Key Insights
- The SEC halted new 3x–5x leveraged ETF plans from Direxion, ProShares, and GraniteShares.
- Regulators said the products understated risk and exceeded the 200% cap under Rule 18f-4.
- Issuers must revise their proposals because the SEC will not review the applications until all leverage and benchmark concerns are resolved.
The U.S. Securities and Exchange Commission has paused the proposal to launch new ETFs from Direxion, ProShares, and GraniteShares due to violations of their leverage conditions. The regulator issued identical warning letters saying the planned 3x-5x leveraged products were in excess of the 200% cap under Rule 18f-4. The move immediately halted the approval process and compelled the issuers to re-evaluate their filings.
The proposed ETFs included volatile assets such as Bitcoin, Ether, Solana, Tesla, and Nvidia. Regulators said the benchmarks tied to these products understated risk and created mismatched expectations. As a result, ProShares has pulled a number of crypto and equity filings, while Direxion and Granite Shares are now in conversation with the agency to amend their submissions. The SEC affirmed it will not resume reviews until all issues are resolved.
Rising Volatility Pressures ETF Designers
ETFs with leverage above 200% can amplify market shocks, particularly in high-volatility environments. According to the SEC, fast-moving assets combined with extreme leverage become difficult to control and increase liquidity concerns. The agency believes that the crypto-linked leverage creates instability in the system that traders are not able to reliably navigate.
Industry voices share the concern. CNBC’s Jim Cramer called the intervention a “pro-investor move” and said it could save ETF holders significant losses. Many crypto commentators agree that combining crypto assets with 3x-5x leverage creates more risks than potential gains.
Short-term traders also frequently look for amplified exposure to take advantage of swings, but prolonged volatility can quickly wipe out gains or force liquidation. The SEC’s position indicates a renewed focus on leveraged strategies that are based on benchmarks that do not undergo transparent risk modelling.
Issuers Reassess Strategies Amid Regulatory Freeze
ProShares had withdrawn filings for 3x leveraged products linked to Bitcoin, Ethereum, Solana, and XRP. The SEC has directed all the relevant issuers to defer the effectiveness until their filings meet the leverage rules. Direxion and Granite Shares are working on updated materials to suit those requirements.
Legal analysts say the consistent warnings are indicative of a coordinated regulatory effort at a time when issuers are accelerating their crypto-related ETF development. Just yesterday, SEC Chair Paul Atkins announced that the agency intends to release new rules for innovation exemptions next month. Atkins has always said that the Commission will be supportive of digital asset procedures.
