SEC Lets Cboe List 3x Products

Here’s to limits being broken … or at least sidestepped.

The Securities and Exchange Commission last week approved a rule allowing Cboe BZX, a major US securities and ETFs exchange, to begin listing six separate 3x leveraged funds from Volatility Shares. The company, along with others, has long asked the agency to approve such strategies, even filing for 5x leveraged funds late last year. This latest move marks a departure from the SEC’s typical wariness regarding leveraged products, having just halted reviews of ETFs with more than 2x leverage in December. But the distinction the SEC made this week is in regard to regulatory structure, not economic risk, securities lawyer Adam Gana said.

“These commodity-based products are operating through a different regulatory framework than traditional 1940 Act funds,” Gana said. “To the average retail investor, however, that distinction is nonexistent. They see an ETF in their brokerage account.”

Exchange-Traded Something

The SEC’s reasoning is that these specific Volatility Shares funds, unlike other 3x, 4x and even 5x proposed funds that issuers have tried to launch, can be regulated by the Securities Act of 1933 rather than the Investment Company Act of 1940. Under the ‘40 Act’s rule 18f-4, which was passed in 2020 and regulates funds’ use of derivatives, registered ETFs can’t offer more than 2x leverage. There are a handful of 3x funds in existence, but these preceded the rule and were grandfathered in. Volatility Shares, by going through the ‘33 Act, avoids the 2x limit. “All six that were filed, they’re all crypto- and commodity-based, so [Volatility Shares was] able to use this pathway,” said Roxanna Islam, head of sector and industry research at TMX VettaFi. “When you think of other 4x, 5x and other 3x [products], a lot of those are single-stock ETFs, and those wouldn’t have qualified.”

Volatility Shares, which declined to comment, will now have more leveraged products available:

• The SEC’s latest move will allow the issuer’s 3x products tracking gold, silver, bitcoin, ether, crude oil and natural gas to begin trading.
• Volatility Shares already had 2x funds available, however, such as BITX and ETHU, which track bitcoin and ether, respectively. These were approved using the same ‘33 Act pathway, Islam said.

Making Waves. The SEC’s decision will likely spur other funds to file for leveraged crypto and commodity products, Islam said. Still, it’s “big news” for Volatility Shares, she added, especially since the firm has so many leveraged crypto products on the market. “We could see more [issuers] follow in the 3x leveraged space, particularly for these crypto products,” Islam said. “There’s a lot of trading demand for them.”