FINRA and Taxes - A Good News, Bad News Punch For Leveraged ETFs
November 27, 2009

SAN DIEGO (ETFguide.com) - November has been an eventful month for leveraged and leveraged short ETFs. Direxion, ProShares, and Rydex all announced their tax-distributions, which were mostly rather tame, while FINRA made owning leveraged (short) ETFs just a bit tougher.

Let's start with the good news. Rydex SGI and ProShares announced that investors would be spared to deal with tax distributions in connection with their lineup of leveraged or short ETFs.

Direxion on the other hand announced considerable tax-distributions. The ex-dividend date for Direxion was November 20th. No prior notice was given by Direxion. As per Direxion's distribution announcement, the distributions ranged from 7.48% to 14.70% of NAV (on 11-20-09). Below is a list of affected ETFs. More than 99% of gains are considered short-term capital gains for tax purposes.

Direxion Daily Emerging Market Bull 3x Shares (NYSEArca: EDC): 14.70%
Direxion Daily Technology Bull 3x Shares (NYSEArca: TYH): 14.50%
Direxion Daily Developed Market Bull 3x Shares (NYSEArca: DZK): 14.03%
Direxion Daily Mid Cap Bull 3x Shares (NYSEArca: MWJ): 13.83%
Direxion Daily Large Cap Bull 3x Shares (NYSEArca: BGU): 11.68%
Direxion Daily Small Cap Bull 3x Shares (NYSEArca: TNA): 11.61%
Direxion Daily 30 yr Treasury Bear 3x Shares (NYSEArca: TMV): 11.18%
Direxion Daily Energy Bull 3x Shares (NYSEArca: ERX): 10.52%
Direxion Daily 30 yr Treasury Bull 3x Shares (NYSEArca: TMF): 10.06%
Direxion Daily 10 yr Treasury Bear 3x Shares (NYSEArca: TYO): 8.21%
Direxion Daily Real Estate Bull 3x Shares (NYSEArca: DRN): 7.48%

As a point of reference, last years tax distributions by Rydex exceeded 80% on one ETF. ProShares least tax efficient ETF last year declared more than 40% of taxable gains.

New FINRA margin requirements for leveraged (short) ETFs

Effective April 30, 2010 (this date has been changed from originally December 1, 2009), the Financial Regulatory Authority (FINRA) is implementing new margin requirements for leveraged ETFs and uncovered options overlying leveraged ETFs. 

In general, FINRA is increasing the maintenace margin requirements for leveraged ETFs and associated uncovered options by a factor commensurate with their leverage.  

In a strategy-based marging account, the current maintenance requirements for leveraged ETFs is 25% of the market value. For short ETFs, the current maintenace margin is generally 30% of the market value.

Effective December 1, 2009, these maintenace margin requirements will increase by a percentage commensurate with the leverage of the ETF, not to exceed 100% of the value.

Example:

100 Shares of Ultra S&P 500 ProShares (NYSEArca: SSO)
Marketvalue: $3,785
Maintenance requirement: 2 x 0.25 = 0.50
$3,785 x 0.50% = $1,892.50 

100 Shares of Direxion Daily Financial 3x Shares (NYSEArca: FAZ)
Marketvalue: $1,965
Maintenance requirement: 3 x .30 = 0.90
$1,965 x 0.90 = $1,768.50

More information regarding the new FINRA requirements can be found here.