The SEC has issued a warning letter to nine ETF providers, indicating that products with over 2x leverage may face strict controls.
According to Reuters, the U.S. Securities and Exchange Commission (SEC) recently sent a warning letter to nine exchange-traded fund (ETF) providers, directly halting their plans to offer new funds (ETFs) with more than 2x leverage.
This letter targets a series of high-leverage ETFs aimed at providing 3x or even 5x daily returns. The underlying assets include not only highly volatile individual stocks such as Tesla and Nvidia but also cryptocurrencies like Bitcoin and Ethereum.
The SEC pointed out in the letter its concern over the registration of funds attempting to offer more than 200% (2x) leveraged exposure and requested issuers to pause progress until key issues are resolved.
The core basis for regulation is Rule 18f-4 under the Investment Company Act, which limits a fund's risk exposure to within 200% of its 'reference portfolio' risk value. Some issuers are attempting to find loopholes in the definition of 'reference assets' to bypass this leverage cap.
This rare and tough measure highlights the SEC's regulatory concerns in the current relatively loose environment for fund approvals, with the main objective being to protect retail investors while controlling systemic risk.
The cryptocurrency market crash in October this year led to nearly $20 billion in single-day liquidations, fully exposing the chain reaction risks of extreme leverage under market pressure. The SEC's warning letter also underscores its concerns and the urgency of warnings related to these risks.
Faced with regulatory pressure, issuers now have no choice but to modify their investment strategies to comply with the 2x leverage limit or formally withdraw their applications. This move marks a rare pause in the relatively loose policy environment for fund approvals in the U.S.
This incident clearly indicates that regardless of the market's demand for high-yield products, 2x leverage has become an unshakable regulatory red line in the U.S. ETF market, and there will be no higher leverage cryptocurrency or single-stock ETF products in the short term.
