APRA makes a super cash call

Australian Prudential Regulation Authority deputy chairman, Helen Rowell, has sent out letters to Registrable Superannuation Entity licensees warning them to be careful about what they include in their cash holdings.

As part of a targeted review, APRA has identified examples where ‘cash' investment options are including exposures to underlying investments that would not generally be considered cash or cash-like in nature.

The definition of what actually constitutes a cash investment would appear to be fairly straightforward. But assets that APRA has observed forming part of some funds' cash options that are underlying investments include asset-backed and mortgage-backed securities, commercial bonds and hybrid debt instruments, credit-default swaps, loans and other credit instruments.

The problem is, these assets don't exhibit the characteristics necessary to be considered as cash or cash equivalent.

“Under the reasonable expectations principles as set out in SPS 530 Investment Governance APRA considers that a superannuation fund member would understand that exposure to a ‘cash' investment option or product will be readily accessible (for withdrawal or transfer) without change in value,” Rowell states.

“This aligns with APRA's definition of cash under Superannuation Reporting Standard (SRS) 530 Investments (drawn from AASB 107) which states that ‘cash':

‘Represents cash on hand and demand deposits, as well as cash equivalents. Cash equivalents represent short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.'

Rowell says that APRA has noted there were also exposures in some funds to cash-enhanced vehicles without sufficient policy guidance as to the permitted holdings of these vehicles.

“APRA further notes that there were a number of cash options where the investment policy framework permitted investments in non-cash like assets, although there were no material exposures observed.

“In view of the above, RSE licensees are reminded of their obligations under SPS 530 Investment Governance paragraph 23 which states that:

‘An RSE licensee's investment selection process must result in the RSE licensee being satisfied that: It has sufficient understanding and knowledge of the investment selected, including any factors that could have material impact on achieving investment objectives of the investment option ... and the investment is appropriate for the investment option.”

Rowell says that in addition to follow-up with specific RSEs identified as part of the desk review, APRA will monitor RSE licensees' cash investment options during the course of its supervisory activities on an ongoing basis.

“APRA expects that RSE licensees consider the content of this letter and, where necessary, review and restructure ‘cash' investment options with exposure to non-cash assets.

“APRA also expects RSE licensees to review relevant investment governance policies such that an appropriate framework is in place, including criteria for inclusion of particular assets in a cash option.”