SEC Halts Leveraged Crypto ETF Proposals, Demands Revisions
- The U.S. SEC has issued formal notices to issuers of proposed ETFs seeking to leverage crypto assets by up to 5x.
- Regulators flagged these filings for attempting to exploit a loophole in the risk management rules outlined in Rule 18f-4, which limits value-at-risk (VAR) to a maximum of 200%.
- The SEC has specifically targeted filings from Direxion and stated that issuers must either revise their strategies or withdraw their applications entirely.
- In October, the SEC noted a surge in applications for leveraged ETFs, raising concerns about compliance with existing derivatives rules.
- More than half of the leveraged ETFs launched in the last three years have closed, indicating potential market instability associated with high-leverage products.
The SEC’s action reflects its commitment to enforcing strict risk controls on funds using derivatives, particularly those exceeding a leverage of 2x. This move aims to prevent frequent termination events and maintain market stability amid rising interest in leveraged crypto products.
As the SEC requires significant changes or withdrawals from issuers, this decision underscores the agency’s cautious approach towards new financial products like leveraged ETFs, especially given recent trends where over half of such funds have shut down.(Source)
