The logo for ProShares, the first Short Bitcoin Strategy ETF, is displayed on a screen on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., June 27, 2022. REUTERS/Brendan McDermid

By Shashwat Chauhan

Dec 4 (Reuters) - ETF provider ProShares has withdrawn its registration request for some highly leveraged exchange-traded funds after receiving a warning letter from the U.S. securities regulator that flagged risk exposures and paused the review of such plans.

Such letters were sent on Tuesday to nine ETF providers, including ProShares, Direxion and GraniteShares, asking them to provide more clarity on the risks tied to funds that sought to track up to fives times the performance of the underlying stock.

ProShares had sought approval from the Securities and Exchange Commission for ETFs, including products targeting to replicate three times the returns of Wall Street tech giants, including Meta Platforms and Broadcom.

"We understand and appreciate the recently published view of the SEC staff regarding certain novel leveraged ETFs filed by several issuers, indicating that such funds do not comply with relevant legal requirements," ProShares said on Wednesday.

The fund manager's suite of registrations also included funds tracking specific sectors, countries and cryptocurrencies.

Tidal Financial and Volatility Shares, two of the nine recipients of the SEC's letter, declined to comment.

Leveraged ETFs, often favored by retail investors, have exploded in popularity due to sustained bullish market sentiment, the rise of speculative trading and a surge in product innovation, especially around single stocks and cryptocurrencies.

GROWING POPULARITY BRINGS SCRUTINY

In its letters, the regulator said its concerns stem from Rule 18f-4 under the Investment Company Act of 1940, which requires a fund's value-at-risk to remain below 200% of the value of an appropriate reference portfolio.

The SEC questioned how the fund managers determine the reference portfolio used to measure leverage risks and suggested the issuers to revise their strategies to comply or withdraw filings.

"I wouldn't characterize it as a broad clampdown, but it does signal a firmer boundary around product complexity," said Dave Mazza, CEO of Roundhill Investments.

The latest scrutiny adds pressure to the growing leveraged ETF market, which continues to attract retail investors despite regulatory concerns over their complexity and risks.

The ProShares UltraPro QQQ ETF - the world's biggest leveraged ETF in terms of assets under management - targets three times the daily performance of the Nasdaq 100 index and has gained more than 40% so far this year.

However, the outsized returns come with higher risks.

Among the hardest hit this year is one tied to Strategy shares, according to VettaFi's ETF database.

Earlier this year, GraniteShares' 3x Short AMD exchange-traded product was terminated after chipmaker AMD's shares surged as much as 38% in one day back in October, driving the fund's value to zero.

(Reporting by Shashwat Chauhan in Bengaluru; Editing by Arun Koyyur)