Compliance, Cryptocurrency, Investments, SMSF

Derivatives require extra trustee care

Derivatives SMSF

SMSF trustees need to be aware of their heightened obligations under the SIS Act when investing in complex financial securities such as derivatives.

An SMSF specialist practitioner has cautioned trustees about the inherent risks of investing in derivatives and emphasised the need to comply with specific obligations outlined in the Superannuation Industry (Supervision) (SIS) Act and Regulations when making such investments.

“Firstly, the fund’s trust deed must permit or not specifically exclude investments in derivatives and, secondly, the investment strategy must explicitly state that the fund intends to invest in derivatives,” ASF Audits head of education Shelly Banton told attendees at an ASF Audits SMSF webinar last week.

“The next hurdle is SIS regulation 13.14 because trustees are not allowed to give a charge over fund assets, but there are some exceptions that we know of.

“One of these [exceptions] is a limited recourse borrowing arrangement and another one is where the fund creates a charge over the assets as a result of investing in derivatives such as options and futures.

“So this is where regulation 13.15A kicks in, which [states] you can do all of that as long as the contract complies with the rules of an approved body, which is outlined in schedule 4 of the SIS Act, such as trading through the ASX 24 [which allows futures and option trading], and there’s a list of over 140 approved bodies in schedule 4 of the SIS Act.”

Banton further noted derivative risk statements (DRS) are also required by the SIS Act, which show the trustees have thought about and managed the risks associated with investing in derivatives.

“The other thing that has to be in place is a DRS. That’s separate to the investment strategy, and that outlines the policies, the restrictions and controls for using derivatives and making sure that all of those compliance processes are in place,” she added.

“If they’re trading in Australia on the ASX 24, it won’t allow them to do so unless their charge has been given. This is usually embedded way down in the product disclosure statement, so you will need a DRS in each and every case.

“A DRS isn’t required, however, when a company has a rights issue, unless of course the trustee purchases more options from the ASX 24 through their broker.”

She also strongly warned SMSF practitioners and advisers against considering investments in cryptocurrency-related derivatives due to the absence of approved authorities in the domain within the existing regulations.

“We’re seeing a lot of synthetics come out of crypto and I can 100 per cent assure you that there are no approved crypto exchanges listed in schedule 4 of the SIS Act,” she said.

“Any form of derivative taken out in relation to crypto where a charge over the asset is given and it will be, will be an automatic breach of regulation 13.14, so please just get your clients to say no.”

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