FINRA Raises Margin Limits on Leveraged ETFs

Over the past year, leveraged and inverse ETFs have come under scrutiny forcing the Financial Industry Regulatory Authority (FINRA) to increase margin limits to aid in curbing the volatility of these investment instruments.

Earlier this month, the margin requirements for leveraged and inverse ETFs have increased by a factor commensurate with the leverage of the ETF, reports Cinthia Murphy for Index Universe. Prior to the ruling, margin costs were 25% of the market value for a leveraged long ETF and 30% of the market value of a leveraged short ETF. What this means for investors is that those who hold leveraged and inverse ETFs will not be able to take on the same amount of margin as investors who hold traditional securities.

A second part of this FINRA ruling deals with maintenance margin requirements for options overlying leveraged ETFs, which are expected to be increased as well, but the effective date for these is being deferred until April 30, 2010. The reason behind this deferral is because the listed options markets are in the final stages of a wholesale overhaul of the method of identifying exchange traded options contracts, states the FINRA Regulatory Notice.

Leveraged and inverse ETFs are a useful tool for investors who understand how they work, so be sure to do your due diligence before you buy.