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COVID period sparks SMSF interest in OTC derivatives

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By mbrownlee
September 09 2020
1 minute read
Chris Donohoe
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A surge in applications for Legal Entity Identifiers in recent months suggests that greater numbers of investors, including SMSFs, are looking to trade in non-exchange-traded instruments such as CFDs and foreign exchange, says an LEI issuer.

Since the end of September last year, SMSFs that want to trade in non-exchange-traded instruments such as CFDs and foreign exchange had to obtain a Legal Entity Identifier (LEI) number.

An LEI is a 20-character alphanumeric code that enables identification of legal entities participating in certain financial transactions.

According to APIR Systems, which is an issuer of LEIs, there was significant growth in the number of entities applying for LEIs in the last quarter of the financial year.

“We’ve seen close to a doubling [in LEIs] in the past financial year. I think the exact number is around 84 per cent,” said APIR Systems chief executive Chris Donohoe.

“So, we went from around 1,600 at 30 June 2019 to over 3,000 at 30 June 2020, but what was really interesting was a lot of that growth came from the last quarter which was very much in the middle of the shutdown and pandemic.”

A large percentage of the entities taking out these LEIs are SMSFs, he said.

This upwards trend, he said, goes hand in hand with the huge surge in retail trading on exchange markets.

“Essentially, [that was the result] of people being at home with screens in front of them deciding that they were going to start investing in the stock market,” he said.

“Now others went a little further over and said, ‘Well, there’s the stock exchange, but there’s also other instruments that I can use as well, whether that’s a CMC or an IG or a Saxo, where I can go and trade foreign exchange, or I can trade CFDs’ — so more exotic-style derivatives. For some SMSFs, [these instruments] do make up part of their portfolio.”

Instruments such as CFDs, he said, can be used to invest on either side of the transaction.

“I can sell it or I can buy it. So, effectively, if I think the market might be going down, I might short sell. You could be a seller or a buyer, so it does give you that flexibility, but there is a risk premium that goes with that as well,” he cautioned.

Miranda Brownlee

Miranda Brownlee

Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.

Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.

You can email Miranda on: miranda.brownlee@momentummedia.com.au