8% x (60/365)1 = $-0.06 - Dividends Received During Period $0.09 = Total Stock Finance cost $-0.125
Buy An EFP
EFP Income for 2 Months (Mature in 60 Days) $-0.17 - Interest Earned on Margin Balance 25%1 x $26.96 x 45% x (60/365)1 = $0.05 - Commission Costs =$-0.005 = Total EFP Finance Cost $-0.125
Savings $0.055 Per Share

¹ Borrowed % • 20% SSF Requirement + 5% excess from stock sale • Interest Charged
• Interest Earned • % of Year

At the end of the sixty day period, 1 share of Microsoft stock is held under each scenario. The trade cost savings of $0.055 from entering into an EFP to purchase an SSF instead of holding the stock would significantly reduce the cost of holding stock.

Short Stock Comparison

Go short 1 share of Microsoft for 60 days with 30% of the stock value held in cash as margin, or enter into an EFP to buy the stock and sell an SSF.

Hold The Stock Short
Interest Paid on Short Proceeds Normally Not Paid + Interest Earned on Margin Balance 30%1 x $26.95 x 45% x (60/365)1 = $0.06 + Dividents Paid in Lieu $-0.09 = Total Stock Finance Cost $-0.03
Sell An EFP
EFP Income for 2 Months (Mature in 60 Days) $0.11 + Interest Earned on Margin Balance 30%1 x $26.95 x 45% x (60/365)1 = $0.06 - Commission Costs =$-0.005 = Total EFP Finance Cost $0.165
Extra Cash Earned $0.195 Per Share

¹ Margin % • 20% SSF Requirement +10% excess from stock buy-in
• Interest Earned • % of Year

At the end of the sixty day period, 1 share of Microsoft stock is held short under each scenario. The trade cost savings of $0.195 from entering an EFP to sell an SSF instead of holding the stock short would significantly reduce the cost of shorting the stock.