Multiple Exchange-Traded Fund (ETF) submissions that posited a leverage factor of three to five times the core underlying asset were suspended by the United States Securities and Exchange Commission (SEC).
Warning correspondence was dispatched by the US Securities and Exchange Commission (SEC) to numerous providers of exchange-traded funds (ETFs), thereby suspending petitions for leveraged ETFs that furnish exposure exceeding two hundred percent to the foundation underlying asset.
Official correspondence was furnished to the ETF originators Direxion, ProShares, and Tidal by the SEC, referencing statutory stipulations detailed under the Investment Company Act of 1940.
Investment funds are mandated to have their exposure curtailed at two hundred percent of their determined value-at-risk by the statute, a metric that is delineated by a “reference portfolio” comprising unleveraged, foundational assets or benchmark indices.
“The fund’s designated reference portfolio provides the unleveraged baseline against which to compare the fund’s leveraged portfolio for purposes of identifying the fund’s leverage risk under the rule.”
The SEC said:
The SEC instructed the fund originators to diminish the degree of financial leverage in compliance with the extant stipulations before their applications would be given deliberation, thereby imposing a constraint on crypto leveraged ETFs furnishing three-to-five times exposure in the United States.
The admonitory correspondence was uploaded by SEC regulatory officials on the identical calendar day that it was transmitted to the originators, a process characterized as an “atypically swift maneuver” by Bloomberg, which suggests that functionaries are intent upon relaying their apprehensions regarding leveraged instruments to the investing populace.
The digital asset market suffered a precipitous decline in October following a sudden market collapse that triggered the liquidation of twenty billion dollars in leveraged positions, representing the most extreme single-day divestment occurrence ever recorded within the history of cryptocurrency, an event that ignited debates among financial assessors and capital holders concerning the inherent risks of employing leverage and its influence upon the crypto sphere.
Rising Crypto Leverage Amplifies Volatility and Dampens Markets
“Financial gearing is demonstrably unmanaged,” was the assertion made by assessors at The Kobeissi Letter in direct response to the admonitory correspondence issued by the SEC.
Crypto divestments have seen a near three-fold increase throughout the duration of this current market cycle, according to Glassnode, a digital asset scrutiny platform.
Divestments within the crypto futures sector during the antecedent market cycle demonstrated an average of twenty-eight million dollars in protracted contracts and fifteen million dollars in contracted contracts daily.
The prevailing market cycle is registering approximately sixty-eight million dollars in protracted divestments and forty-five million dollars in contracted divestments each day, as reported by Glassnode.
Post-Election Optimism Fuels Demand for Leveraged Crypto ETFs
The requirement for leveraged digital asset Exchange-Traded Funds (ETFs) experienced a notable surge after the 2024 presidential election in the United States, due to the prognostication of a more amenable regulatory environment for crypto within the nation.
Leveraged Exchange-Traded Funds (ETFs) are not obligated to undergo margin requisitions and instantaneous divestments like financially geared digital asset derivatives, yet significant detriment can still be inflicted upon financier principal during a bearish trend or even a stagnant market, given that financial attrition is accumulated more swiftly than capital appreciation.
