Shelley Banton, head of education for ASF Audits, said in a recent webinar that trustees should be aware of how regulations in the SIS Act specifically apply to derivatives.
“This is where regulation 13.15A steps in and allows the fund to provide improved charge over its derivative assets as long as the derivative contract complies with the rules of the approved body,” she said.
“This requires that the fund has a derivative risk statement in place, which means that where the fund is trading in exchange-traded options, trustees can give that charge over assets of the fund as long as they trade from a list of approved bodies from schedule four of the SIS Regulations,” she said.
Ms Banton said the list has around 144 approved bodies including domestic and foreign exchanges and clearing houses, the ASX 24, the NASDAQ, and the Shanghai Futures Exchange, but it does not mention any cryptocurrency exchanges that are trading in synthetic crypto investments.
“You need to be aware that it will be a breach of the regulations if your clients are trading in crypto derivatives,” she said.
Although best practice is for a separate document to be in place regarding derivative investments, Ms Banton said this can be embedded in the investment strategy, but has to be a separate standalone unit in that strategy.
“It has to include the restrictions and controls on using derivatives, which means you can look at the expertise of people who are involved in trading those ETOs, and it also has to include the compliance processes to ensure that the controls are effective,” she said.
It’s also important to remember that while the term derivative applies to a variety of financial arrangements, it doesn’t mean that everything’s going to meet the requirements of the SIS Act and may not pass muster at audit time.
“The ATO is warning about derivatives and has said that in general, funds should not be using derivatives as a speculative tool, especially in those situations where the net exposure of fund assets to that asset class is outside the limits set in the investment strategy,” she said.
“Also remember that something we look for at audit is the fact that the fund’s total portfolio is not geared up through derivatives simply to circumvent the borrowing limitations imposed by section 67 of the SIS Act.”
