Daily Leverage Certificates (DLCs) are exchange-traded investment products that allow investors to take a bullish or bearish leveraged exposure to an underlying asset, such as an equity index or a single stock.
As DLCs are essentially a leveraged product with a fixed leveraged factor of 5x or 7x, these are usually designed for investors who want to magnify the exposure of their underlying positions for short term trading purpose.
Unlike most leveraged products on the market, one thing that stands out for DLCs is that they are listed on the cash market of SGX and by design they cannot trade below zero value. Because of that, there is no risk of a margin call.
Simply put, your maximum loss will not be more than the capital you have invested at the start.
There is also very little capital outlay needed to take a magnified exposure position to the underlying asset as compared to buying the underlying asset directly on leverage.
For instance, if you want to buy a 5x magnified position on Long Tencent (underlying stock), you would have to fork out a minimum of 100 shares x HKD 301 x 5 = HKD 150,500, which is equivalent to about SGD 26,330.
With Tencent 5xLongUB250228 (“OOSW”), for the same exposure to the stock price movement, you only need one fifth of the capital as your initial capital, i.e HKD 150,500 / 5 = HKD 30,100, which is equivalent to about SGD 5,266.
Furthermore, DLCs are listed on the SGX and traded in SGD. They are suitable for anyone who wants to get an exposure to HK stocks without having the hassle to open a separate broker that caters the needs for an overseas account and converting the currency.
There are two types of DLCs available depending on which strategy you wish to undertake.
The Long DLC goes in the same direction as the underlying asset while the Short DLC goes the opposite direction as the name implies.
There are two distinct advantages of DLCs which I will explain below here in greater detail:
1.) Compounding Effect:
The compounding effect is one which truly distinguish DLCs from the rest of the many other products in the market today.
Because DLC’s leverage is fixed and reset on a daily basis at the closing, the return is compounded for every additional day you hold the DLC.
Take this underlying asset versus 5x Long DLC example for instance – the underlying stock price goes up by 2% for each consecutive day until day 3, returning the investor a cumulative compounded return of 6.12%. Technically, a 5x leverage on the underlying asset would earn the investor 6.12% x 5= 30.6%.
The DLC on the other hand returns the investor higher at 33.1% because the leverage is reset on a daily basis. This means that the investor gets to earn more the longer he holds the DLC as the compounding effect kicks in.
As a case study, an extreme scenario of compounding effect is as below: when Tencent plunged by 38% in around Feb to Mar this year:
In the same period, a 5x Tencent Short DLC went up by 558%, compared to the underlying asset movement multiplying the leverage, which is 38% x 5 = 190%.
On the other hand, the 5x Tencent Long DLC dropped by 93.6% during the same period. In fact, there was also a positive compounding in this case, in a sense that the DLC lost less than 190% (as mentioned above no DLC can trade below zero), and did not lose the entire value.
Keep in mind that compounding effect can be negative as well. It is when the underlying asset does not go in a trend, i.e volatile without a direction, or goes sideways.
2.) Air Bag Mechanism:
The Air Bag Mechanism is built into every DLC to reduce the actual exposure of the DLC to changes in the underlying asset in case of significant adverse movement in the underlying asset during the day.
For example, an unprecedented event may send a stock down by more than 15% in one day from its previous close. This was what happened to Keppel Corp back in 2020 when oil price went negative and oil companies crashed due to this unforeseen circumstances. Another case for Alibaba also lingered when regulatory fears sent its share price plunging down hard in late 2020.
When such event happens, the Air Bag Mechanism will be triggered on the Long DLC.
The Long DLC will be suspended for at least half an hour as it adjusts for the “New Observed Price” before it resumes trading – subsequent movement of the DLC after it resumes will be referenced to the “New Observed Price” instead of the previous close of the underlying asset. This helps to maintain and limit the risk level for an investor than what would have been worse otherwise.
As the Top Issuer of Listed Structured Products in HK and having been ranked top in sales in both warrants and CBBCs in 2021, UBS made its debut to launch DLCs on SGX back in February 2022.
They started with 10 Long and Short DLCs with some of the most prominent names such as Tencent, Alibaba, Meituan, BYD, and the Hang Seng Index and slowly grew their lists to 72 DLCs over time (as of writing). The current shelf covers 26 Hong Kong stocks and 3 Hong Kong indices. You can refer to all the DLCs lists here.
You can identify easily the DLCs that were issued by UBS by its naming convention – with the ticker sign including “UB”. Example below:
If you want to find out more information about what UBS issued DLCs have to offer, you can refer to their website here for further details.
Like every products out there in the market, there will be risks associated that you have to be aware of before you start trading.
One of the biggest risks is the Counterparty risk.
DLCs are issued by third-party financial institution such as UBS. If the issuer defaults, investors can lose all or part of that money that was invested in the DLC. This is the reason why it is important to choose a reputable financial institutions which are prominent as an issuer.
The second risk is on the liquidity.
DLCs are relatively more complex products compared to buying or selling the underlying stocks so it may not have that many liquidity in the market out there and may result in bigger spreads and thinner volume.
Investors who choose to trade DLCs often understand the underlying reasons and perks of doing so.
By being able to leverage the underlying asset with minimum capital and no risk of a margin call, you may be able to reap in higher profits if you have a strategy of high conviction.
The Airbag Mechanism is there to help cushion the downside adverse impact but it is important to note that you can still lose a good amount of your money if your picks are wrong. Ultimately, we are still talking about a leverage effect for this product so it is important that investors do possess ample knowledge about the risks involved and make their own due diligence before trading DLCs.
This post is written in partnership with UBS.
For disclaimer relevant to this article, please refer to the page: https://dlc.ubs.com/en/advertorial_disclaimer