Derivatives Risk Statement and Reserve Strategy

Superannuation & SMSF StrategyUnder some circumstances the SIS Act and Regulations require a SMSF to have strategies other that the Investment Strategy, including a Derivatives Risk Statement and a Reserve Strategy:

Derivatives

SIS regulation 13.14 prohibits SMSFs from allowing charges to be created over fund assets, however as this is Superannuation there are a number of exceptions. The one of interest to this discussion is contained in regulation 13.15A. Broadly, this regulation allows a charge to be created over fund assets in relations to a derivatives contract, however there are a number of requirements.

The first is the definition of ‘derivatives contract’, which is defined to be an option or futures contract. The ATO ruling ATO ID 2007/57  sets out the implications of this for what are regarded as derivatives but don’t meet this definition – such as Certificates For Difference (CFDs) – as a CFD isn’t a option or futures contract it doesn’t meet the definition, and so the exemption under regulation 13.15A can’t apply and any charge created would be a breach of regulation 13.14 This is not to say that SMSFs cannot invest in CFDs or other non-options/futures derivatives (see ATO ID 2007/56 ) but that there cannot be a charge of assets.

Secondly the change must be in order to comply with the rules of an Approved Body.

Thirdly the fund must have a Derivatives Risk Statement and the investment must be in accordance with the Statement. The regulation requires the Statement to contain:

  • policies for the use of derivatives including analysis of risks
  • controls on the use of derivatives
  • processes to ensure the controls are effective

Para-phrased, see the full requirements in reg 13.15A

This is quite a substantial requirement, tending toward the requirements of an APRA-regulated fund, though likely appropriate given the nature of derivatives. It is perhaps unfortunate that similar requirements don’t apply to SMSFs investing in other complex securities which don’t require a charge over assets.

Reserves

The Covenants inserted into the Governing Rules of an SMSF by s52B of the SIS Act include a requirement that where a fund maintains reserves the trustees:

  • ‘formulate, review regularly and give effect to a strategy for their prudential management’
    • which must be
      • consistent with the fund’s investment strategy, and
      • consistent with its capacity to discharge its liabilities

Source: Superannuation Industry (Supervision) Act 1993 s52B 

Though not directly relevant, given the lack of guidance on ‘prudential management’ of reserves for SMSFs, the following APRA publications may be of assistance:

 

Want to know more about SMSFs and Superannuation – subscribe to our NewsletterRSS feed or follow us on Twitter.

 

This article, as with all content on this site, is for informational purposes only, and is not legal, financial, tax or other advice. Please read our Terms and Conditions of Use.

Leave a Reply

Your email address will not be published. Required fields are marked *