SMSF Technical Education & Strategies

 

Can you invest in or trade CFDs in your SMSF ?

Contracts for Difference (known as CFDs) are synthetic financial products that allow you to access the movement in price of shares and other instruments such as stock indices, commodities, currencies and futures contracts without owning the underlying product.

When you open a CFD you effectively pay a deposit into a CFD bank account for initial margin requirements, and you then may be required to make additional margin payments to cover any moving losses on your open positions. CFDs do have a leverage effect (up to 10 times) with a consequent exposure to potentially large gains and losses in relation to a relatively small deposit.

 

The key issues for CFDs which many people questioned were:

- is there a borrowing, and hence a contravention of the 'no borrowing' rules ?

 

- is there a contravention of the 'no charge over assets law' due to the margin requirement ?

 

In the case of a CFD position being taken, the ATO addresses below its view on each of these items:

 

Borrowing:

" There is no loan between the CFD provider and the SMSF trustee and therefore no contravention of the prohibition on borrowing by trustees in section 67 of the SISA. The requirement to pay a deposit and meet margin calls does not represent borrowing, they are rather contractual liabilities to make payments if and when required and are not repayments ( Prime Wheat Association Ltd v. Chief Commissioner of Stamp Duties (NSW) 97 ATC 5015; (1997) 37 ATR 479). The obligations in relation to CFDs are distinguished from margin lending through a broker's margin account in relation to the purchase of shares by an SMSF, which does represent a prohibited borrowing under the SISA."

 

So you're OK on this one - a CFD does NOT represent a borrowing.

 

Charge over assets:

"The operation of the CFD bank account and the obligation to pay deposits and margins does not create a charge over any assets of the fund. The parties are relying on the contract and not on any security interest to be created by the contract ( White v. Conroy (1921) 21 SR (NSW) 257; (1921) 38 WN (NSW) 63, Berrington v. Evans (1839) 3 Y & C Ex 384; 160 ER 73). Under the CFD, the monies in the CFD bank account are the property of the CFD provider and the fund (investor) has no beneficial interest in the account. (Trustees need to examine individual product disclosure statements and contracts to ensure that there is no charge made over an asset as prohibited in regulation 13.14 of the SISR and that all requirements of the SISR and SISA are adhered to.) "

 

So you should be OK on this one too - there is no charge over assets provided only cash / money is used for margin requirements.

In a related document, the ATO makes it clear that "Under the product disclosure statement the CFD provider may, under a related agreement, permit an investor to deposit assets with the provider as security against their obligations to pay deposits or margins", and that the trustee must not enter into any such agreement as it will grant a charge over fund assets in relation to the obligations to make payments under the CFD.

So you're NOT OK if you use "assets" as collateral for margin (e.g. shares).

 

Note that cash is NOT classed as an 'asset' for this purpose.

 

Of course, you need to make sure you don't have any restrictions under your trust deed from investing in CFDs, and you must invest in accordance with your SMSF written investment strategy.

 

Note also that there is NO requirement for a derivatives risk statement as that only deals with options and futures contracts, where a margin is required to satisfy the requirements of an approved exchange.