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2nd UPDATE:Finra To Raise Margin Requirement On Leveraged ETFs

(Updates with comments from Finra starting in the second paragraph and with additional detail about new margin requirements in the sixth)

By Ian Salisbury

Of DOW JONES NEWSWIRES

NEW YORK -(Dow Jones)- Leveraged exchange-traded funds face yet another restriction as the regulator that oversees the retail brokerage industry said it plans increased margin requirements for the funds and uncovered options tied to the funds starting Dec. 1.

Leveraged ETFs, which magnify stock market gains and losses, have long been marketed as an alternative to margin accounts, which are another way to achieve the same goal. But, a Financial Industry Regulatory Authority spokesman says some investors are combining the two methods.

"They are buying a leveraged ETF, then taking on additional leverage through a margin account," he says. "We felt it needed to be addressed." Finra didn't offer statistics detailing how common the practice is.

Leveraged ETFs, such as those offered by ProFunds Group and Direxion Funds, have been one of the most popular and controversial investments to hit Wall Street in the past several years. Traders love the ability to juice returns or bet against certain segments of the market. But the way the funds compound daily gains and losses have surprised some observers, leading to warnings from several regulators including the Securities and Exchange Commission and previous comments by Finra.

In general, margin requirements for ETFs and options will be increased "by a factor commensurate with their leverage," according to Finra. The current margin requirement is typically 25% of the market value of a long ETF and 30% of a short ETF.

Thus the new leverage requirement for a long fund that aims to double daily returns would be 50% instead of 25%. For one that aims to triple daily returns it would be 75% instead of 25%.

New margin requirements won't exceed 100% of the market value, according to Finra.

-By Ian Salisbury, Dow Jones Newswires; 212-416-2241; ian.salisbury@ dowjones.com

  (END) Dow Jones Newswires
  09-01-091622ET
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