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 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). 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.
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). Thus, for example, whereas the base strategy-based maintenance margin requirement for a non-leveraged long ETF is set 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 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.
Portfolio Margining accounts reporting net liquidating equity below USD 100,000 are limited to entering trades which serve solely to reduce the margin requirement until such time as either: 1) the equity increases to above 100,000 or 2) the account holder requests a downgrade to Reg T style margining through Account Management (select the Trading Access and then trading Configuration menu options).
If a Portfolio Margining eligible account reporting net liquidating equity below USD 100,000 enters an order which, if executed, would serve to increase the margin requirement, the following TWS message will be displayed: "Your order is not accepted, margin requirement increase not allowed. Equity with loan value is less than 100,000.00 USD."
Please note that requests to downgrade to reg T will become effective the following business day if submitted prior to 4:00 ET. Also note that as the Reg T margining methodology generally affords less leverage than does Portfolio Margining, requesting a downgrade may lead to the automatic liquidation of positions in your account in order to comply with Reg T. You will receive a warning message if that is the case at the time you request the downgrade.
Portfolio Margining is eligible for US securities positions including stocks, ETFs, stock and index options and single stock futures. It does not apply to US futures or futures options positions or non-US stocks, which may already be margined using an exchange approved risk based margining methodology.
In order to enabled for portfolio margining an account must be approved for option trading and must have at least USD 100,000 in net liquidating equity. Account holders will also be required to acknowledge and sign the Portfolio Margin Risk Disclosure document and be bound by its terms.
Portfolio margining may be requested through the on-line application phase (in the Account Configuration step) or after the account has been approved. To apply once the account has already been approved, log into Account Management and select the Trading Access and then Trading Configuration menu items. There you may choose the portfolio margin treatment which will initiate the approval process. Please note that requests are subject to review (generally a 1-2 day process) and may be declined for various reasons including a projected increase in margin upon upgrade from Reg T to Portfolio Margining. Also note that accounts approved for portfolio margining but maintaining net liquidating equity below the USD 100,000 threshold will remain subject to Reg T margining and not have portfolio margining applied until such time the net liquidating value of the account exceeds USD 100,000.