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Have you heard about Daily Leverage Certificates, or DLCs? They are all the rage in Europe and are now available here in Singapore.
Issued by Societe Generale (SocGen), DLCs have been traded on Singapore Exchange (SGX) since mid-2017. DLCs were first introduced in Europe in 2012 and have been one of the fastest-growing financial products there.
To date, SGX remains the first and only venue in Asia to offer trading in DLCs.
Daily Leverage Certificates — How do they work?
As a leverage product, investors get increased exposure to an underlying asset to possibly earn a higher return. The leverage amount of a DLC can be 3, 5 or 7 times.
DLCs come in Long and Short versions, which are stated in the name. Investors who are bullish about a certain underlying asset can buy the Long DLC, and investors who are bearish can buy the Short DLC.
Based on 5x leverage, if the underlying asset, typically a single stock or index, moves 2% in the right direction from its previous closing price, you earn 2% x 5 = 10% gain on the DLC. However, if the underlying asset moves in the direction against you, you can end up with -10% loss.As you can see in the diagram above, the 3, 5 or 7 times leverage is based on the daily performance of the underlying asset. Because of its leverage nature, DLCs are designed as short-term investments, with a typical holding period of intra-day or up to a week.
To date, there are 97 DLCs listed on key Asian indices and single stocks from Singapore and Hong Kong — 20 Index DLCs and 77 single stock DLCs — so there’s a wide range for you to choose from!
One of the main draws of trading DLCs is that it can help you amplify your trading performance using only a fraction of the cost. Here’s a closer look at some of the reasons you should consider using the DLCs:
1. Gain fixed leverage of up to 7 times
As mentioned above, you can get fixed leverage of 3x, 5x and 7x, which gives you increased exposure on your initial investment. Any movements in the underlying asset are amplified by the leverage factor.
You also get the flexibility to take either short or long positions on the DLC, so if you have analysed how the market might move, you can take advantage of falling/rising markets.
2. Low capital outlay (free up your cash!) and reduce your trading costs
DLCs allow you to participate in the price performance of an underlying asset at a fraction of the underlying asset price. The DLCs are usually priced lower between S$0.50 to S$2 per unit and offer a leveraged exposure, this means you can achieve the same exposure to DBS stock (price is now $26 thereabouts) using less of your capital as opposed to buying the stock directly.
Also, the SGX trading and clearing fees for a stock is 0.04%; while for a DLC of the same stock, you only need to pay SGX trading and clearing fees of 0.005%. That’s 8 times lower!
Assuming you want to gain a S$10,000 long exposure to DBS stock (putting aside commissions as it varies between brokers), let’s look at an example below…
Buying DBS stock
– Capital needed for DBS stock = $10,000
– Exchange trading cost for DBS stock is 0.04% x $10,000 = $4
Buying DBS DLCs
– Capital needed for 5x Long DBS DLC = $10,000/5* = $2,000
– Exchange trading cost for the 5x DLC is just 0.005% x $2,000 = $0.10
*Based on the leverage factor
Similarly, it is also much cheaper to use DLCs to trade in overseas stocks (i.e. Hong Kong). On top of a lower capital outlay as shown in the previous point, there is no need to pay the exchange fees (e.g. stamp duty) that are charged if you were to buy the Hong Kong stock directly.
Another bonus point is that you do not have to convert your cash into HKD. All the DLCs are traded and settled in SGD.
3. Pay a lower commission amount as opposed to CFDs
On DLCs, depending on how much your leverage is, you only pay commission on a percentage of the full exposure amount.
For example, if the commission payable is 0.25% and the full exposure amount you want to get is $10,000 — on a 5x DLC, you need only invest $10,000/5 = $2,000. The commission of 0.25% you pay on $2,000 = $5, instead of $25 on another leverage product (such as CFDs) that bases the commission payable on the full contract size.
Here’s a simple table for illustration purposes:
|Tencent 5x DLC||Tencent CFD|
|Full exposure amount||$10,000||$10,000|
|Commission payable||($10,000/5) x 0.25% = $5||$10,000 x 0.25% = $25|
4. Never lose more than what you’ve invested
Many leveraged products out there are subject to a margin call. This means that should the value of the investor’s account fall below the minimum value or maintenance margin, the investor will need to account for the additional difference.
However, with DLCs, there is no margin call. Even if your DLC plummets way beyond what you invested, you will only lose your initial capital — nothing more.
In the case of the 5x Long DLC where the underlying asset goes down by 25% in a day, causing the DLC to theoretically drop by 125%, the DLC will only drop 100% (its entire value). The DLC investor will only lose the initial investment and won’t be forced to fork out extra money to cover the additional -25% loss.
That said, there is still the possibility of losing your entire investment amount in DLCs and you should be monitoring the markets closely.
Sounds good… but what else do I need to know?
Here are two key product features that we will highlight briefly but you’re encouraged to do further research before you start trading the DLCs.
1. Compounding Effect
As DLCs’ performance is calculated on a daily basis, there’s a compounding effect in place. In a trending market (steadily moving in the same direction), one can potentially gain more; however in a volatile market (ups and downs), the performance of the DLC might be reduced.Source: SGX
In the illustrations above, a 5x DLC in a trending market sees 21.30% gain due to the compounding effect, versus just a 20.25% gain if there had been no compounding effect.
In a volatile market with the same result after Day 3, the 5x DLC sees only a 15.50% gain (less than 5 times the underlying performance) due to the compounding effect, which locks in the loss on Day 2, using it as a baseline for Day 3.
2. Airbag Mechanism
Another feature of DLCs is the airbag mechanism, which is designed to reduce the negative impact of an extreme move in the underlying asset during the day. Of course, it won’t be triggered if the DLC is aligned to the market direction, so you can still enjoy your possible gains while cushioning your potential losses.
Here’s an example of what typically happens when the airbag mechanism is triggered:
- At 11am, the underlying asset of a 5x DLC moves against the direction of the product. This threshold is typically 15% on the underlying asset for a 5x DLC (this 15% translates to a -75% loss!)
- DLC issuer immediately requests SGX to suspend trading in the relevant DLC for 30 minutes
- At 11.30am, trading resumes from the New Observed Level, aka a “intraday reset”
This helps to slow down the rate of loss.
There are two risks to note here: While the built-in airbag mechanism can cushion losses, if the underlying asset continues to move against the DLC, the investor can still potentially lose all the initial investment. In addition, in the case of the rebound situation, there’s reduced exposure and thus a lower chance of recovery for the rest of the day due to the reset.
3. DLC is a Specified Investment Product
As DLCs are classified as a Specified Investment Product (SIP), investors may need to check with their brokers if they are qualified to trade SIP products. In general, SIP products are of higher risk (mostly because of the leveraged nature) or have a more complex structure compared to traditional single stocks. Investors are advised to assess the product structure, associated risks, valuation, costs and expected returns before they make their first trade.
To learn more about how to be SIP-qualified, check out SGX’s easy-to-understand infographic on SIPs here.
How do I get started?
DLCs can be traded on a regular stock trading account with any of SGX’s local retail brokers (list of brokers here) so all you need to do is log in to your stock trading platform and a simple search for “DLC” will display all 97 of the DLCs.
As long you’re SIP-qualified, you will be able to trade the DLCs. Otherwise, speak to your broker on how you can become qualified.
What do you think about the DLCs? Share your thoughts in the comments below!