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.
