The funds under management (FUM) of Australian superannuation funds have grown substantially since legislation was introduced in 1992 requiring employer contributions. Over the past five years, total FUM has climbed from approximately A$2.3 trillion ($1.44 trillion) to A$4.1 trillion and is expected to continue growing for the next 10-20 years before stabilizing at approximately A$9 trillion.

The Australian market has limited available investment opportunities, and these tend to be concentrated in the banking and mining sectors. As a result, many funds have looked to non-Australian markets for assets to complement and diversify their portfolios.

Superannuation funds have increasingly used derivatives to cost-effectively and efficiently manage their non-Australian-dollar currency and investment exposures. According to the Reserve Bank of Australia (RBA), outstanding derivatives positions by Australian superannuation funds are estimated to stand at approximately A$900 billion, mainly in FX derivatives.

As a result, the Australian Prudential Regulation Authority, the Australian Securities and Investments Commission and the RBA are increasingly focusing on the superannuation sector and have turned their attention to systemic risks and operational capacity relating to derivatives.

This report looks at how funds can navigate the regulatory requirements and effectively manage their use of derivatives. This includes:

• Reviewing and documenting the operational, liquidity and regulatory issues associated with increased use of derivatives to manage non-Australian-dollar exposures.
• Investigating the systems, processes and standards to manage derivatives exposures.
• Examining the range of derivatives that can be used to hedge offshore investments.
• Planning for increased use of derivatives and the impact this will have, including on access to
  markets.
• Maintaining and increasing proactive interactions with regulators and other parties, such as
  central banks and industry associations.
• Adopting established technology solutions to increase efficiency and reduce operational and
  liquidity risks.

Click on the attached PDF to read the full report.