Effective December 1, 2009, FINRA has implemented increased customer margin requirements for leveraged Exchange Traded Funds (ETFs) and uncovered options underlying leveraged ETFs (see NASD Rule 2520 and NYSE Rule 431). 

Leveraged ETFs are a subset of ETFs which 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 a generate performance which is not only a multiple of but also the inverse of the underlying index or benchmark (e.g., a short ETF). 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. 

The regulatory objective with respect to this margin increase is to recognize the leverage embedded in these instruments and establish a margin rate which is commensurate with that level of leverage (not to exceed 100% of the ETF value). Thus, for example, whereas the base strategy-based maintenance margin requirement for a non-leveraged long ETF will remain at 25% and a short non-leveraged ETF at 30%, examples of the maintenance margin change for leveraged ETFs are as follows:

1. Long an ETF having a 200% leverage factor: 50% (= 2 x 25%) 

2. Short an ETF having a 300% leverage factor: 90% (= 3 x 30%) 

A similar scaling in margin will also take effect for options. Thus, for example, whereas the base strategy-based maintenance margin requirement for a non-leveraged listed and uncovered broad based ETF index option will remain at 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), that 15% rate will increase by the leverage factor of the ETF. 

In the case of portfolio margin accounts, the effect will be similar, with the scan ranges by which the leveraged ETF positions will be stress tested increasing by the ETF leverage factor. 

Clients maintaining positions in these ETFs should be aware that IB's standard liquidation policies will remain in effect upon the implementation of this new margin requirement and thereafter and any account which reports a margin deficit is subject to immediate liquidation. 

A list of the leveraged ETF products impacted by this change are outlined below