Two parties agree a price for the physical goods and simultaneously transfer offsetting futures positions: the cash buyer takes the long futures, the cash seller takes the short. It lets a hedger unwind futures and price physical in one step, at a mutually agreed basis.
EFPs are legal exceptions to the rule that all trades must cross the central order book, and they are how much of the real commodity and precious metals business actually prices itself.
Example: a refiner buys 500,000 barrels from a trading house at "January CL plus $0.60" and passes 500 long CL contracts back. No screen print at $0.60 ever appears; the EFP is reported separately.
Related: efrp, basis, block-trade, physical-delivery, cash-market