New offering from SGX: SOCGEN launched US Magnificent Seven Daily Leverage Certificates (DLCs)

Warning: Please note that investing in Daily Leverage Certificates (DLCs) is highly speculative and are meant for short-term trades. They may not be suitable as long-term investments as it is a high-risk financial product that give investors a leveraged return based on the daily performance of an underlying reference securities.

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In recent years, Daily Leverage Certificates (DLCs) have gained popularity among traders seeking to capitalize on short-term market movements with enhanced returns. As a form of leveraged trading instrument, they offer amplified exposure to underlying indices or stocks without the complexities of traditional margin accounts or derivative products.

In this article, we will cover what are DLCs, who they are most suitable for, the risks involved, and the latest offering from Société Générale's (SOCGEN).

1) What are DLCs?

DLCs are listed financial products that provide traders with leveraged exposure to the daily performance of an underlying asset. DLCs are designed to multiply the returns of an index or stock by a fixed leverage factor—between 2x to 7x—on a daily basis. This means that if the underlying asset moves 1% on a given day, a 5x leverage DLC would move by 5%. DLCs can be long (benefiting from price increases) or short (benefiting from price declines), providing flexibility to trade in both directions of the market.

DLCs are typically issued by financial institutions and traded on major stock exchanges, such as the Singapore Exchange (SGX). They are transparent, standardized products designed to be accessible to a broad range of traders who want to capture short-term market movements.

For the full list of DLCs available on FSMOne, readers may refer here. The names of DLCs may seem complicated at first glance, but once you understand the meaning of each part of the name, it becomes much clearer of the intention of the instrument. For example we look at this “APPLE 3xShortSG261006 (SGX:PODW)”.

Figure 1: How to read a DLC name

Unlike diamonds, DLCs cannot be held forever. They have a finite lifespan and will cease to exist on the expiry date. Upon expiry, the final exercised value of the DLC is calculated and automatically be returned back to investors.

Another characteristic of the DLC is the Daily Reset feature. The price of the DLC will be reset at the start of each trading day based on the closing level of its underlying asset the day before. This means that if you hold the DLC for more than one day, due to the compounding effect and daily reset, the cumulative return from DLC will deviate from the underlying asset return multiplied by the leverage factor.

Finally, there is also an Air Bag feature for DLCs. This mechanism will be triggered if the price of the underlying asset moves against the direction of the DLC. It is designed to reduce the amount of loss in the value of a DLC during extreme market conditions.

For instance, if the underlying asset drops by the pre-determined percentage of 10% during the trading day, the Air Bag mechanism triggers an intraday reset. The DLC will be suspended from trading for about 30 minutes. After the reset period, a new observed level is determined and the performance of the underlying asset will be based on this new observed level. Although the Air Bag feature will slow the rate of losses for investors if the price of the underlying asset moves in the opposite direction, it will also reduce the trader’s ability to recoup losses as subsequent gains are now based on new observed level.

2) Who are DLCs suitable for?

DLCs are suitable for traders, not long-term investors. This distinction is crucial for anyone considering these instruments. DLCs are designed for short-term trading and are meant to provide leveraged returns based on the daily performance of an underlying asset. Due to the compounding effect, the performance of a DLC over a period longer than a day can deviate from the expected multiple of the asset's performance. Therefore, they are not suitable for buy-and-hold investors.

Traders who are comfortable with making short-term directional bets on the market and who understand how leverage works will find DLCs to be an effective tool. These instruments, however, are double-edged swords that allow them to magnify both gains as well as losses based on the movement of the underlying asset. Therefore, given the leveraged nature of DLCs, they are best suited for experienced traders who actively monitor the markets and have a clear risk management strategy in place.

3) What are the risks involved in trading DLCs?

While DLCs offer the potential for enhanced returns, they also come with significant risks that traders must fully understand before diving in.

• Leverage Risk: The leverage effect magnifies both gains and losses. A 5x leverage DLC will increase in value by 5% if the underlying asset rises by 1%, but it will also lose 5% of its value if the asset falls by 1%. This amplified risk requires careful consideration of position sizes and stop-loss strategies.
• Compounding Effect: DLCs reset their leverage on a daily basis, meaning their performance over multiple days is influenced by compounding effects. This can cause the actual performance of a DLC over time to differ significantly from the expected leverage. For example, in volatile or sideways markets, the returns of a DLC may erode even if the underlying asset’s long-term trend is in line with the trader’s view.
• Market Risk: As with all trading instruments, market volatility and external factors (such as geopolitical events, macroeconomic shifts, or corporate news) can lead to sudden, unexpected movements in the underlying asset. Traders using DLCs should be prepared for these fluctuations.
• Liquidity Risk: While DLCs are traded on exchanges like SGX, they can have varying levels of liquidity. Low liquidity can lead to wider spreads, making it more expensive to enter and exit positions.

4) Latest offering from SOCGEN

SOCGEN is one of the most prominent issuers of DLCs. Recently, they launched the US Stock DLCs for the Magnificent 7 stocks in October 2024 to mark 7 Years of DLCs. The latest offering provides traders the ability to long or short US Stocks during Asia hours, so they do not have to stay up late into the night monitoring their trades in the US market.

The new DLCs, which offer 3x leverage for long/short exposure (traded in SGD), were launched in two batches. The first batch covering Apple, Nvidia and Tesla was available for trading from 4 October 2024. The second batch included the rest of the Magnificent 7: Microsoft, Alphabet, Amazon and Meta Platforms started trading on 8 October 2024.

These US stock DLCs are only available for trading during SGX-ST trading hours. During Asia hours, these US stock DLCs will track the derived spot price of US stocks quoted on alternative trading systems. The derived spot price data will have delays of up to 15 minutes and will be available on Issuer SOCGEN’s DLC website.

However, one of the key risks is that the airbag mechanism may only be triggered overnight during US hours when SGX is closed. This means that there is a risk of significant or total loss overnight and investors will not be able to exit their DLC positions at that time.

5) Benefits of SGX trading on FSMOne

One of the key advantages of trading DLCs on SGX through FSMOne is the flat fee structure of $8.80 per trade. This competitive pricing structure makes it cost-effective for traders, especially those who trade frequently or in larger volumes. Flat fees eliminate the uncertainty of variable brokerage costs, which can add up for active traders, thereby reducing the overall friction of trading DLCs.

In addition to the low-cost structure, FSMOne provides a user-friendly platform with access to a wide range of trading tools, research resources, and customer support. These features are particularly beneficial for traders who are managing leveraged positions and need to stay informed on market movements in real-time.

Conclusion

DLCs are powerful instruments that can amplify returns for traders with the right skill set, market understanding, and risk management strategies. However, they are not suitable for long-term investors due to the daily resetting of leverage and the associated risks. By offering exposure to both rising and falling markets with fixed leverage, DLCs present exciting opportunities for traders who are willing to manage the heightened risks.

For those looking to trade DLCs efficiently and at a lower cost, FSMOne offers competitive pricing and easy access to SGX-listed products, making them an ideal choice for traders aiming to maximize their trading potential.