Handbook
Resources: Guide to Daily Leverage Certificates (DLC)

What are Daily Leverage Certificates (DLC)?

Daily Leverage Certificates (DLC) are exchange-traded financial products that enable investors to take a leveraged exposure to an Underlying Asset, such as an equity index. Daily Leverage Certificates replicate the performance of an Underlying Asset versus its previous day closing level, with a fixed leverage factor.

The leverage effect means that any movements in the Underlying Asset are amplified. Daily Leverage Certificates will leverage the investment exposure by a fixed amount, e.g. 3 or 5 times. Therefore, the daily return of Daily Leverage Certificates will be equal to the daily return of the Underlying Asset multiplied by the fixed leverage factor, before costs and fees.

There are two types of Daily Leverage Certificates - Daily Long and Daily Short which enable investors to take a long or short exposure to an Underlying Asset.

For bullish investors who think that an Underlying Asset is set to rise over the Trading Day they can trade Daily Longs. Daily Longs will generate a positive return by leveraging any rise in the Underlying Asset.

On the other hand, for investors who hold a bearish view and expect the Underlying Asset to fall, they could select Daily Shorts which will generate a positive return by leveraging any fall in the Underlying Asset.

In either case, if investors make the wrong call and the markets move against their chosen view, the Daily Leverage Certificates will amplify losses in the same way as they will amplify profits, putting the entire capital of investors at risk.

Daily Leverage Certificates are listed on the Singapore Stock Exchange (SGX) and can be bought and sold via brokers just like shares at any time during market hours. A Designated Market Maker (DMM) will contribute live tradable prices and intra-day liquidity.

* If you are a retail client in Singapore, please note that Daily Leverage Certificates may be traded only if you are a SIP (Specified Investment Products) qualified retail client.

The Effect of Leverage

Depending on how far markets move in one day, active trading can be a limited endeavour unless investors are trading in sizeable quantities, particularly when the trading costs are taken into account.

For investors who want to maximise their short term exposure to market movements, Daily Leverage Certificates can provide the opportunity to increase the exposure by a fixed factor, up to 5 times. This means that a SGD1,000 position in a 5 times Daily Leverage Certificates can provide the same exposure as SGD5,000 invested directly in the Underlying Asset. This represents leverage of 5 times, and it simply means that every 1% movement in the Underlying Asset translates to a 5% move in the price of your Daily Leverage Certificates that day.

The charts below illustrate the simulated impact of leverage on daily returns by looking at the Daily Performance of the Hang Seng Index (HSI) in 2016.

The charts below illustrate how leverage may increase daily profits or daily losses.

The HSI is the most widely quoted indicator of the Hong Kong stock market's performance.

Daily Returns of Hang Seng Index in 2016 (1x/3x/5x)

The charts below illustrate the simulated impact of leverage on daily returns by looking at the Daily Performance of the MSCI Singapore Index (SIMSCI) in 2016.

The charts below illustrate how leverage may increase daily profits or daily losses.

Daily Returns of the MSCI Singapore Index (SIMSCI) in 2016 (1x/5x)

*Illustrations may be provided that are based on the historical data of: a) products or b) underliers that collectively bear the same characteristics of the product simulated. Simulations of past performance allows the product's hypothetical past performance to be calculated and may provide a basis for modelling the product's behaviour during different phases in the market in the past. However such simulations are not a reliable indicator of actual or future performance of the product. Where any future performance or projected return is simulated, such figures are a forecast and are not a reliable indicator of future results. Returns may therefore not be guaranteed. Illustrations above have not taken into account costs and fees.

Compounded Returns

Daily Leverage Certificates are designed around the Daily Performance of their Underlying Asset and as such are intended to be traded on an intraday basis. They apply a fixed level of leverage which makes it easier to determine price movements during a single Trading Day. This will be 3 or 5 times the Daily Performance of the Underlying Asset, before factoring in costs and fees.

Investors can, however, hold Daily Leverage Certificates for longer than one Trading Day although the return could be more or less than the leverage factor that is embedded within the product.

This is because the performances of the Underlying Asset and the Daily Leverage Certificates are reset at the end of each Trading Day.

When markets open on the next day, the performances of the Underlying Asset and the Daily Leverage Certificates will be measured from the closing levels recorded on the previous Trading Day.

What this means, in practice, is the performance each day is locked in, and any subsequent returns are based on what was achieved the day before. This is a process referred to as 'compounding'.

The compounding effect can positively enhance returns in trending markets (upward or downward) whilst negatively impacting returns when the markets are more volatile or trend sideways for long periods. The effect of this compounding is further amplified as daily returns are leveraged.

Effect of Compounding

The following 3 scenarios illustrate how Daily Longs & Daily Shorts perform in various market scenarios and demonstrate both the positive and negative effects of compounding. We will make the assumption that investors purchase 5x Daily Long or 5x Daily Short at SGD2.50 per unit and the Underlying closed at a level of 24,000 on the previous trading day.

In trending markets with low volatility, the performance of the Daily Leverage Certificate for a period longer than a day may exceed the return of the Underlying Asset, multiplied by the stated exposure level.

The non-compounded, leveraged return is for illustrative purposes and does not relate to any specific product. The calculation below is before costs and fees are factored in.

An Illustration of Compounding with 5x Daily Long

Trending Up

This example explains how consecutive days of positive returns will lead to 5x Daily Long returning more than 5 times the overall performance of the Underlying Asset.

The Underlying Asset has increased a total of 6.12% over the 3-day period but 5x Daily Long would have increased 33.20%, which is 5.42 times the performance of the index (33.20/6.12). This is because each day the return is applied to a progressively larger amount. If daily compounding was not applied, 5x Daily Long would have only increased by 30.60% (6.12%x5) as the Underlying Asset is assumed to have an initial constant increase of 6.12%.

Trending Down

This example explains how consecutive days of negative returns will lead to 5x Daily Long falling less than 5 times the overall performance of the Underlying Asset.

The Underlying Asset has fallen a total of 5.88% over the 3-day period but 5x Daily Long has fallen 26.80%, which is only 4.56 times the performance of the index (26.80/5.88). This is because each day the loss is taken from a progressively smaller amount. For example, on day 1, the 10% loss to 5x Daily Long is applied to SGD2.50 and creates a SGD0.25 loss. However, by day 2 the 10% loss is applied to SGD2.25, creating a loss of SGD0.22. If compounding was not applied, the product would have lost 29.40% (5.88%x5) as the Underlying Asset is assumed to have an initial constant decrease of 5.88%.

Volatile Markets

The downside of compounded returns comes from volatile markets where prices are changing on an erratic basis from one day to another. The example below shows that 5x Daily Long falls 15% on day 1 and 20% on day 2, before rising by 45% on day 3. The important point to note here is that the 45% rise on day 3 only takes 5x Daily Long back to a value of SGD2.47. This is because 5x Daily Long was only valued at SGD1.70 when it began to recover on Day 3. As such, the 45% gain only amounted to SGD0.77 (SGD1.70x 45%). The overall loss over the 3 days is 1.2%. There would have been a gain of 7.50% (1.5% x5) without compounding. In this case, the product recorded a loss even though the Underlying Asset has moved in the same direction on a daily basis.

This highlights a key risk of the Daily Leverage Certificates; the more the Daily Leverage Certificates fall, the harder it is for them to recover because any subsequent gain in percentage is applied to a lower value of the Daily Leverage Certificates due to the effect of compounding. This is the reason these products are not designed to be held for long periods.

An Illustration of Compounding with 5x Daily Short

Trending Up

This example explains how consecutive days of positive returns will lead to 5x Daily Short falling less than 5 times the overall performance of the Underlying Asset.

The Underlying Asset has increased a total of 6.12% over the 3-day period but 5x Daily Short has fallen 26.80%, which is 4.38 times the inverse performance of the index (26.80/6.12). This is because each day the loss is applied to a progressively smaller amount. If compounding was not applied, 5x Daily Short would have decreased by 30.60% (6.12%x5) as the Underlying Asset is assumed to have an initial constant increase of 6.12%.

Trending Down

This example explains how consecutive days of negative returns will lead to 5x Daily Short returning more than 5 times the overall performance of the Underlying Asset. In this example, the Underlying Asset has fallen a total of 5.88% over the 3-day period but 5x Daily Short has increased 33.20%, which is 5.65 times the performance of the index (33.20/5.88). This is because each day the return is taken from a progressively larger amount. If compounding was not applied, the product would have increased 29.40% (5.88% x5) as the Underlying Asset is assumed to have an initial constant decrease of 5.88%.

Volatile Markets

The below example shows that 5x Daily Short fall 15% on day 1 and 20% on day 2, before rising 45% on day 3. The important point to note here is that the 45% fall on day 3 only takes 5x Daily Short back to a value of SGD2.47. This is because 5x Daily Short was only valued at SGD1.70 when it began to recover on Day 3. As such, the 45% gain only amounted to SGD0.77 (SGD1.70x45%). The overall loss over the 3-day is 1.2%. There would have been a gain of 12.60% (2.52%x5) without compounding. In this case, the product recorded a loss even though the Underlying Asset has moved in the same direction on a daily basis.

This highlights a key risk of the Daily Leverage Certificates; the more the Daily Leverage Certificates fall, the harder for them to recover because any subsequent gain in percentage is applied to a lower value of the Daily Leverage Certificates due to the effect of compounding. This is the reason these products are not designed to be held for long periods.

Air Bag Mechanism

What is it and how is it triggered?

The Air Bag Mechanism is a safety mechanism that is built into the Daily Leverage Certificates. It is designed to reduce the negative impact of an extreme move in the Underlying Asset during the day.

Underlying Type Product Airbag Trigger
Equity Index 3x Daily Long -20%
Equity Index 3x Daily Short +20%
Equity Index 5x Daily Long -10%
Equity Index 5x Daily Short +10%
Single Stock 5x Daily Long -15%
Single Stock 5x Daily Short +15%

In more volatile markets, the Air Bag Mechanism can provide some valuable loss protection to investors.

If the Underlying Asset is an Equity Index, for a 3 times Daily Leverage Certificates, the Air Bag will be triggered when the Underlying Asset moves against the Daily Leverage Certificates by 20%, and for 5 times Daily Leverage Certificates by 10% compared to previous close, or previous New Observed Level (as defined below) if an Air Bag has already occurred on the same trading day.

If the Underlying Asset is a Single Stock, for a 5 times Daily Leverage Certificates, the Air Bag will be triggered when the Underlying Asset moves against the Daily Leverage Certificates by 15% compared to previous close, or previous New Observed Price if an Air Bag has already occurred on the same trading day.

Investors should note however that the Air Bag Mechanism will also maintain a reduced exposure to the Underlying Asset even if the Underlying Asset starts to move in favor of the Daily Leveraged Certificates after the Air Bag Mechanism has been triggered, thereby reducing its ability to recover losses for investors.

There is no guarantee the Air Bag Mechanism will prevent investors from losing the entire value of their investment.

For a 5 times DLC, In the case of a big overnight drop of more than 20% (or 20% drop within the 15-minute observation period), the DLC would also result in a total loss. (Similarly, 15% for 7x and 34% for 3x)

How it works in practice

The Air Bag Mechanism is triggered when the Underlying Asset reaches the stated Airbag Trigger Level (denoted by "A" in the next diagram). When the Air Bag Mechanism is triggered, the trading of the Daily Leverage Certificates is suspended, and a 15-minute observation period begins.

During the 15-minute observation period the lowest level (for a Daily Long), or highest level (for a Daily Short) of the Underlying Asset is recorded, this level is termed the new observed level (denoted by "M" in the next diagram).

Resumption in trading of the Daily Leverage Certificates (denoted by "R" in the next diagram) happens 30 to 45 minutes after the Air Bag Mechanism has been triggered and the leverage of the Daily Leverage Certificates is subsequently applied to the performance of the Underlying Asset computed from the observed level instead of the last closing level.

The Air Bag Mechanism can be triggered more than once per day, and the new trigger level will be based on the new observed level.

An illustration with 5x Daily Long - Underlying Asset continues to fall after the Air Bag Mechanism has been triggered. The Air Bag Mechanism will reduce any subsequent losses in the product.

The figures used in the above example are given for purely indicative purposes, the objective being to describe the Air Bag Mechanism of the product. For the purpose of these illustrations cost and fees are not taken into account.

An illustration with 5x Daily Long - Underlying Asset rises back after the Air Bag Mechanism is triggered.

However, if the markets were then to bounce back, the Air Bag Mechanism would actually work against the investors, as it reduces the ability of the Daily Leverage Certificates to recover. This is due to the fact that the subsequent positive daily performance is now applied on a lower value (observed level) of the Underlying Asset.

The figures used in the above example are given for purely indicative purposes, the objective being to describe the Air Bag Mechanism of the product. For the purpose of these illustrations cost and fees are not taken into account.

When would the Air Bag have been historically Triggered?

  Percentage
Largest Intraday Rise 14.35%
Largest Intraday Fall -15.39%
Airbag could have
been activated for
the last 10 years?
3x Leverage
5x Leverage
0 times
5 times

Source: Bloomberg, as of 28 June 2017*

  Percentage
Largest Intraday Rise 17.14%
Largest Intraday Fall -17.41%
Airbag could have
been activated for
the last 10 years?
3x Leverage
5x Leverage
0 times
15 times

Source: Bloomberg, as of 28 June 2017*

  Percentage
Largest Intraday Rise 9.16%
Largest Intraday Fall -9.88%
Airbag could have
been activated for
the last 10 years?
5x Leverage 0 times

Source: Bloomberg, as of 28 June 2017*

*Illustrations may be provided that are based on the historical data of: a) products or b) underliers that collectively bear the same characteristics of the product simulated. Simulations of past performance allows the product's hypothetical past performance to be calculated and may provide a basis for modelling the product's behaviour during different phases in the market in the past. However such simulations are not a reliable indicator of actual or future performance of the product. Where any future performance or projected return is simulated, such figures are a forecast and are not a reliable indicator of future results. Returns may therefore not be guaranteed. Illustrations above have not taken into account costs and fees.

Costs and Fees

The examples in the previous sections are simplified without costs and fees for illustration. In the actual trading of the Daily Leverage Certificates, costs and fees are factored in such that the daily performance of the Daily Leverage Certificates is not exactly equal to the leverage factor multiplied by the daily performance of the Underlying Asset.

When the investors trade intra-day (buying and selling the Daily Leverage Certificates on the same Trading Day), the costs are the brokerage fees, trading fees and Bid/Ask Spread from trading which are typically the same as trading stocks on the relevant exchange. The leverage and hedging costs and fees will only apply when the Daily Leverage Certificates are held overnight.

Costs and fees are transparent and can be computed with published data using the formula. The specific costs and fees for each product can be found on either http://dlc.socgen.com or the relevant listing documents.

  Trading intra-day Held overnight
Brokerage Fee
Bid/Ask Spread
Funding Cost*
Rebalancing Costs*
Gap Premium
Management Fee

*Embedded in the Leveraged exposure
Stamp or other charges may be applicable in accordance with the laws and practices of the courts where the Daily Leverage Certificates are traded.

There are costs and fees that are linked to the leverage exposure:

An illustration of costs and fees with a 5x Daily Long on HSI

In the example above, the costs and fees per day are approximately 4 basis points of the Daily Leverage Certificates' value (SGD 2.5 X 0.04%= SGD 0.001). This is less than the original minimum ticker size (SGD0.01) when the Daily Leverage Certificates are issued at SGD 2.50.
*as of 29 June 2017

Are Daily Leverage Certificates Right for You?

These products may be right for you if: These products may not be right for you if:
You will hold the investment for less than a day. You are looking to hold the investment long term.
You will hold the investment for more than a day, but understand that gains and losses will be compounded and certain additional costs and fees will be factored in. You do not understand the impact of compounding on your investment returns and you do not wish to pay certain additional costs and fees on positions held for more than a day.
You would like the opportunity to gain a return of 3 or 5 times the daily rise or fall of the Underlying Asset. You do not want to take the risk that your gains or losses would be multiplied by 3 or 5 times.
You understand that the Air Bag Mechanism is designed to protect you against extreme intraday market movements. It may however lead to underperformance if the Underlying Asset recovers later that Trading Day. You do not want to potentially underperform the Underlying Asset should the Air Bag Mechanism be activated, followed by a recovery in the Underlying Asset.
You appreciate that your entire capital is at risk but you will never lose more than you invested. You do not want to risk any of your capital.
You are SIP qualified. You are not, or you are not prepared to become SIP qualified.

Daily Leverage Certificates are examples of Specified Investment Products (SIPs). The Monetary Authority of Singapore (MAS) has introduced measures for intermediaries to safeguard the interests of individual investors investing in SIPs, which are products with features that might be more complex in nature. Investors have the opportunity to assess their qualifications to trade SIP or enhence their product knowledge through the SGX online portal available on SGX website https://onlineeducation.sgx.com/specifiedinvestmentproducts/.