The DLCs will be open for trading during SGX Securities market trading hours. However the market maker would not quote in the market if the underlying markets of the respective DLCs are closed.
For the purpose of this simulation, we have restricted the trading hours to as follows (similar to when the market maker would quote in the real market):
- DLCs on SGX-listed underlyings – 9am to 12pm; 1pm to 5pm
- DLCs on HK Indices (HSI/HSCEI) – 9:15am to 12pm; 1pm to 4:30pm
- DLCs on HK-listed Stocks – 9:30am to 12pm; 1pm to 4pm
Apart from rounding and bid/ask which also impact the performance shown but to a lesser extent, the most common reason why investors might perceive that the DLC performance has deviated from expected leverage performance is due to a wrong reference price being used.
DLCs are designed around day-on-day performances, i.e. DLC performance should be compared to its value at underlying closing time the previous day. According to SGX’s methodology of calculating daily percentage performance, SGX uses the last traded price of the DLC the previous day as the base (denominator). Since the time of the last trade on the DLC the previous day does not necessarily coincide with that of the underlying, there is a mismatch in what we are comparing. Less popular DLCs (with less trading to “refresh” the last price) usually show a bigger discrepancy.
To check if your DLC is providing the leverage performance as promised, you should compare the current bid price of the DLC against the “intrinsic close” value that is published daily on SG’s website. This “intrinsic close” is the value of the DLC at the underlying closing time the previous day, and serves as an accurate reference price to calculate the expected leverage performance.
Reason to issue more than one DLC
Usually the reason to issue more than one product on the same underlying asset, direction and leverage is because the price sensitivity of existing products are getting lower due to their low unit price. The new products will provide investors with higher-sensitivity options, which is more favorable for short-term trading.
How to differentiate between the existing and new DLCs
For index DLCs, investors can differentiate between the existing and new DLCs by their expiry date as indicated in the counter name and by their stock code. The new products will have a longer dated expiry.
What will happen to the existing DLCs
For single stock DLCs, apart from the difference in stock code, a letter (“A”, “B” and so forth) will be added to the new product name for easy identification. For example, the name of the new 5x Short DLC on Tencent is “DLC SG5xShortTencent A”. Investors can also go to SocGen’s website
to check the difference in expiry date.
Despite the difference in price sensitivity and expiry date, investors should note that both the existing and new products will move in line with the underlying asset multiplied by the leverage factor. Societe Generale will continue to provide the same market making quality for both new and old DLCs.
DLC price, no matter Long DLC or Short DLC, is not supposed to be impacted by dividend payout.
Taking DBS stock as an example. Assuming DBS is at S$ 25.5 today at close and tomorrow is ex-dividend day and DBS is paying out S$ 0.5 of dividend. If tomorrow DBS opens at S$ 25, both Long DLC and Short DLC will be unchanged in value (before costs and fees). If DBS opens at S$ 25.5, it will be seen as up by 2%, i.e. 5x Long DLC will be up by 10% and 5x Short DLC will be down by 10% (before costs and fees).
The same concept applies to corporate action, i.e. DLC prices will not be affected by corporate action adjustments.
Investors can refer to “Leverage Strategy Formula” and “Examples and illustrations of adjustments due to certain corporate actions” in the relevant Supplemental Listing Document of the DLCs for more details.
The issue price of a DLC is arbitrary, i.e. it is decided by the issuer, which is similar to the mechanism of a stock or an ETF. For DLC, issuers determine the issue price that strikes a balance between tighter spread and higher sensitivity.
Because DLC issue price is arbitrary, for two DLCs of the same underlying asset, direction and leverage but of different prices, the lower-priced DLC should not be considered as more cost-effective than the higher-priced one. In fact, the higher-priced DLC will be more sensitive than the lower-priced DLC and hence will be a better product from short-term trading perspective.
After a DLC is launched, its fair value is calculated according to the pricing formula, i.e. (daily percentage performance of the underlying asset x leverage) minus costs and fees applicable. Investors can check the latest intrinsic closing values on https://dlc.socgen.com
, or can refer to the relevant Supplemental Listing Document published on the same website or SGX’s website.
Investors holding their positions overnight will incur leverage and hedging costs and fees which consist of the Management Fee, Funding Costs, Stock Borrowing Costs (for Short Certificates only), Rebalancing Costs (if applicable) and Gap Premium, which are calculated daily and applied to the value of the product (i.e. reflected in the bid/ask quotes and not a separate transaction). The costs and fees level will be published on the website at https://dlc.socgen.com
and updated daily.
Usually, the daily cost & fee is accumulated is less than a minimum tick.
For the full calculation of the cost and fees, investors can refer to the “Leverage Strategy Formula” section in the relevant Supplemental Listing Documents of the DLCs.
Currently the expiry date of all the DLCs are 3 years from launch. On expiry date, DLCs will be cash-settled. Investors who hold DLC units on expiry date will receive in cash the settlement value of the DLCs according to its pricing formula.
Prior to expiry of a DLC, issuers would issue product with a longer expiry for investors to choose or switch.
Investors can also refer to the relevant Term Sheet of the DLC, published on https://dlc.socgen.com
, to check the Expiry Date.
None of the DLCs are expected to expire within the duration of the SG Active Trading Tournament 2019.
This is likely due to compounding effect.
DLC’s leverage is fixed on a daily basis and is reset (back to the fixed leverage) at the end of each trading day. Technically, if a DLC is held for longer than a day, the return will be compounded every day, i.e. overall cumulative return would deviate from underlying asset cumulative performance multiplying by the fixed leverage. This is called compounding effect.
Compounding effect can be positive or negative, depending on the “path” of the underlying asset during the trading period.
From the example above, the same overall cumulative performance of the underlying can result in a varying performance in the 5x DLC. In scenarios 1 and 2, the underlying reaches the same level of 105.08 after three days - however, on different “paths”. The DLC performs differently in each scenario. In scenario 1, the underlying is on a clear upward trend, whereas in scenario 2 it is in a very volatile movement. In this case, the Daily Leverage Certificate performs better in scenario 1 than in scenario 2.
In general, compounding effect tends to be positive in trending market. For a Long DLC, when the market is trending up, Long DLC could deliver return more than the fixed leverage; when the market is trending down, Long DLC could lose value less than the fixed leverage.
In side-way or volatile market, DLCs may deliver leverage less than the fixed leverage, or may arrive at a loss when the underlying asset goes back to the same price after a volatile period.
The nature of compounding effect to a certain extent positions DLC as a trend trading product.
The “Cumulative Return” tool on https://dlc.socgen.com
can help investors better understand compounding effect by selecting a historical period and compare the cumulative returns between underlying asset and DLC:
Investors can also refer to the section of “Illustration on how returns and losses can occur under different scenarios” in the relevant Supplemental Listing Document of the DLC for more information about compounding effect.
For more information, please visit https://dlc.socgen.com
. Alternatively, you may email to firstname.lastname@example.org
if you have any questions on the DLC.