Leveraged ETF Margin Rules to Change

Investors in the ProShares UltraShort Financial ETF(SKF), for example, would be subjected to twice the margin requirement due to the fund's 200% leverage. Investors in Direxion's Daily Emerging Markets Bear 3X Shares (EDZ), would require triple the current margin requirement.

In its regulatory release, FINRA notes that it "recently reminded firms of their sales practice obligations with respect to leveraged and inverse ETFs, including the risks caused by the fact that most of these funds are designed to achieve their stated performance on a daily basis."

FINRA's June notice to firms set off a wave of attacks against the leveraged fund industry, as issuers like ProShares, Rydex and Direxion scrambled to increase disclosure ahead of regulation. A recent lawsuit also claimed that ProShares UltraShort Real Estate (SRS) also engaged in misleading sales practices.

It was just a matter of time before this logical answer to the leveraged ETF problem was put into place. New margin requirements will have the same effect as banks cutting credit. It will trim down the field of investors and test for suitability.

This regulatory measure is an important step for the booming ETF industry. Non-traditional ETF funds should require a separate set of regulations than their traditional peers. A continued coordinated effort from regulatory agencies will be an important step in protecting investors.

-- Written by Don Dion in Williamstown, Mass.

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