Leveraged ETF Margin Rules Come Into Effect

by on May 3, 2010

Leveraged ETFs have found themselves in the regulatory spotlight repeatedly over the last year. Several investors who failed to understand the math behind leveraged ETFs have filed lawsuits against ProShares and Direxion, alleging that investments in these products caused them to incur big losses (read more about these lawsuits here and here). The SEC has put a temporary freeze on approval of new derivatives-based ETFs and mutual funds, saying that it wants to take a closer look at investor protections afforded by these products. And late last week the Financial Industry Regulatory Authority finally implemented a rule that it had originally planned to introduce in late 2009, increasing the minimum margin requirement for leveraged ETFs “by a factor commensurate with the leverage of the ETF.”

Previously, margin requirements on leveraged ETFs had ranged from 25% to 30%, depending on the whether the exposure maintained was long or short. According to the new regulations, the new margin requirements will be computed by multiplying previous requirements by the leverage provided (e.g., 2x, 3x). See more on how the new regulations will impact requirements here.

The changes will also impact the amount of money day traders will have to keep in their margin accounts, with the normal $25,000 maintenance requirement now being multiplied by the leverage factor of the ETF. It’s unclear how much of an impact the new changes will have on leveraged ETFs. Some have noted that many users of these products don’t use them within a margin account, meaning that the impact would be minimal. The new rules were originally scheduled to be rolled out on December 1, but were pushed back until the end of April.

Disclosure: No positions at time of writing.