Regulator Puts Brakes on High-Leverage ETF Proposals
A series of warning letters from the US Securities and Exchange Commission has stalled new leveraged ETF applications. The agency targeted proposals for funds that would offer more than double the daily return of their underlying assets.
The SEC’s correspondence reached several ETF issuers, notably Direxion, ProShares, and Tidal. The letters referenced legal limits established under the Investment Company Act of 1940.
The law restricts a fund’s risk exposure to 200% of the value-at-risk from a designated, unleveraged reference portfolio. According to the SEC, this portfolio serves as the crucial benchmark for evaluating a fund’s leverage risk.
Issuers were directed to reduce leverage to meet this standard for their applications to advance. This guidance places significant hurdles before prospective high-leverage crypto ETFs in the US market, including those with extreme multiplier strategies.
