In late 2025, SEC staff sent warning letters to nine ETF issuers, including Direxion and ProShares. The letters froze applications for 3x–5x leveraged ETFs tied to single stocks, sectors, and crypto assets including Bitcoin and Ethereum. The SEC staff cited Rule 18f‑4's value‑at‑risk cap and the requirement that the unleveraged underlying asset be the designated reference portfolio, which established that new ETFs cannot legally target more than 200% exposure.
This episode is the latest turn in a longer struggle over how much leverage regulators will tolerate in mass‑market ETFs. Since adopting Rule 18f‑4 in 2020, the SEC has allowed a boom in 2x products and a historic surge in spot Bitcoin ETF assets.
The agency has repeatedly warned that complex, leveraged structures can devastate retail investors and magnify volatility. The new stance holds the line at 2x—even under a more crypto‑friendly Trump‑era SEC—shaping whether Wall Street can package 3x–5x exposure in ETFs or push that to derivatives, offshore venues, and shadow banking.
Regulatory limit on a fund’s value‑at‑risk relative to its unleveraged reference portfolio, effectively capping new ETF leverage at 2x.
3x–5x
Targeted leverage in blocked filings
Leverage multiples sought by new single‑stock and crypto ETF proposals, now effectively shut down by SEC staff letters.
9
ETF issuers receiving 2025 SEC warning letters
Includes Direxion, ProShares, GraniteShares, Tidal and Volatility Shares; all told to cut leverage or withdraw.
≈85%
Losses in some 2x crypto‑linked ETFs during 2025 slump
Crypto‑tied leveraged ETFs on bitcoin‑heavy stocks lost around 80–85% from peak to trough in the 2025 downturn, underscoring volatility and compounding risk.
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15 events
Latest: December 4th, 2025 · 6 months ago
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December 2025
ProShares withdraws highly leveraged ETF plans
LatestIssuer Response
ProShares formally withdraws registration requests for several 3x ETFs, including triple‑leveraged products tied to mega‑cap tech stocks and crypto‑related sectors, acknowledging the SEC’s stance and signaling that the initial wave of ultra‑leveraged filings is effectively dead on arrival.
SEC sends similar warning letters to multiple ETF issuers
Regulatory Action
SEC staff issue nearly identical letters to eight other ETF sponsors, including ProShares, GraniteShares, and Tidal, pausing the review of applications for new highly leveraged ETFs seeking more than 2x exposure and explicitly questioning attempts to redefine reference portfolios under Rule 18f‑4.
SEC staff letter to Direxion rejects 3x ETF leverage structures
Regulatory Action
The SEC’s Division of Investment Management sends a letter to Direxion’s counsel stating that staff will not perform a substantive review of filings for ETFs seeking more than 200% leveraged exposure, clarifying that the funds must use their actual underlying assets as designated reference portfolios for VaR tests and urging Direxion to revise objectives or withdraw filings.
November 2025
Bitcoin and crypto ETFs suffer steep drawdown into November
Market Event
Bitcoin falls below $90,000—more than 25% off its October peak—with spot Bitcoin ETFs seeing multi‑billion‑dollar net outflows. Leveraged ETFs tied to a major bitcoin‑heavy corporation lose around 80–85%, highlighting the dangers of combining high leverage with volatile crypto‑linked equities.
During a partial government shutdown, SEC officials tell reporters that dozens of recently filed 3x and 5x leveraged ETFs may violate the 2x cap in the Derivatives Rule, pre‑signaling heightened scrutiny of ultra‑leveraged products.
Volatility Shares files 27 ultra‑leveraged ETFs, including 5x crypto
Product Filing
Volatility Shares submits a post‑effective amendment proposing 27 new ETFs with 3x and 5x leverage on Bitcoin, Ether, Solana, XRP and volatile U.S. equities, with an automatic effective date of December 29, 2025 absent SEC intervention.
Crypto markets peak before October crash
Market Event
Bitcoin hits an all‑time high around $126,000, with spot Bitcoin ETFs recording billion‑dollar inflow days. Days later, a sharp October crash wipes out tens of billions in value, triggers massive liquidations of leveraged positions, and begins a multi‑month drawdown.
July 2025
SEC approves in‑kind creations/redemptions for BTC and ETH ETFs
Regulatory Action
Under Chair Paul Atkins, the SEC authorizes in‑kind creation and redemption mechanisms for all spot Bitcoin and Ethereum ETFs, widely interpreted as a major crypto‑friendly policy move that further boosts ETF adoption.
January 2024
SEC approves first wave of spot Bitcoin ETFs
Product Approval
The SEC approves 11 spot Bitcoin ETF applications, enabling funds like BlackRock’s iShares Bitcoin Trust (IBIT) to list and kickstarting a historic inflow cycle that normalizes crypto exposure in mainstream portfolios.
June 2023
SEC allows first 2x Bitcoin futures ETF
Product Approval
The SEC permits the launch of the first 2x leveraged Bitcoin futures ETF, signaling that modestly leveraged crypto exposure is acceptable within the derivatives and VaR framework, but without yet addressing higher leverage or spot products.
July 2022
SEC officials warn about risks of single‑stock leveraged ETFs
Public Statement
SEC’s Office of Investor Education and Commissioner Caroline Crenshaw issue statements flagging single‑stock levered and inverse ETFs as highly risky and potentially unsuitable for most investors, foreshadowing later leverage debates.
October 2020
SEC adopts Rule 18f‑4, modernizing derivatives regulation for funds
Rulemaking
The SEC adopts Rule 18f‑4 under the Investment Company Act, allowing broader derivatives use by funds but imposing a VaR‑based leverage limit. The rule generally caps a fund’s VaR at 200% of a designated reference portfolio and effectively limits new leveraged or inverse ETFs to +/-2x exposure, while grandfathering existing over‑200% products.
August 2018
ESMA caps leverage on retail CFDs and crypto derivatives in EU
International Regulation
The European Securities and Markets Authority implements pan‑EU product‑intervention measures including strict leverage caps (down to 2:1 on crypto CFDs) and negative balance protection for retail clients, providing a reference point for leverage control in complex products.
August 2009
FINRA raises margin requirements on leveraged ETFs
Regulatory Action
FINRA adopts Regulatory Notice 09‑53, increasing customer margin requirements for leveraged ETF positions and associated options to limit excessive retail leverage.
June 2009
FINRA warns brokers about leveraged and inverse ETFs
Regulatory Warning
FINRA issues Regulatory Notice 09‑31 reminding firms of suitability and disclosure obligations for leveraged and inverse ETFs, noting that daily‑reset products are typically unsuitable for buy‑and‑hold retail investors.
Historical Context
3 moments from history that rhyme with this story — and how they unfolded.
1 of 3
June–December 2009
FINRA’s 2009 crackdown on leveraged and inverse ETFs
In the aftermath of the 2008 financial crisis, FINRA issued Regulatory Notice 09‑31, warning brokers that leveraged and inverse ETFs were complex, daily‑reset products often unsuitable for long‑term retail investors. It highlighted how compounding could cause these funds to dramatically underperform their stated multiples over time and reminded firms of stringent suitability, disclosure, and supervisory obligations. Later that year, FINRA followed up with Regulatory Notice 09‑53, raising margin requirements on leveraged ETFs and related options to curb excessive customer leverage.
Then
Broker‑dealers tightened controls on who could trade leveraged ETFs and for how long, and some firms curtailed retail access altogether. The products remained available but became more closely associated with short‑term trading and speculation.
Now
Regulators and courts developed a strong record treating leveraged ETFs as complex products demanding special care. This set a precedent for today’s SEC stance that ultra‑leveraged ETFs pose outsized risks and require structural limits rather than relying solely on point‑of‑sale disclosures or broker supervision.
Why this matters now
The current SEC campaign builds directly on a decade‑plus of skepticism about complex, leveraged ETPs. FINRA’s experience shows that suitability and margin rules alone did not prevent retail harm, supporting the SEC’s view that hard structural caps like Rule 18f‑4’s 2x limit may be necessary.
2 of 3
2018–2019
ESMA’s leverage caps on CFDs and crypto for EU retail investors
In 2018, the European Securities and Markets Authority used its product‑intervention powers to ban binary options for retail clients and to impose strict leverage caps on contracts for difference (CFDs), with limits ranging from 30:1 on major FX to 2:1 on cryptocurrencies, along with negative balance protection and standardized risk warnings. ESMA later allowed these temporary measures to lapse after national regulators implemented similar rules across EU member states.
Then
Retail CFD trading volumes declined, and many high‑leverage offerings were curtailed or pushed toward professional‑client categories. Providers retooled products to comply with leverage caps and enhanced disclosures.
Now
ESMA’s actions became a global reference point for managing complex, leveraged products sold to households. The measures demonstrated that regulators can and will use product‑level leverage limits to address systemic investor‑protection concerns, even at the cost of reducing product variety.
Why this matters now
ESMA’s approach parallels the SEC’s emerging position: rather than trusting disclosure alone, regulators set hard leverage ceilings for mass‑market products, especially where crypto and single‑stock volatility amplify risks. It suggests that the SEC’s 2x cap is part of a broader global trend toward constraining leverage in retail‑facing wrappers.
3 of 3
2019–2020
SEC’s 2020 adoption of Rule 18f‑4 and the shift to VaR‑based leverage limits
After years of case‑by‑case exemptions for ETFs using derivatives, the SEC adopted Rule 18f‑4 in October 2020, creating a unified framework for registered funds’ derivatives usage. The rule requires most funds using significant derivatives to run a formal risk management program and to comply with an outer limit on leverage based on value‑at‑risk. In practice, this means a fund’s VaR cannot exceed 200% of a designated reference portfolio’s VaR under the relative test, effectively making 2x the maximum leverage for new ETFs, although a narrow band of older >2x funds was grandfathered.
Then
Issuers welcomed the clarity and used the new framework to launch a variety of 1x and 2x leveraged and inverse ETFs without bespoke exemptive relief, contributing to significant growth in complex ETPs—especially as crypto‑linked futures funds emerged.
Now
Rule 18f‑4 turned the question of ETF leverage from a political or moral debate into a technical one about VaR, reference portfolios, and model assumptions. The December 2025 letters are essentially the SEC enforcing its original intent: ensuring that funds measure VaR against the true underlying asset and not a contrived benchmark that allows leverage to creep beyond 2x.
Why this matters now
Understanding Rule 18f‑4’s design is crucial to interpreting the current story. The rule was always meant to cap leverage at about 2x for new ETFs; issuers’ attempts to design 3x–5x products were, in effect, tests of how strictly the SEC would apply that limit. The 2025 crackdown suggests the Commission is returning to the rule’s original spirit after a period when some in the industry hoped for a looser interpretation.
