May 22, 2024

Daily Leverage Certificate: Basic Knowledge You Need To Know Before Trading It (Guest Post by InvestingNote)

Author: Trading Impossible | Joey Choy
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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:

DBS

OCBC

UOB

Venture

…and more

Hong Kong:

Tencent (700 HK)

PingAn (2318 HK)

Geely Automobile (175 HK)

Hong Kong Exchange (388 HK)

…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?

Management Fee per annum 0.40%

Gap Premium per annum

(a hedging cost against extreme market

movements overnight.)

3x : 1.8%

5x : 3%

7x : 4.2%

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 .

Guest Post by InvestingNote. “InvestingNote is the first and largest social network for investors in Singapore. Find out more about us here.

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