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Thursday, June 20, 2019

Daily Leverage Certificates ( DLCs)


Daily Leverage Certificates ( DLCs)

What is Daily Leverage Certificates (DLCs)?
It is actually a financial instruments that is designed to multiply the Daily Performance of an Underlying Assets with a leveraging effect of example 3x , 5x or 7x DLC .

If the underlying asset moves by 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%.

Example : If the underlying asset moves goes up by 1% and you have chosen 3x Long DLC would have gone up by 3%. Let say you have bought using 3x Long DLC with $3000 today and the underlying asset price is 100. Tomorrow the price goes up to 101( up by 1%) , your 3x Long DLC value would be increasing to $3090( up by 3%) before the broker commission/other fees etc .

Theoretically you would have generated a gain of $90 excludes costs and fees.

On the other hands, if the underlying assets price drops by 1%, your 3x Long DLC investment value would also drop to $2910( down by 3%) before costs and fees. You have generated a loss of $90.

DLC comes in Long and Short versions. While Long DLC provides leveraged return versus the Underlying Asset, Short DLC provides a positive (and leveraged) return when the Underlying Asset declines.

All the current single stock DLCs have a leverage of 5, while index DLCs come in 3 choices of 3, 5, and 7 times leverage.

Is DLCs suitable for me?
DLCs are designed for active investors or traders who have financial knowledge and experience in trading leverage products and willing to take a higher risk. It is designed for sophisticated investors who are looking for the potential to make enhanced returns from the daily benchmark indices or stock counters.

To be eligible or qualified as a DLCs investors or traders, he or she will need to be SIP qualified before they can start to trade on DLCs product.
Under MAS’ guidelines to enhance safeguards to retail investors, brokers must assess if investors have the relevant knowledge and experience before they can invest in “Specified Investment Products”. SIPs are products that have structures, features and risks that may be more complex and include DLCs.

Investors or traders need to complete a customer account review with their respective broker. The criteria used to qualify the investor in the customer account review consist of Educational Qualifications, Work Experience and Investment Experience. Investors will need to satisfy one of the 3 criteria above to qualify. 

DLCs is a simple financial instrument designed for short-term traders . The holding period of an average trade generally can range from a day to a couple of weeks. If you only want to invest in the most stable stocks and get the regular dividend yield, then DLCs is not really suitable for you. But if you have a short-term view on a stock/index and would like to get a convenient leverage to enlarge the potential return, then you may consider trading a DLCs.
What should I know before I start trading DLCs
DLCs are listed on SGX like a stock, and they are also traded like a stock. If you have a stock broker account that can trade say any single stock share, you can use the same broker account to trade DLCs too. Unlike some other leveraged investment products, there is no margin requirement for DLCs.

The list of DLCs counters are listed on this website.
Below is a snap-shot of the list of DLCs counters and their bid and asking price.

 Costs & Fees
Investors trading in and out of a DLCs in the same trading day will need to pay a brokerage commission and SGX trading fee to their broker, and the spread on the bid & ask prices (the difference between the offer price paid when buying the DLCs and the bid price received when selling the DLCs).

If traders/investors wishes to hold overnight then other charges like Management fees , Gap Premium(is a hedging cost that protects the product from extreme market movements overnight. Without the gap premium, if the underlying asset were to open more than 20% against the intended direction of a 5x DLC, the loss in the value of the DLC could be more than 100% (loss of 5 times 20%) + Funding costs and Rebalancing costs.


Risks of dealing with DLCs
Counter party risk - These products are issued by a third-party and may be guaranteed by a guarantor. Any failure of the issuer or guarantor to perform obligations when due, may result in the loss of all or part of an investment. If the issuer is not incorporated in Singapore, any insolvency proceedings in respect of the issuer will be subject to foreign insolvency laws and procedures.

Market price of the DLC may be affected by many factors -
Investors should note that the market price of the DLC may be affected by different factors, including but not limited to the level, volatility and liquidity of the underlying asset, and its related futures contracts, the currency exchange rates and the credit worthiness of the issue

Investor may lose his entire investment -
If the underlying asset falls to levels such that the cash settlement amount is calculated to be less than or equal to zero, the investor will lose his entire investment. In the event the value of a DLC reaches zero /becomes worthless, the issuer may request that the DLC be suspended and subsequently apply for them to be de-listed.

To summarize the benefits of using DLCs:

Easy to understand – returns can be boosted by a fixed daily leverage; trades like a normal single stock.

Can do both Long or Short DLCs trade to take advantage of the price direction.

Limited losses – losses are limited to the initial capital invested.

Compounded method - the performances each day are locked in and subsequent returns are based on what was achieved the day before.

The Air Bag Mechanism - Air Bag mechanism is designed to slow down the rate of loss on the index during extreme market conditions. The reset takes place over a period of 30mins. This is designed to reduce the impact of any subsequent fall.

To find out more about this DLCs products you may visit the below websites:
Disclaimers :
The above information provided is solely for reading and understanding of DLCs products. And at No instance to be regarded as a investment advice.


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