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TheStreet Open House

Leveraged ETF Margin Rules to Change

NEW YORK ( TheStreet) -- In what could be be a major blow to ultra-long and utra-short ETFs, the Financial Industry Regulatory Authority announced Tuesday that it would be raising margin requirements for leveraged ETFs on Dec. 1.

In Regulatory Notice 09-53, FINRA notes that it will be implementing increased customer margin requirements for leveraged ETFs and uncovered options overlying leveraged ETFs.

Leveraged ETFs like the Direxion Daily Financial Bull 3X (FAS) and Direxion Daily Financial Bear (FAZ) have become increasingly popular with investors over the last year. These funds use derivatives like futures and swaps to achieve ultra-long or ultra-short exposure to their underlying indices.

FINRA notes the "inherent" volatility of leveraged ETFs as the reason for the new requirements. Since many of the leveraged ETF funds are designed to give investors 200% or 300% exposure to their underlying indices, the funds can swing violently depending on the direction of the market.

Citing NASD Rule 2520, FINRA says that "in response to market conditions," it will "prescribe higher initial and maintenance margin requirements." FINRA also is careful to distinguish the "increased volatility of leveraged ETFs compared to those of their non-leveraged counterparts."

Currently, in a strategy-based margin account, the maintenance margin requirement is 25% of the market value for any long ETF, and generally 30% of the market value for any short ETF. The new margin rules will require that margin requirements increase by "a percentage commensurate with the leverage of the ETF, not to exceed 100% of the value of the ETF."

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