Trading derivatives
The growth in both derivative trading and SMSFs over the last decade raises the question as to whether derivatives can be traded inside a Self Managed Super Fund (SMSF), and if so, under what restrictions or parameters?
The Superannuation Industry Supervision (SIS) Act (the body of superannuation law) actually prescribes very few restrictions on exactly what type of investments trustees can go into, however it is very prescriptive about the way that investments can be structured.
In relation to derivatives, the main issue here is that some derivative contracts have an asset collateral requirement, and accordingly may fall foul of regulation 13.14. This section states that the trustee must not give a charge over, or in relation to, an asset of the fund.
However, there is an exception when it comes to derivatives such as options and futures contracts as regulation 13.15a states that a trustee may give a charge over an asset of the fund if:
The charge is given in relation to a derivatives contract. The charge is given in order to comply with the rules of an approved body (such as the options clearing house) n The fund has in place a derivatives risk statement. The investment to which the charge relates is made in accordance with the derivatives risk statement
So it would appear that under the SIS act, derivatives are a legitimate and allowable investment for a SMSF providing the above issues are satisfied. What is needed to allow derivatives to be used in your SMSF?
Here are some things for trustees to include on their check-list:
Trust deed
Your trust deed governs the rules of your fund. For you to do anything in your fund, your trust deed must allow it. check in the €Investments€ section of your deed, and see if it allows investment in derivatives. Most deeds should, but never just assume. You always need to check that this is the case.
Derivatives Risk Statement
A Derivatives Risk Statement is required (and must be adhered to) where the trustees are entering into derivatives contracts where an asset of the fund is held as collateral. covered calls on shares are an example. This statement follows a specific format and requires certain specific information to be included.
Written investment Strategy
This sets out the investment strategy for the fund. Derivatives should not be treated as a separate asset class, but rather as part of the exposure to the asset class to which the derivative relates. Whilst this seems logical, it does raise the issue of how to measure the exposure of a derivative contract.