Risk statements critical for some derivatives

SMSFs derivatives

SMSFs with derivatives that give rise to a charge over the fund’s assets must also have a derivatives risk statement in place.

Derivatives can provide a good diversification option for SMSFs, but must be used in line with specific compliance requirements, especially if they give rise to a charge over the fund’s assets, an SMSF legal expert says.

Townsends Business & Corporate Lawyers superannuation online services division managing solicitor Jeff Song noted having a formal derivatives risk statement in place was critical for SMSFs investing in derivatives that required the provision of a charge over the assets of the fund.

Song pointed out SMSFs with derivatives that gave rise to a charge over the fund’s assets had to fulfil the additional compliance requirement of having a derivatives risk statement outlining what policies the trustees would adopt in relation to the use of derivatives, how the trustees would analyse and assess the risks associated with the use of derivatives and how the use of derivatives would fit in with the investment strategy of the fund.

The risk statement should also set out what restrictions and controls the trustee would put in place to regulate the use of derivatives, particularly taking into account the expertise available to the fund, and the compliance processes in place to ensure the controls were effective, he noted.

“Not all derivatives require the investor to give a charge over its assets as security. If, however, a SMSF trustee is investing in a derivative which requires the trustee to give a charge over the assets of the fund, the trustee must have in place a formal derivative risk statement and comply with the terms of the statement throughout the investment period,” he said.

He pointed out SMSFs investing in derivatives would need to satisfy the sole purpose test in order to remain compliant and were also required to check whether potential derivatives investments were permitted by the fund’s trust deed.

“The investment strategy of the fund should also be reviewed to see if the proposed derivatives investment is within its scope,” he added.

SMSFs require a legal entity identifier (LEI) to invest and trade in derivatives or currency and, according to an issuer of the identifier, have been slow to take up and renew the LEI when it expires.

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