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Margin Requirements - Leveraged ETF Products


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What are the Margin Requirements on Leveraged ETF Products?

Leveraged Exchange Traded Funds (ETFs) are a subset of general ETFs and are intended to generate performance in multiples of that of the underlying index or benchmark (e.g. 200%, 300% or greater). In addition, certain of these ETFs seek to generate performance which is not only a multiple of but also the inverse of the underlying index or benchmark (e.g., a short ETF).*

To accomplish this, these leveraged funds typically include among their holdings derivative instruments such as options, futures or swaps which are intended to provide the desired leverage and/or inverse performance. 

Increased Risk, Volatility & Margin Requirements: Exchange margin rules seek to recognize the additional leverage and risk associated with these instruments by establishing a margin rate which is commensurate with that level of leverage (but not to exceed 100% of the ETF value). 

What are Leveraged Exchange Traded Funds ETFs?

What is the difference in margin requirements for leveraged versus non-leveraged ETFs?   

 

Consider the difference between strategy-based maintenance margin requirements for leveraged and non-leveraged margin requirements:

 

 

 

 

Examples of the maintenance margin change for non-leveraged ETFs: 

 

 

 

Non-leveraged long ETF 

 

Short non-leveraged ETF

 
 

 

25%

 

 

30%

 

 

 
 

 

 

 

 

Examples of the maintenance margin change for leveraged ETFs: 

 

 

 

Long an ETF with a 200% leverage factor:

 

Short an ETF with a 300% leverage factor:

 
 

 

50% (= 2 x 25%) 

 

 

 

90% (= 3 x 30%)

 

 
 
 

 

A similar scaling in margin is also in effect for options. For example, the Reg. T maintenance margin requirement for a non-leveraged, short broad-based ETF index option is 100% of the option premium plus 15% of the ETF market value, less any out-of-the-money amount (to a minimum of 10% of ETF market value in the case of calls and 10% of the option strike price in the case of puts). In the case where the option underlying is a leveraged ETF, however, the 15% rate is increased by the leverage factor of the ETF. 

 

In the case of portfolio margin accounts, the effect is similar, with the scan ranges by which the leveraged ETF positions are stress tested increasing by the ETF leverage factor.  See NASD Rule 2520 and NYSE Rule 431 for further details.

 

 

*Many of these ETFs are used to take advantage of volatility and may not be appropriate for investors with less than a high-risk tolerance and an aggressive, speculative and trading profits profile. Please read the prospectuses very carefully before taking positions in these securities.

 

Links: 

FINRA Regulatory Notice 09-53 (ETF Margin Increase)

Portfolio Margin  Day Trading Restrictions   

Linked Exchange Traded Products

 

Volatility-Linked Exchange-Traded Products