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Financial Product

Views 38622022.09.21

What are DLCs?

Overview

1. DLCs are financial instruments that give investors fixed leveraged up to 7 times and based on the daily performance of underlying assets.

2. There are some Characteristics of DLCs including fixed leverage of up to 7 times both long and short, compounding effect and airbag mechanism.

3. DLCs are Specified Investment Products (SIP), and investors need to be SIP qualified to invest in DLCs in Singapore.

Daily Leverage Certificates (DLCs) are financial instruments issued by a third-party financial institution(usually banks) and are traded in the securities market of the Singapore Exchange (SGX-ST). 

DLCs offer investors fixed leverage up to 7 times of the daily performance of the underlying assets (e.g. market indices or single stocks). 

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%.

Product Specifications

SGX is Asia's first venue to offer trading in DLCs. If the underlying assets are indices, 3 times, 5 times and 7 times DLCs are provided, and the leverage of DLCs of individual stocks is 5 times. The trading currency is SGD, and the minimum transaction size is standardized to 100. The maximum loss on investing DLCs is limited to the principal amount invested.

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Source:SGX

Characteristics of DLCs

  • Fixed leverage of up to 7 times both long and short

DLCs are designed to be traded over short periods of time, predominantly on an intra-day basis. DLCs offer the flexibility to trade both rising and falling markets. 

For each underlying and leverage factor, there is a long and short DLC available. Buy a long DLC to benefit from rising prices, buy a short DLC to benefit from falling ones.

20210607000095551e107943971.png

DLCs come without the features impacting pricing for options such as implied volatility, time decay or margin calls. 

  • Compounding effect

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 asset and the DLC is reset at the end of each trading day. This means that any subsequent performance of the DLC is calculated based on the performance achieved the day before. 

Take a 3x long DLC as an example, if the underlying asset rises by 1% for 3 consecutive days, the return on the underlying asset will be 3.03%, and the return on the 3x DLC will be 9.27%.

  • Airbag Mechanism

An airbag mechanism is built into the DLC to slow the rate of loss in the value of the DLC in extreme market conditions when triggered. 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 or a 15% movement in the underlying stock of the DLC (based on previous closing price). 

The airbag mechanism will only be triggered upon movements of the underlying asset that go against the direction of the product. For example, if the underlying asset falls by 10%, the airbag mechanism for a 7x Long DLC will be triggered as the value of the DLC will decrease by 70% (7 x 10%) with the fall in the underlying asset, but the airbag mechanism for a 7x Short DLC will not be triggered.

Investor Suitability

DLCs are meant for short-term trades, particularly day trading, and aim to provide higher returns on the fluctuations of the underlying assets, which also means the risk of substantial losses up to the principal investment amount within a very short time frame.

DLCs are suitable for investors who 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. Under guidelines of MAS 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". 

Source: SGX

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