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

If an iron condor strategy exists in the account, then the margin requirement on that strategy will be the margin on one of the spreads in that iron condor.  If the margin requirements on each individual spread is different, then IB will use the requirement that is greater. 

There are two scenarios which could occur if a long option is taken to expiration.  If the option is out-of-the-money at expiration and you do not choose to exercise it, the option will expire worthless, and your losses will consist of the premium that was paid to acquire the option.  If the option is in-the-money at expiration by 0.01 or more, it will be automatically exercised on your behalf (unless you previously chose to lapse the option) by the Options Clearing Corporation (OCC).  The OCC processes monthly expiration options on the third Saturday of the month, or the day after Friday expiration.  The resulting long or short position will be put into the account, effective on the Friday trade date.  If the account has sufficient margin to satisfy the requirement on the resulting position, it will then be up to the account holder to decide what they want to do with the position.  If the resulting position causes a margin deficit, the account will be subject to liquidation at a time which is defined by the holdings within the account.  Please be aware that any positions could be liquidated as a result of the account being in margin violation—the liquidation is not confined to only the shares that resulted from the option position.  For example, if the account holds currency, futures, future options positions or and non-USD product, the account may begin to liquidate to meet the margin deficit as soon as a corresponding market opens.