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The U.S. Securities and Exchange Commission (SEC) has issued warning letters to several exchange-traded fund providers, freezing applications for leveraged crypto ETFs offering more than 200% exposure to their underlying assets. Nine ETF providers, including Direxion and ProShares, received these notices on Dec. 2, as reported by Reuters.
Warning comes as ETFs gain momentum
The clampdown arrived amid one of the strongest weeks of institutional activity in months. On Dec. 2, Vanguard Group, the world’s second-largest asset manager, confirmed it would allow ETFs and mutual funds that “primarily hold cryptocurrencies” to trade on its brokerage platform. Products tied to Bitcoin (BTC), Ether (ETH), XRP, and Solana (SOL) will now be accessible for clients, marking a sharp policy reversal.
Daily flow data from SoSoValue showed a surge in demand in the two days following the decision. Institutional adoption has continued on other fronts. Bank of America advised wealth-management clients this week to allocate 1% to 4% of portfolios to digital assets, marking one of its strongest endorsements of the sector. Coverage for four Bitcoin ETFs, namely Bitwise Bitcoin ETF (BITB), Fidelity Wise Origin Bitcoin Fund (FBTC), Grayscale Bitcoin Mini Trust (BTC), and BlackRock’s iShares Bitcoin Trust (IBIT), begins Jan. 5.
What SEC's warning says
Direxion, ProShares, and others received notices citing compliance requirements under the Investment Company Act of 1940. According to the letters, funds seeking leverage must adhere to Rule 18f-4, which caps risk by limiting a fund’s Value-at-Risk (VaR) to no more than 200% of a designated reference portfolio. The regulator reiterated that any fund tracking a leverage or inverse multiple of an unleveraged index must use that index as its reference portfolio for VaR calculations.
Rule 18f-4 requires open-end funds to maintain VaR no greater than 200% of an unleveraged reference portfolio. Some of the ETFs of Direxion and ProShares listed for revision include:
- Direxion Shares ETF Trust
- ProShares Trust
Because leveraged ETFs aim to deliver multiples of underlying securities or indexes, the SEC argued that their reference assets “provide the precise representation of the fund’s unleveraged portfolio,” questioning how derivatives risk managers could justify using alternative baselines. Until issuers revise strategies to comply, the regulator’s stance effectively places a ceiling on high-leverage crypto ETFs in the U.S.
This article has been published in thestreet.com via Yahoo News.
SEC issues fresh warning letters to ETF issuers
Just a day ago, the crypto community was celebrating the turnaround of long-time crypto critic Vanguard Group when they announced they would now allow ETFs and mutual funds that hold crypto. Today, a fresh warning from the SEC has reversed the optimistic sentiment. The U.S. ...
finance.yahoo.com
