Finra defers increased margin requirement for options on leveraged ETFs

The Financial Industry Regulatory Authority (Finra) has deferred the increased maintenance margin requirement for options on leveraged ETFs until April 30 2010.

The industry body has also deferred the increased day-trading margin requirements with respect to leveraged ETFs, until the same date.

Finra says while it is committed to increasing these margin requirements, it is also aware that listed options markets are undergoing an overhaul of the method of identifying exchange-traded options contracts, in a move called the Options Symbology Initiative.

As a result of this new methodology, which is to be completed by February next year, Finra has deferred the increased margin requirements so firms can allocate resources to meet the new methodology deadline.

However, the industry body highlights that that the increased maintenance margin for leveraged ETFs came into effect on December 1 2009, as announced earlier in the year (ETFM, September 4).

The margin requirement for any long ETF is 25% of the market value and for any short ETF, 30% of the market value. As of December 1, these requirements increased by a percentage respective to the leverage of the ETF. For example, a two-times leveraged fund would require margin amounting to two times 25% of the market value.

Direxion Funds marketing director Andy O'Rourke says: "As we are uncertain about how many investors are trading leveraged ETFs in margin accounts, we are uncertain about how big an impact the new margin requirements will have on the broader industry."

He adds: "We do believe that the vast majority of Direxion Shares ETF shareholders are buying the funds in regular non-margin accounts and would like to make sure that it is clear that in this case, there are obviously no margin requirements and that investors can never lose more than their original investment."

Finra says the increased margin requirement is a response to market conditions, in respect of the heightened volatility of leveraged ETFs compared to non-leveraged funds.