Yesterday, FINRA (the Financial Industry Regulatory Authority) announced Regulatory Notice 09-53. It addresses the need to charge more margin for leveraged ETFs than standard ones. I have said many times that these products are as much a function of increased leverage as they are about anything else. It is a way around the margining rules. Well, that loophole is about to close, come December 1, 2009, when new regulations go into effect.
For the underlying securities, they are going to multiply the current margin requirements (25% for long and 30% for short) by the amount of leverage, e.g. 200% for double-levered and 300% for triple-levered ETF’s. That means if you are short a triple-levered ETF, you will now have to post 90% of the price of the underlying.
For naked options sellers, there will be a similar ramp in calculating margin. Currently, the amount in addition to the option premium that needs to be held back is 15% for broad-based indexes and 20% for narrow ones. These amounts for leveraged ETFs will now be multiplied by the amount of leverage the ETF gives.
Portfolio Margining accounts will also have their current limits multiplied by the amount of leverage the product gives.
Day trading buying power numbers will also be multiplied by the amount of leverage. Basically, a security that has a 25% margin currently but is triple leveraged will actually need 75% of the market value.
I think that this will cause a dramatic decrease in the volume traded in these securities. There is much less advantage now to trading them in terms of leverage compared to the standard ETFs. It will be interesting to see how this plays out in December.
