Tuesday, September 1, 2009

Margins Increased on Leveraged ETFs

Today the FINRA (Financial Industry Regulatory Authority) announced that margin requirements will be increased on leveraged ETFs. The amount of the increase is proportional to the amount of leverage. So a 2X ETF will see its margins increased by 2X, a 3X ETF by 3X.

                   Current 2X ETF     3X ETF
Bull ETF  25%  50%  75%
Bear ETF  30%  60%  90%

The FINRA gives the example below:

Like Direxion and Horizon, they also use the wrong number for leverage. Mathematically speaking, 2X is not 200%. 2X is 100%, and 3X is 200%.

Anyway, these are instruments of mass financial destruction that should never have existed. They have increased the coffers of the issuers by hundreds of billions of dollars, likely trillions by now. Please see our FAS-FAZ live Loss-o-meter. Mind boggling.

Read the full document here.

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