The Financial Industry Regulatory Authority (FINRA) has raised the margin limits on leveraged and inverse exchange traded funds (ETFs).
The increased margin requirements will take place on Dec. 1. While leveraged and inverse ETFs have been considered to be an alternative to margin accounts, FINRA said that some investors are combining the two methods, reports Ian Salisbury for Dow Jones Newswires.
The requirements will be increased “by a factor commensurate with their leverage.” The current requirement for a long ETF is 25% of the ETF’s market value; the new requirement would be 50%. In a triple leveraged ETF, the requirement would be 75%. In a short ETF, the margin requirement is 30% of the ETF’s value; it would double to 60% under the new rules.
The requirements won’t exceed 100% of the ETF’s market value.
Maintenance margin rules state that the equity in one’s margin account must not fall below 25% of the securities in the account. If this does happen, the investor would receive a maintenance margin call, which requires the investor to put in more money and get back above the 25% level.
Margin requirements are raised if there are certain volatile positions held in an account. They help ensure that there are enough funds in an account to cover big swings in a security’s price.
FINRA’s actions today seem to be the responsible thing to do, since inverse and leveraged ETFs may not be appropriate for most investors to buy on margin.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.