On May 12, the SEC Division of Investment Management staff (IM staff) issued a statement regarding registered funds’ investments in Bitcoin futures (Statement). The Statement acknowledges the development of the Bitcoin futures market since the IM staff began to consider issues surrounding potential cryptocurrency-related investments by registered funds in 2018.
In the Statement, the IM staff referred to its January 2018 letter to the registered fund industry in which it identified several areas of concern about cryptocurrency-related investments, including valuation, liquidity, custody, arbitrage mechanisms for ETFs, potential market manipulation and other risks. In the Statement, the IM staff notes the development of the Bitcoin futures market, including increased trading volumes, readily available prices and the lack of custody challenges as a result of being cash-settled and exchange-traded. The IM staff further notes the recent adoption of Rule 18f-4 under the Investment Company Act of 1940 (also known as the Derivatives Rule), which would impose certain limitations on the level of leverage created by derivatives use and would also require funds to implement a derivatives risk management program.
The Statement indicates the IM staff’s belief that investments in Bitcoin futures should only be made by mutual funds that have appropriate strategies for such investments and that fully disclose the associated material risks. The IM staff encourages any investor interested in investing in mutual funds that have exposure to Bitcoin futures to carefully evaluate the risks of such investments and the investor’s own risk tolerance and to understand the speculative and volatile nature of the Bitcoin futures market.
In addition, the IM staff urges closed-end funds interested in investing in Bitcoin futures to contact it to discuss Investment Compact Act compliance and investor protection considerations prior to filing a registration statement that would include Bitcoin futures disclosure.
The IM staff indicates that it will continue to monitor the Bitcoin futures market, specifically that it will analyze the market’s liquidity, mutual funds’ ability to liquidate Bitcoin futures positions, valuation, fund compliance with the liquidity rule, the potential for fraud or manipulation in the underlying Bitcoin market and whether the market could also accommodate ETF investment in Bitcoin futures in light of mutual funds’ experiences investing in them.
The Statement is welcome news for open-end mutual funds and closed-end funds that have been contemplating investments in Bitcoin futures. Prior to filing a registration statement to provide for Bitcoin futures exposure, open-end funds should review and consider the IM staff’s views on the appropriateness of pursuing a strategy that includes Bitcoin futures and how a fund’s compliance with its liquidity risk and derivatives risk management programs may affect such an investment. Closed-end funds should consult with the IM staff prior to filing a registration statement to disclose Bitcoin futures exposure. It appears that ETFs will need to wait for further IM staff guidance after it evaluates whether the Bitcoin futures market can accommodate ETF investment.
- Andrew J. Davalla | Andrew.Davalla[at]ThompsonHine.com
Compliments of Thompson Hine LLP – a member of the EACCNY.