A) US ETF (best for 3×), B) US ETN (cleanest path for 4×), C) EU/UK/CH ETP (market-norm for 3×/4×).
Phase 0 — Decide the Wrapper (one-page decision)
- Target leverage: If you need 4×, prioritize ETN (US) or ETP (EU/UK/CH). If 3×, ETF/ETN/ETP are all viable.
- Investor base: US advisors prefer ETF plumbing; prop/hedge funds are agnostic; EU retail requires PRIIPs KID (ETP).
- Risk preference: ETF = counterparty risk diversified via swaps; ETN = issuer credit risk; ETP (secured note) = collateral + security trustee.
- Exchange access: US (NYSE Arca/Cboe BZX) vs LSE/Xetra/SIX.
Lock this choice first; everything flows from it.
Phase 1 — Sponsor shell & governance
- Incorporate Sponsor: Delaware LLC/Corp (or Irish PLC/Jersey SP for EU ETP).
- Board/CCO: Appoint independent directors (ETF trust/PLC), name CCO and Derivatives Risk Manager (ETF rule 18f-4).
- Policies: Code of ethics, compliance manual, DRMP (derivatives risk management program), business continuity, cyber, valuation.
- Insurance: D&O + E&O.
Phase 2 — Core service providers (term sheets out)
- Custodian: State Street or BNY (collateral/T-bills).
- Fund Admin/Accounting: U.S. Bank/State Street/Northern Trust.
- Lead Market Maker (LMM): Jane Street, Virtu, Flow Traders (multi-dealer encouraged).
- APs (ETF/ETP): Jane Street, Susquehanna, Citi, BofA—AP agreements.
- iNAV vendor: S&P DJI/ICE/NYSE/Markit.
- Auditor: Big Four.
- Legal: US (’40/’33 Act specialists), EU listing sponsor counsel if ETP.
- ISDA counterparties (ETF/ETP): GS/JPM/MS/BofA/Citi (target 3–5).
- Security Trustee (ETP): Intertrust/GLAS for collateral trust.
Phase 3 — Derivatives & exposure plumbing (the engine)
- ISDA/CSA stack: Negotiate master ISDAs + CSAs (daily variation margin, eligible collateral = T-bills, haircuts, NAV triggers).
- Confirm templates: Pre-agree total-return equity swap confirmations on MSTR, including early termination, market disruption, and borrow pass-through language.
- Counterparty diversification: Allocate swap notional across 3–5 dealers; set per-dealer caps and reduction steps on stress.
- Leverage targeting:
- Target exposure each morning: N_t = L \times \text{NAV}_t where L \in \{3,4\}.
- Micro-rebalance bands: If realized leverage leaves [L−0.5, L+0.5], execute up to 2 intraday touch-ups.
- Collateral ops: Tri-party with custodian; aim >102% on received leg; set margin call cut-offs.
- Borrow contingency: Embed hard-to-borrow surcharge pass-through; maintain a borrow stress dashboard (dealer quotes, utilization, fee).
Phase 4 — Methodology & risk controls (calculation agent spec)
- Objective statement: Daily L× the daily total return of MSTR (dividends reinvested, corporate actions adjusted).
- NAV formula:
\text{NAV}_{t+1}=\text{NAV}t\Big(1 + L\cdot r{\text{MSTR},t} – f_t\Big)
f_t = management + financing (SOFR + spread + borrow) + trading frictions. - iNAV: Publish every ~15s:
\text{iNAV}t=\text{NAV}{\text{prev}} \Big(1 + L\cdot \frac{P_t-P_{\text{prev}}}{P_{\text{prev}}} – \hat f_t\Big) - Drawdown brakes: Creations pause at −70% (STR3) / −85% (STR4) intraday iNAV draw.
- Acceleration: If closing NAV < $1.00 or specified EoD events, accelerate and distribute residual cash.
- Capacity caps: Notional ≤ 15–25% of MSTR ADV and ≤ 5–8% free float across all dealers.
- Corporate actions: Splits, rights, tender offers—follow exchange notices; adjust swap notionals and iNAV divisor.
Deliverable: a 30–50 page calc-agent book with all formulas, triggers, halt logic, and file specs.
Phase 5 — Legal docs & filings (by wrapper)
A) US
ETF
(target
3×
)
- Trust & Board: Join existing ETF trust or form new.
- Registration: Form N-1A (or N-2 for ETMF variants) with Rule 18f-4 DRMP; leverage, single-name risk, compounding disclosures.
- Exchange listing: NYSE Arca/Cboe 19b-4 eligibility check; assign ticker, CUSIP/ISIN, FIGI.
- DTC/NSCC: Obtain DTC eligibility; NSCC for creations.
- AP Agreements: Executed; basket language for cash primary and optional in-kind MSTR.
- Tax: RIC intent; 1099 reporting; PFIC/2410 checks irrelevant (US equity).
- Advertising: Website + one-pager through FINRA 2210 review if used in broker comms.
B) US
ETN
(cleanest
4×
)
- Issuer: Partner with a US bank that has an effective S-3 shelf (or add a new series to an existing base prospectus).
- Docs: Base prospectus + pricing supplement spelling the daily 4×, brakes, acceleration, and calculation agent.
- DTC: Note eligibility; CUSIP/ISIN assignment.
- Listing: NYSE Arca/Nasdaq; assign ticker.
- Security: Unsecured; add issuer credit risk risk box; no ISDAs needed (issuer synthetically hedges internally).
C)
EU/UK/CH ETP
(3×/4× common)
- SP/Issuer: Irish PLC/Jersey SP issuing secured notes.
- Prospectus: Under EU Prospectus Regulation; PRIIPs KID for retail; appoint listing sponsor.
- Security & Collateral: Grant security over collateral portfolio to Security Trustee; tri-party custody.
- Listing: LSE Main Market, Xetra, SIX (admission docs per venue).
- Tax/Withholding: Structure to minimize leakage; publish KID risk/summary measures.
Phase 6 — Market microstructure & seeding
- Seed capital: Commit internal seed to enable tight two-sided markets.
- Spread targets: Negotiate with LMM (e.g., 1–2¢/share or bps target) and inventory buffers for gap days.
- Creation unit: Default 25,000 shares; set creation cut-off and T+1 settlement in ops manual.
- Website & files: Publish Holdings.csv, Leverage.txt, Carry.txt, Capacity.txt, Counterparties.txt daily at a fixed timestamp; show iNAV feed.
- Cost-of-carry note: Weekly post with realized financing and borrow costs.
Phase 7 — End-to-end ops testing (table-top → UAT → live)
- UAT book: Full dry-run of open/close rebalance, micro-rebalance triggers, swap resize, and margin calls.
- Halt drill: Simulate MSTR LULD halts, exchange early closes, and NAV floor acceleration.
- AP dry-run: At least one test creation and test redemption with your LMM/AP before go-live.
- File integrity: Hash/sign your daily disclosure files; verify public timestamping.
Phase 8 — Launch-day runbook (operations you follow religiously)
Open (09:30 ET):
- Compute target_notional = L × NAV_open
- Publish first iNAV; confirm market maker quote width
Intraday:
- Monitor realized leverage vs band [L−0.5, L+0.5]
- If breach and micro_rebalances_today < 2, execute VWAP micro-rebalance
Brakes/halts:
- If iNAV drawdown hits brake threshold ⇒ pause creations (and possibly redemptions)
- Mirror MSTR halts; suspend iNAV if tape broken
Close (15:45–15:58 ET):
- Lock official MSTR close; compute Fund NAV
- Resize swap notionals to L × NAV_close
- Publish daily files + carry note schedule
Phase 9 — Post-launch controls & governance
- Risk Committee: Weekly review of leverage drift, borrow costs, and capacity.
- Compliance: Derivatives exposure/VaR attestations (ETF), issuer risk monitoring (ETN), PRIIPs updates (ETP).
- Audits: Annual financials; SOC1/SOC2 reviews of key vendors.
- Enhancements: Tune micro-rebalance bands, update acceleration thresholds only through formal supplements.
Phase 10 — Marketing the right way (truth > hype)
- Always say DAILY. Hammer compounding/path dependency.
- Scenario tables: +/−5/10/20/30/40/50% MSTR days; show decay in chop.
- Education: “Why levered daily ≠ long-term multiple” explainer.
- Compliance routing: FINRA 2210 for US materials; KID updates for EU; keep risk box front-and-center.
Quick-start checklists
Legal pack (by wrapper)
- Sponsor formed; board/CCO/DRMP
- Counsel engaged; drafts opened
- Prospectus (ETF: N-1A; ETN: base + pricing; ETP: EU Prospectus)
- Exchange listing app; ticker/CUSIP/ISIN/FIGI
- DTC/NSCC (ETF/ETP) eligibility
- AP/LMM agreements executed
Engine & ops
- 3–5 ISDAs + CSAs signed (ETF/ETP)
- Swap confirms template; borrow pass-through
- iNAV vendor integrated; spec tested
- Micro-rebalance bands implemented (max 2/day)
- Brake & acceleration logic coded
- Daily files automated; website live
Risk & capacity
- Capacity caps vs MSTR ADV & float
- Counterparty limits dashboard
- Carry/borrow weekly note template
- Halt/early close playbook
Implementation snippets (hand to the desk)
Micro-rebalance decision:
band_low = L – 0.5
band_high = L + 0.5
if micro_rebalances_today < 2:
if realized_leverage < band_low or realized_leverage > band_high:
target = clamp(L, realized_leverage + 0.5*sign(L – realized_leverage), band_low, band_high)
execute_VWAP_rebalance_to(target)
micro_rebalances_today += 1
iNAV streaming:
iNAV_t = NAV_prev * (1 + L * ((MSTR_t / MSTR_prev_close) – 1) – daily_fee_estimate)
broadcast(iNAV_t) every 15s
Acceleration check:
if NAV_close < 1.00 or event_of_default:
declare_acceleration()
liquidate_swaps_T+0
distribute_cash_T+X
Naming & release pack
- Tickers: STR3 / STR4 (alts: MST3 / MST4)
- Tagline: Volatility → Velocity
- Design: High-visibility orange + matte black; DAILY RESET stamp on every chart.
- Press kit: 1-pager, risk box, scenario table, methodology summary, LMM quote.
Final word
This is a convexity machine—not a toy. Choose the wrapper, lock the counterparties, codify the math, publish the ugly, and ship.
If you want, I’ll generate your calc-agent spec, prospectus summary (ETF/ETN/ETP versions), and the daily disclosure file templates you can plug into your site—right now.