Trustees are facing a deep freeze in Europe

Summary: A new wave of global legislation coming into effect will catch out some SMSFs if they don’t take quick action.

Key take-out: The compliance process is relatively simple, but there is a registration and annual renewal cost.

Self-managed superannuation fund trustees transacting with counterparties in Europe using over-the-counter (OTC) financial products will be prevented from doing so in two months, unless they have a special identifier code.

New laws will come into play for Australian investors on March 31, requiring funds, trusts and other entities that transact in European markets using products such as contracts for difference (CFDs) or other synthetic non-exchange instruments to have a unique 20-character Legal Entity Identifier (LEI).

The LEI is a mandatory requirement of the new Markets in Financial Instruments Directive (MiFID II) reporting regime that has been introduced in Europe to create greater transparency between counterparties and to strengthen investor protection.

In Australia, entities transacting in European OTC products including SMSFs will need to have an LEI, and this requirement will be overseen by the Australian Securities and Investments Commission. The requirement will cover all SMSFs using Australian-based OTC trading platforms.

“It’s a realisation that Australia does need to move down a path to be more consistent with the other G20 partners, in particular Europe, because these regulations are affecting all of us,” says Chris Donohoe, chief executive of APIR Systems, which is licensed by the London Stock Exchange as a registered agent to issue LEI codes.

“If an SMSF is trading derivative products on a European exchange, they will have to have one of these LEI codes. I think it’s important that people understand that this is seen as identifier of the future and will be required for a lot of transactions.”

Donohoe says that a “reasonable percentage” of the 600,000 SMSFs registered across Australia transact in Europe.

“You’d be surprised, and it would only take 5 to 10 per cent of those 600,000 and you’ve got a very, very large number,” Donohoe says. “There's only about 11,000 of these identifiers issued in this country already, but yet there’s a very large potential latent group in SMSFs.

“I think it's time to build up the awareness, what are these things required for, and who should actually have them, and how do I actually go about getting them as well?”

Those requiring an LEI will need to approach a registered agent in Australia and complete a registration form, with the costs varying between accredited issuers.

APIR charges $220 per entity to register for an LEI through the London Stock Exchange, and a $135 annual maintenance fee. The turnaround time is generally 24 to 48 hours.

“The whole point of this is to be able to fully track the exposure of individual entities to specific counterparties, which was lacking during the global financial crisis,” Donohoe says.

“You have the impact on mums and dads through SMSFs, which is the need to have an LEI to be able to transact. But the other side is you will have a massive amount of data collected by regulators, central banks and policymakers to understand and take the temperature of what’s going on, to see what sort of transactions and exposures are actually out there.

“Different jurisdictions have handled it in different ways. So the United States is reasonably advanced as well and will apply these legal identifiers in slightly different ways to Europe.

“Very much, the global view is this (LEIs) will be the identifier of the future. It’s being adopted and used in different ways, but we’re lagging. So expect to see, at every level, more use of this identifier. I think that’s the bottom line.”