Indiana Grain Company, LLC

Posted: 09/03/09

By: tomgrisafi

Regulators are imposing new restrictions on leveraged exchange-traded funds, volatile investments that can multiply the gains or losses of a market index or benchmark.

Traditional ETFs track a market index such as the Standard & Poor's 500, and can be traded throughout the day, unlike mutual funds. Leveraged ETFs seek to deliver multiples of an index or benchmark, often in volatile areas such as commodities or currencies that involve derivatives like futures contracts and swaps.

The Financial Industry Regulatory Authority issued a notice Monday that it will increase customer margin requirements in leveraged ETFs beginning Dec. 1. The requirements boost the amount an investor must deposit with a broker before they can borrow to invest ''on margin'' in the products.

FINRA, an independent industry regulator, and government regulators at the Securities and Exchange Commission have recently issued warnings highlighting risks for investors in leveraged ETFs, particularly those investing for the long-term. And some brokerage firms have set new sales limits on customer investments in leveraged ETFs, with some halting sales outright.

Source: Reuters, New York Times

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