The Financial Industry Regulatory Authority is imposing increased margin limits on purchases of leveraged and inverse exchange-traded funds in an attempt to curtail the volatility such products impose on retail investors.
Starting on Dec. 1, the maintenance margin requirement for leveraged long- and short-ETFs will be increased by a percentage commensurate with the leverage employed by the ETF.
This amount will not be allowed to exceed 100% of the value of the ETF. For example, on an ETF leveraged by 200%, the new margin maintenance requirement will be 75% of the value of the ETF.
FINRA also is increasing the maintenance margin requirements for listed and over the-counter uncovered options on leveraged ETFs.
Currently, the maintenance margin requirement for leveraged long ETFs is 25%, while the maintenance margin requirement for leveraged short ETFs is 30%. (Read the FINRA press release here.)
The change in regulations comes on the heels of a lawsuit filed at the end of last month against ProShares by Pearson, Simon, Warshaw & Penny LLP and Tydings & Rosenberg LLP on behalf of investors who lost money in one its leveraged inverse ETF products.
Investors allege that they were not informed that shares in the UltraShort Financials ProShares Fund (NYSEArca:SKF) should not be held more than a single trading day and were not an appropriate hedge against a decline in U.S.-based financial stocks.
As a result, they claim that ProShares made materially false and misleading registration statements when it filed its application for the product with the Securities and Exchange Commission , and are seeking to recover the losses incurred.