NEW YORK, July 12 (Reuters) - Investors are taking on record amounts of debt to buy securities on the New York Stock Exchange now that rule changes have made it easier to borrow, data showed on Thursday.
The NYSE data showed margin debt surged 11 percent to $353 billion in May, easily topping the last record of $318 billion hit in April.
Contributing to the surge are regulatory changes that allow investors to take on more debt from their brokers, said NYSE Regulation spokesman Brendan Intindola.
Under a pilot program called portfolio margining that went live in early April, several brokerage firms are now offering risk-based margin rules to institutional investors.
The program is luring some of the business that had moved offshore to places, particularly London — where the product was already offered — back to the United States, Intindola added.
“I think more and more customers will be using the leverage of risk-based margins as more firms get approved and there is more experience with portfolio margining in the industry,” said Doug Engmann, managing director of equities at Fimat USA LLC, one of the brokerages offering portfolio margining.
Portfolio margining allows a broker to assess a portfolio as a whole — which means an investor no longer has to put up separate collateral for their stock and their options holdings. That makes a margin call — a request for more collateral — less likely, and enables the investor to borrow more.
Doug Engmann at Fimat USA LLC said portfolio margining therefore allows for more leverage but less risk because it encourages the use of options to hedge the underlying positions.
“I am less concerned about the size of the margin debt than I would have been 30 years ago,” Engmann said, “Now there are derivatives that are being used to hedge securities positions.”
The ample appetite for debt has not been affected by recent turbulence in the credit markets. The NYSE spokesman said, “This is merely borrowing to buy more from your broker, it is an equities-primarily phenomenon, it is separate from the problems in the credit market.” He added that the pilot program may move into other asset classes such as bonds in the future.
Jason Goepfert, president of www.sentimenTrader.com, a Minnesota-based Web site specializing in investor sentiment, said the rise in margin debt “is much ado about nothing even though the credit market is in turmoil. It is due to the fact that customers have an enormous amount of cash in other brokerage accounts.”
He said those cash levels are double what they were in 2000.
“Yes, debt is high, but a customer can buy at least twice the amount of cash if he or she goes on margin. Being conservative, there is at least $400 billion in buying power from investors — not a trival amount given that the total market value of the S&P 500 is $13 trillion.”