Finra hits customers with increased margins for leveraged ETFs

New Financial Industry Regulatory Authority (Finra) rules come into effect today, putting increased margin maintenance requirements in place for investors who hold leveraged exchange-traded funds (ETFs). Margin requirements are now to be "commensurate with the leverage of the ETF", according to Finra's regulatory notice.

Existing margin costs are 25% of market value for a long ETF and 30% for a short ETF. This figure will now be multiplied by the leverage of the underlying fund to determine the new margin requirement for "non-traditional ETFs", as Finra calls leveraged products. "In view of the increased volatility of leveraged ETFs compared to their non-leveraged counterparts, Finra believes higher margin levels are necessary," says the regulatory authority in the new rules.

However, industry participants believe the new requirements may be a sign that Finra is trying to raise the bar of entry for retail investors. Leveraged ETFs have been a source of controversy after it emerged that due to daily resets, it is unlikely they will achieve their investment objectives over periods longer than one day. Finra issued a regulatory notice in June 2009 reminding dealers of sales practice obligations, and at least one lawsuit is underway against an ETF provider by a group of investors who say the products were mis-sold to them.

New margin requirements for listed uncovered options linked to leveraged ETFs and day-trading of the products have been deferred for implementation until April 30, 2010, to "accommodate ongoing changes in options symbology and other systems-related concerns," says Finra.