Daily Leverage Certificates (DLCs)
Why trade DLCs?
- Leverage up to 7 times the daily performance of an underlying index
- Flexibility to trade both rising and falling markets
- Low capital outlay and loss limited to invested amount
- No margins. No implied volatility impact. No time decay impact.
- Transparent pricing due to tradability of the products on exchange
What are Daily Leverage Certificates (DLCs)?
Daily Leveraged Certificates (DLCs) are a form of structured financial instrument issued by banks and traded on the securities market. DLCs offer investors fixed leverage of 3 to 7 times the daily performance of the underlying index, be it a rising or falling market. The basic principle is simple – if the underlying moves by 1% from its closing price of the previous trading day, the value of the 3x DLC will move by 3%.
SGX is Asia’s first venue to offer trading in DLCs, allowing investors to gain fixed leveraged exposure to developed Asian market indices and single stocks. This comes without the features impacting pricing for options such as implied volatility, time decay or margin calls.
DLCs were first introduced in Europe in 2012, where they are also called constant leverage products or factor certificates, and received wide interest from investors in Europe shortly after their launch.
How does the DLC work?
- Daily Long and Short
- Compounding effect
- Airbag mechanism
DLCs are designed to be traded over short periods of time, predominantly on an intra-day basis. The DLCs offer the flexibility to trade both rising and falling markets. For each underlying and leverage level, there is a long and short DLC available. A bullish investor who thinks that the underlying index is set to rise over the trading day can select, for example, a 3x Long DLC, which will rise in value by 3% for each 1% rise in the underlying index (before cost & fees). A bearish investor who expects the underlying index to fall can instead select, for example, the 3x Short DLC, which will rise in value by 3% for every 1% fall in the underlying index (before cost & fees).
If the investor’s trading horizon is over a few days, it is important to note that the performance of the DLC may vary from the leverage factor of the DLC. This is because the performance of the underlying index and the DLC is reset at the end of each trading day. When markets open the next day, the performance of the underlying index and the DLC will be measured from the closing levels recorded on the previous trading day. This means that any subsequent performance of the DLC is calculated based on the performance achieved the day before. The same process is repeated on each trading day. Over the period of more than one day, the profits or losses are thus compounded.
An airbag mechanism is built into the DLC to slow the rate of loss in the value of the DLC in extreme market conditions. Each DLC listed will have a pre-set trigger for the airbag mechanism. This trigger is usually activated upon a 10% movement in the underlying index for a 5x DLC and a 20% movement for a 3x DLC (based on the closing price of the underlying index in the previous trading day). The airbag mechanism will only be triggered upon movements of the underlying index that go against the direction of the product. For example, if the underlying index falls by 20%, (a) the airbag mechanism for a 3x Long DLC will be triggered as the value of the DLC will go down with the fall in the underlying index; but (b) the airbag mechanism for a 3x Short DLC will not be triggered because with the fall in the underlying index, this DLC will increase in value by 60% (3 x 20%).
Available DLCs as of 22 February 2019
|1||MSCI Singapore Index||Long, Short||5x, 7x|
|2||Hang Seng Index||Long, Short||3x, 5x, 7x|
|3||Hang Seng China Enterprises Index||Long, Short||3x, 5x, 7x|
|4||CapitaLand (C31)||Long, Short||5x|
|5||DBS Group Holdings Ltd (D05)||Long, Short||5x|
|6||Genting (G13)||Long, Short||5x|
|7||Keppel Corporation Limited (BN4)||Long, Short||5x|
|8||Oversea-Chinese Banking Corp (O39)||Long, Short||5x|
|9||Singapore Telecommunications (Z74)||Long, Short||5x|
|10||United Overseas Bank Limited (U11)||Long, Short||5x|
|11||Venture Corporation Limited (V03)||Long, Short||5x|
|12||Wilmar (F34)||Long, Short||5x|
|13||Yangzijiang Shipbuilding (BS6)||Long, Short||5x|
|14||AIA (1299.HK)||Long, Short||5x|
|15||China Construction Bank (0939.HK)||Long, Short||5x|
|16||CNOOC LTD (883.HK)||Long, Short||5x|
|17||Galaxy Entertainment (0027.HK)||Long, Short||5x|
|18||Geely Automobile (0175.HK)||Long, Short||5x|
|19||Hong Kong Exchange (0388.HK)||Long, Short||5x|
|20||HSBC (0005.HK)||Long, Short||5x|
|21||Petrochina Co Ltd-H (857.HK)||Long, Short||5x|
|22||Ping An Insurance Group Co-H (2318.HK)||Long, Short||5x|
|23||Tencent Holdings Ltd (700.HK)||Long, Short||5x|
*DLCs track the total return index of the respective underlying indices or underlying stocks
- Trading of DLCs on SGX will take place on SGX-ST (Securities Market) from 9 am to 5 pm
- DLCs can be found in the same instrument groups as structured warrants
- DLC Stock code ends with “W” like structured warrants
- Board lot is 100
- SGX Trading Fees: 0.1 basis points or 0.001% of traded value
- SGX Clearing Fees: 0.4 basis points or 0.004% of traded value
Frequently Asked Questions
Daily Leverage Certificates (DLCs) are for investors who are willing to accept the risk of substantial losses up to the principal investment amount, possibly within a very short timeframe. Investors should also have sufficient understanding of the product and should possess either a high level of knowledge or sufficient trading experience to properly evaluate and assess the product structure, associated risks, valuation, costs and expected returns. All investors need to be Specified Investment Products (SIP) qualified to invest in DLCs. DLCs seek to achieve short-term investment results that correspond to the daily magnified performance of the underlying benchmarks.
Investors need to complete a Customer Account Review (CAR). For more information regarding CAR, you may visit our FAQ page here or contact your trading representative to find out more.
Alternatively, investors may assess their qualifications to trade SIPs or enhance their product understanding through the SGX online education program.
Similar to shares, investors may buy and sell DLCs on the SGX securities market through POEMS. DLCs are also settled on the same basis as share transactions, which is on the second business day after the trade date, or T+2.
DLCs have a limited life with a maximum tenure of 3 years. At expiry the final exercised value of the DLC is calculated and automatically paid to investors.
DLCs can complement a portfolio by offering enhanced returns over a shorter time frame. You can take advantage of daily market news or when expecting economic events. Provided that the markets go the right way for you, these amplified returns can be an effective way to boost the overall return of your portfolio.