Daily Leverage Certificate: Basic Knowledge You Need To Know Before Trading It

by: Society Generale 


This article is a sponsored post and are of the writers’ personal opinions and do not in any way reflect ProButterfly.com's or REITScreener.com's official opinion. ProButterfly.com does not issue a buy or sell recommendation on any security, and any research paper published by ProButterfly.com is purely for informative purposes. 


The Daily Leverage Certificate is a product launched by SGX that was offered by Societe Generale since 2017. This product is available for trading on the SGX securities market.

DLCs are slightly complex, moderate risk financial products which give investors a leveraged return based on the daily performance of an underlying
reference index.

DLCs have a finite lifespan and will be delisted on its expiry date. The final exercised value of the DLCs will be calculated and paid to investors automatically on the expiry date (which is after 3 years).

Note that: (if the Expiry Date is not a Business Day, then the Expiry Date shall fall on the preceding Business Day and subject to adjustment of the Valuation Date upon the occurrence of Market Disruption Events as set out in the Conditions of the Certificates)

What is a DLC?

The Daily Leverage Certificate offers investors fixed daily exposure in the following 3 leading Asian Indices as well as single stocks . It also allows investors to leverage and capture amplified movements of the reference index. Investors can either buy "Long DLC" or buy "Short DLC", as the two types of DLCs allow you to bet on both the rises and falls of the underlying asset respectively.

The underlying indices that the Daily Leverage Certificate will track are the 3 key indices in the Singapore and Hong Kong exchanges:

  • MSCI Singapore Index (SIMSCI)
  • Hang Seng Index (HSI)
  • Hang Seng China Enterprises Index (HSCEI)

And below are the some of the single stocks that Daily Leverage Certificates track:

Singapore:

  1. DBS
  2. OCBC
  3. UOB
  4. Venture
  5. …and more

Hong Kong:

  1. Tencent (700 HK)
  2. PingAn (2318 HK)
  3. Geely Automobile (175 HK)
  4. Hong Kong Exchange (388 HK)
  5. …and more

What DLC does that really attract investors is that it increases investors’ returns as it increases investors’ exposure level to the indices.

How Does it work?

The basic principle is pretty straightforward – let’s say if the underlying index moves 1% from its closing price of the previous trading day, the value of a 3x DLC will move by 3%, and that of a 7x DLC will move by 7%.

DLCs offer a fixed leveraged return of 3, 5 or 7 times of the daily performance of the underlying asset. 3x simply means it is 3 times leverage and 5x means it is 5 times leverage (so does 7x) . Leverage amplifies the returns and losses of investors, be it rising or falling market.

Currently 3x, 5x and 7x are available for indices and only 5x is available for single stocks.

Below is an illustrative returns for an investment of 1 unit of the 3x Long DLC, that was bought at $2.00 when the 3x Leveraged STI Index was trading at 9,000 and sold on the same Trading Day.

What are the fees like?

 

Who will find it useful?

Of course, DLCs are not meant for everyone. They are meant for sophisticated retail investors who wants to do short term trades. It is also suitable for investors who would like to have leveraged returns form the daily movement of the underlying assets.

At the same time, all investors need to be Specified Investment Products (SIP) qualified to invest in DLCs. Those who are not familiar with DLCs or do not have high risk tolerance should not consider trading DLCs. One should only consider trading DLCs if you have a high risk tolerance.

Special feature: The Airbag Mechanism

With the Airbag Mechanism, now you don’t have to worry that there will be a risk that losses may exceed deposits as each DLC will have a pre-set trigger for its air bag. Now what exactly does “Airbag mechanism” mean?

For example, if you were to buy a stock on a 5:1 margin, a leverage of 5x is used and the underlying asset losses 10% of its value, what it does is that the air bag trigger will come into effect to automatically trigger an intraday reset of the underlying index. The airbag mechanism will only be triggered if the underlying asset moves in the opposite direction of the product. For example, if the STI rises by 20%, the airbag mechanism for the 5x Short STI DLC will be triggered.

But do take note that the air bag will not prevent you from losing your entire investment where the leveraged movement of the underlying reference index exceeds the value of the DLC.

For example, a 5x DLC, with an airbag that is set to trigger if the underlying reference index falls by 10% will become futile its underlying reference index suffers a sharp fall of 20% or more in the course of a trading day, or at opening of a trading day due to overnight movements.

In a nutshell...

Other than stock market indices as we mentioned earlier, there are also more than 50 DLCs for 20 regional blue chip stocks ranging from DBS to Tencent, as the underlying asset! Check out the full list of DLCs here.

For investors who want to maximise their short term exposure to market movements, DLCs can provide the opportunity to increase the exposure by a fixed factor, up to 5 times.

For indexes, you can select a leverage from 3x, 5x or 7x!

Also, it doesn’t matter if the market is bearish as well – you can buy a short DLC to
capitalise on a bearish situation.

For the 5x DLC with Venture as the underlying asset, it actually yielded a return of more than 70% in a week, just back in February!

To have a better understanding, check out the full educational series here.

Last but not least, if you’ve never traded a DLC and would like to know how, see if you qualify by taking the Specified Investment Product (SIP) test here.

 

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We are hosting our next new and refreshed The Essentials of REIT Investing seminar on the 06th November 2019 (Wed) from 7pm to 10pm at the Maybank Kim Eng Event Hall (Level 3), 50 North Canal Road, Singapore 059304.

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Meanwhile, do also check out the book REITs to Riches: Everything You Need to Know About Investing Profitably In REITs available at all major bookstores around Malaysia and Singapore. To purchase the eBook (PDF) copy, navigate to http://aktive.com.sg/store/reits-to-riches/.

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