By Suzanne McGee and Ateev Bhandari (Reuters) -The U.S. Securities and Exchange Commission told Reuters that it was "unclear" whether the dozens of recent filings by asset managers to issue highly leveraged ETFs would be approved by the agency. Since the U.S. government shutdown began, "the agency has received a large number of registration statements for ETFs seeking to offer 3x and 5x leveraged, equity-linked exposure," said Brian Daly, director of the SEC's division of investment management. "It is unclear whether these ETFs would comply with the Derivatives Rule (Rule 18f-4), which generally limits leverage to 2x." On Wednesday, ETF issuer Volatility Shares filed to launch a total of 27 highly leveraged ETFs, including the first-ever proposed 5x ETF for the U.S. market, in a move that raised eyebrows amid widespread concerns over inflated asset prices. A 5x target means that an ETF would seek to quintuple the daily return of an underlying single stock. Until now, the SEC has approved single-stock leveraged ETFs with a maximum of 2x. The SEC's response comes as a partisan shutdown in Washington has forced the agency to function on skeletal staffing, limiting its ability to review corporate filings, investigate misconduct, and oversee markets. "It is reassuring to see that, despite the shutdown, the SEC continues to monitor new ETF filings and take note of those that could be potentially problematic for retail investors and for the ETF industry as a whole," said Amrita Nandakumar, president of Vident Asset Management, a firm that works with ETF issuers. A concentration of investor assets into leveraged ETFs has fueled caution across the market, highlighted by last week's broad-based selloff after U.S. President Donald Trump escalated the trade war against China. While such leveraged ETFs are designed to amplify the return of the underlying stock or index, a fall in the price of the indexed asset can force liquidations. "Of those launched more than three years ago, over half have closed and 17% have lost over 98% of their value over their lives," said Bryan Armour, ETF analyst at Morningstar, referring to the dangers of leveraged ETFs. A JPMorgan report estimated that some $26 billion of selling from leveraged ETFs at Friday's close exacerbated the downward spiral. A Reuters analysis of SEC filings found that Volatility, whose filings included a 3x and a 5x offering on bitcoin treasury pioneer Strategy, proposed its filings to go effective 75 days after submitting. "This SEC administration has been more amenable to new strategies coming to market, but 5x leveraged single-stock ETFs will test those limits," Armour added. SEC staff will not be able to review the new filings until after the shutdown is over, the agency's Daly added. Volatility did not immediately respond to a Reuters request for comment. (Reporting by Suzanne McGee; Editing by Mark Porter and Philippa Fletcher)
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