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Approximately A$900 billion of open derivatives positions are held by Australian superannuation funds, according to the Reserve Bank of Australia (RBA). The International Swaps and Derivatives Association (ISDA) has highlighted that these funds are making more frequent use of derivatives as a cost-effective and efficient way to manage their foreign currency and investment exposures. With these derivative trades there usually also comes some ASIC trade reporting requirements.
How are Australian Superannuation funds currently using derivatives?
Due to the limited size of the domestic investment market and a rising proportion of offshore assets, Australian super funds are increasingly using derivatives to manage currency and investment risks. In fact, ISDA notes that the value of super funds under management ($4.1 trillion) has outgrown the total market capitalisation of all companies listed on the Australian Stock Exchange ($3 trillion). Accordingly, they are not only investing in Australian shares and assets, but those overseas too.
Currency hedging has become an effective strategy for super funds as they reach the limit of what they can invest in local markets. About 50% of funds under management is held in non-AUD assets, which can expose the funds to risks related to fluctuations in currencies and interest rates, when members of super funds expect returns in AUD. To help manage these risks, super funds are frequently trading derivatives such as FX forwards, cross-currency swaps, interest rate swaps, FX options and total return swaps.
Key trade reporting requirements under the ASIC Rules
Super funds are responsible for complying with key regulatory requirements under the ASIC Trade Reporting Rules. These reporting obligations are complex and underwent significant changes following the ‘rewrite’ updates to the regulations which came into effect on 21 October 2024.
The ASIC Trade Reporting Rules require daily reporting of new trades and updates to existing derivatives positions, including modifications and terminations. This is a demanding and laborious process, which can use up a lot of an RSE’s compliance resources. Failure to comply can result in penalties, making it essential for firms to ensure their reporting processes are consistently accurate and up-to-date.
Super funds that invest in offshore assets involving derivatives, may be subject to foreign trade reporting regimes, in addition to ASIC requirements. Reports would be required to be submitted to an ESMA or FCA-registered Trade Repository.
Note, third parties may act as an agent reporting funds’ trades or offer consultancy on derivative reporting regulations. The oversight of third parties can attract the attention of regulators as well as resulting in operational losses and remediation costs.
Looking ahead
Super funds are expected to increase their use of derivatives due to the continuing growth in offshore investments. ISDA notes that 71% of large funds plan to increase their offshore investments and most funds also hedge assets fully against currency risk. With this increased reliance on derivatives, funds will need to dedicate more resources to ensure compliance with the ASIC trade reporting obligations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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