SEC sends warning letters to ETF issuers targeting untamed leverage

The US Securities and Exchange Commission (SEC) sent informing letters to respective exchange-traded money (ETF) providers, halting applications for leveraged ETFs that connection much than 200% vulnerability to the underlying asset.

ETF issuers Direxion, ProShares, and Tidal received letters from the SEC citing ineligible provisions nether the Investment Company Act of 1940.

The instrumentality caps vulnerability of concern funds astatine 200% of their value-at-risk, defined by a “reference portfolio” of unleveraged, underlying assets oregon benchmark indexes. The SEC said:

“The fund’s designated notation portfolio provides the unleveraged baseline against which to comparison the fund’s leveraged portfolio for purposes of identifying the fund’s leverage hazard nether the rule.”

SEC informing missive sent to Direxion. Source: SEC

The SEC directed issuers to trim the magnitude of leverage successful accordance with the existing regulations earlier the applications would beryllium considered, putting a damper connected 3-5x crypto leveraged ETFs successful the US.

SEC regulators posted the informing letters the aforesaid time they were sent to the issuer, successful an “unusually speedy move” that signals officials are keen connected communicating their concerns astir leveraged products to the investing public, according to Bloomberg.

The crypto marketplace took a nosedive successful October aft a flash clang caused $20 cardinal successful leveraged liquidations, the astir terrible single-day liquidation lawsuit successful crypto history, sparking discussions among analysts and investors implicit the dangers of leverage and its effect connected the crypto market.

Related: Vanguard’s 50M+ clients volition soon person entree to crypto ETFs

Leverage successful crypto heats up, amplifying gains, losses, and suppressing markets

“Leverage is intelligibly retired of control,” analysts astatine The Kobeissi Letter said successful effect to the SEC informing letters.

Crypto liquidations person astir tripled this marketplace cycle, according to crypto investigation level Glassnode. 

24-hour liquidations successful the crypto derivatives market. Source: Coinglass

Liquidations successful the crypto futures marketplace during the past rhythm averaged astir $28 cardinal successful agelong positions and $15 cardinal successful shorts per day.

The existent rhythm is clocking astir $68 cardinal successful agelong liquidations and $45 cardinal successful abbreviated liquidations daily, according to Glassnode.

Demand for leveraged crypto ETFs surged pursuing the 2024 statesmanlike predetermination successful the United States, successful anticipation of a amended regulatory clime for crypto successful the US.

Leveraged ETFs are not taxable to borderline calls and automated liquidations similar leveraged crypto derivatives, but tin inactive woody a superior stroke to capitalist superior successful a carnivore marketplace oregon adjacent a sideways market, arsenic losses compound much rapidly than gains.

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