After winning gold for Most Preferred Product Issuer award, ShareInvestor speaks with Mr Keith Chan, Head of Cross Asset Listed Distribution, Asia Pacific at Societe Generale to find out more about an exciting new product: stock-based DLCs.
A highly liquid and flexible asset type, Daily Leverage Certificates (DLCs) have earned their place as one of the most highly traded assets on the Singapore Exchange (SGX). First launched by Société Générale in July 2017, DLCs used stock indices such as the Hang Seng Index (HSI) as an underlying asset on which the DLCs would be based. Now, Societe Generale returns with a new take on DLCs: on top of index-based DLCs, they now offer stock-based DLCs. We spoke to Keith Chan, Head of Cross Asset Listed Distribution, Asia Pacific at Societe Generale, about this new product.
Mr Keith Chan
Congratulations on winning the Gold Award for Most Preferred Product Issuer at INVEST Fair 2018. What, in your view, led to this achievement?
Thank you. I believe that it’s mainly due to our efforts in innovation. Societe Generale was the first to launch DLCs on the SGX, in Asia. This product is in demand because of its flexibility and the opportunities presented by leveraged returns.
Another reason would be that we’ve been putting a lot of effort into education for investors. Since this product is relatively new in the Asian market, we’ve been working with SGX and brokers to help sophisticated retail investors learn how to use this product. We have also received good feedback about the information provided on our dedicated DLC website (dlc.socgen.com).
Finally, we’re a market maker that provides high and consistent liquidity for the products we offer. A good product can exist, but if there’s no liquidity, investors will find it difficult to trade and nobody will use it. Investors and traders have told us that they like DLCs because it’s easy to enter and exit trades with them.
Why use individual stocks for the new stock DLCs now as opposed to stock indices?
We started with Index DLCs because most retail investors follow the market indices, and their performance will be more familiar. Offering an instrument that could go Long or Short on the index would allow them to understand the new product easily.
As of now, the index DLCs have been in the market for 1.5 years. We believe that it’s time to extend this product to individual stocks now that the market has started to get a feel for how DLCs work. This was how we introduced DLCs in a new market in Europe, by starting with the local equity index, and then expanding into single stocks and other asset classes.
There is also high demand for this type of product. Investors follow large-cap stocks in the market and want to profit from trading those stocks but can’t because of low volatility. The capital requirement for buying large-cap stocks can also be quite high. v DLCs are low-cost to trade and they make it easier to gain exposure to large-cap stocks. The leveraged returns, when applied to stocks with low volatility, can still yield good returns for investors.
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- DLCs are low-cost to trade and they make it easier to gain exposure to large-cap stocks.
How do stock DLCs work?
Similar to index DLCs, Stock DLCs use stocks as an underlying asset and the DLC provides a fixed leveraged return based on the daily performance of the underlying asset. Choice of Long and Short DLCs are available for investors with a bullish or bearish view respectively.
For example, with a 5x Long DLC on a stock, if the stock price rises 1% against the previous day’s closing price, the 5x Long DLC will rise in value by 5% before costs and expenses and the 5x Short DLC will drop in value by 5% before costs and expenses.
Investors normally hold a portfolio of stocks. Having a leveraged Long and/or Short position through DLCs can improve their returns. They can use a small amount of capital to get additional exposure to the underlying stock with leverage. A short DLC can also hedge against their stock holdings, in case they think that the market may have some short-term corrections. It’s like buying an insurance against drops in the price of the underlying stock.
While conceptually simple, traders should remember that DLCs are short-term trading instruments. Gains and Losses compound daily, and if held for longer than a day, the returns will deviate from the fixed leverage level.
Also, one major difference between Stock and Index DLCs is that only 5x leverage is offered on Stock DLCs, while index DLCs currently offer up to 7x. This is due to relatively higher volatility on a single stock vs an index (effectively peformance of a basket of stocks).
How were the stocks selected for the stock DLCs?
Firstly, we look at what investors request. While getting feedback for demand on DLCs, we got many requests for single stock DLCs based on large-cap companies. Many of our stock DLCs are from Hong Kong and Singapore because they are what our investors want.
Secondly, we look at the liquidity of the underlying asset: the more liquid it is, the better liquidity we can provide on the DLC.
The liquidity of a product should reflect the liquidity of the underlying asset.
What sort of investor is this product most suited for?
DLCs are classified as capital markets products other than prescribed capital markets products and Special Investment Products (SIPs), which only SIP qualified retail clients in Singapore can trade. It’s more suitable for sophisticated and active investors and people who like trading short-term, due to the high leverage.
Will the ongoing trade war between US and China present more opportunities or more risk for users of DLCs?
There’s a lot of volatility now and concern by investors about the trade war, so investors are looking for ways to hedge against a stock’s performance in the short term. Negativity may cause the market to come down in the short term, and short DLCs can help to hedge against losses from short-term downward corrections.
It’s a good time for this product to come up and allow investors to hedge against their stock holdings.
Our product specialist, Alvin, brought you how to use DLCs to capture positive return in the current volatile market situation.
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