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Home / Education
DLC Educational Video Series

  • What is DLC?
  • What leveraged performance
    do I get and how do I check it?
  • Compounding effect
  • Daily Leverage Certificates vs Structured Warrant
  • Daily Leverage Certificates vs Contract for Difference
What is a Daily Leverage Certificate (DLC)?
  • DLC 101
    • Background

      Daily Leverage Certificates (DLCs) are brought to Asia in 2017. They had soon become popular among investors and short-term traders because of their simple and transparent structure.

    • Exchange traded instrument

      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.

      DLCs available on this website are listed on the SGX. Investors can find and trade them on most brokers' platforms.

      Each DLC is a separate trading counter on the SGX, with a separate counter name, trading code and price. Price of a DLC can be totally different from its Underlying Asset and is decided by the Issuer on the initial listing date.

      DLCs are traded on security market of an exchange and by design they cannot trade below zero value. When you invest in a DLC, your entire invested capital is at risk, but the maximum loss will not be more than the total capital you invested.

    • Fixed daily leverage

      DLCs are called "Daily" Leverage Certificates because the leverages they provide are fixed and presented on a daily basis.

      The fixed daily leverage factor can vary across products depending on the individual product terms. Some of the more common leverage factors are 3, 5 and 7x.

      Taking a 5x Long DLC as an example, for every 1% the Underlying Asset goes up from its previous close, DLC theoretical values goes up by 5% from its previous closing theoretical value. If the Underlying Asset goes up by 2%, DLC would be up by 10% instead, and so forth.

      If, on the other hand, the Underlying Asset goes down, Long DLC would also decrease in value with a leverage.

      DLC
      Daily Percentage Performance*
      Underlying Asset
      Daily Percentage Performance
      Leverage
      Factor
      *Before costs & fees are applied.

      Please note that investors should NOT refer to the last traded price in the previous trading day as the reference price to determine DLC daily performance. This is because last trade done in the previous day may not be transacted exactly at market close of the Underlying Asset. DLC value, as well as the market making quotes, continues to move with the Underlying Asset after the last trade is done. In other words, last traded price in the previous day does not reflect the true DLC value at market close.

      Investors should refer to Intrinsic Close published on UBS's DLC website as reference price to determine DLC daily percentage performance.

      Intrinsic Close is the value computed with reference to the valuation formula of the Certificates. More information on the valuation formula of the Certificates can be found in the relevant supplemental listing documents.

    • Long & Short

      There are two types of DLCs available, which you can tell from the names: Long DLCs and Short DLCs.

      A Long DLC goes in the same direction as the Underlying Asset, while a Short DLC goes the opposite.

      If you want to express a bullish view with leverage, you can buy a Long DLC.

      On the other hand, if you want to express a bearish view with leverage, you can buy a Short DLC.

      Investors are encouraged to always 'buy' a Long and Short DLCs to express bullish and bearish view respectively. If investor shorts a Long DLCs to express bearish view and subsequently is not able to cover the positions, investor will be forced to enter the buy-in market to buy back the shorted positions, which can worsen overall investment return.

  • Compounding effect

    As mentioned previously, DLC's leverage is fixed on a daily basis, which also means that DLC leverage is reset every day at day end.

    Because of the leverage reset, if you hold a DLC for more than one day, the return is 'compounded' for every additional day you hold the DLC.

    This compounding effect causes the DLC's cumulative return (return by comparing latest price to when you bought the DLC on day 1) to deviate from [Underlying Asset's cumulative return] x [Leverage factor].

    Simply put, a 5x Long DLC provides 5 times relationship to the Underlying Asset on a daily basis, set aside costs & fees and marketing conditions. But 5 times every day does not necessarily mean 5 times for the period you hold.

    Compounding effect can be positive or negative, depending on the 'path' of the Underlying Asset.

    Let's take a look at the below scenarios.

    Scenario 1: Underlying Asset trends up Compounding GAIN

    Long DLC's cumulative percentage gain is MORE than Underlying Asset cumulative percentage gain x Leverage Factor

    Day 0 Day 1 Day 2 Day 3
    Underlying Asset Value 100.00 102.00 104.04 106.12
    Daily % change 2.0% 2.0% 2.0%
    Cumulative % change 6.1%
    Cumulative % change x Leverage 30.6%
    DLC Value 0.100 0.110 0.121 0.133
    Daily % change 10.0% 10.0% 10.0%
    Cumulative % change 33.1%

    Any prices stated in the materials are for information purposes only and do not represent valuations for individual circumstances or other financial instruments. There is no representation that any transaction can or could have been effected at prices stated in the materials, and such prices do not necessarily reflect internal books, records or theoretical model-based valuations and may be based on certain assumptions.

    Scenario 2: Underlying Asset trends down Compounding GAIN

    Long DLC's cumulative percentage loss is LESS than Underlying Asset cumulative percentage gain x Leverage Factor

    Day 0 Day 1 Day 2 Day 3
    Underlying Asset Value 100.00 98.00 96.04 94.12
    Daily % change -2.0% -2.0% -2.0%
    Cumulative % change -5.9%
    Cumulative % change x Leverage -29.4%
    DLC Value 0.100 0.090 0.081 0.073
    Daily % change -10.0% -10.0% -10.0%
    Cumulative % change -27.1%

    Any prices stated in the materials are for information purposes only and do not represent valuations for individual circumstances or other financial instruments. There is no representation that any transaction can or could have been effected at prices stated in the materials, and such prices do not necessarily reflect internal books, records or theoretical model-based valuations and may be based on certain assumptions.

    Scenario 3: Underlying Asset fluctuates in a volatile way Compounding LOSS

    Long DLC's cumulative percentage return is LESS than Underlying Asset cumulative percentage return x Leverage Factor

    Day 0 Day 1 Day 2 Day 3
    Underlying Asset Value 100.00 104.00 97.76 106.12
    Daily % change 4.0% -6.0% 8.6%
    Cumulative % change 6.1%
    Cumulative % change x Leverage 30.6%
    DLC Value 0.100 0.120 0.084 0.120
    Daily % change 20.0% -30.0% 42.8%
    Cumulative % change 19.9%

    Any prices stated in the materials are for information purposes only and do not represent valuations for individual circumstances or other financial instruments. There is no representation that any transaction can or could have been effected at prices stated in the materials, and such prices do not necessarily reflect internal books, records or theoretical model-based valuations and may be based on certain assumptions.

    Scenario 4: Underlying Asset sideways Compounding LOSS

    Long DLC's cumulative percentage return is negative when Underlying Asset cumulative percentage return is about flat or positive

    Day 0 Day 1 Day 2 Day 3
    Underlying Asset Value 100.00 102.00 98.84 100.00
    Daily % change 2.0% -3.0% 1.1%
    Cumulative % change 0.0%
    Cumulative % change x Leverage 0.0%
    DLC Value 0.100 0.110 0.094 0.099
    Daily % change 10.0% -15.0% 5.4%
    Cumulative % change -1.5%

    Any prices stated in the materials are for information purposes only and do not represent valuations for individual circumstances or other financial instruments. There is no representation that any transaction can or could have been effected at prices stated in the materials, and such prices do not necessarily reflect internal books, records or theoretical model-based valuations and may be based on certain assumptions.

    In all the above scenarios, the Long DLC provides exactly 5 times daily return of the Underlying Asset.

    Comparing scenario 1 and 3, Underlying Asset's cumulative returns are the same for both scenarios, and the Underlying Asset also ends up at 106.12 on Day 3, but the returns on DLCs are different because of the 'paths' the Underlying Asset goes through.

    Because of the nature of compounding effect, DLCs are usually positioned as trend-trading products.

  • 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.

    Please note that Air Bag Mechanism may not guarantee prevention of a DLC from losing its entire value.

    First let's take a look at the below table for air bag trigger thresholds of different DLC types.

    Underlying Type Type Product Airbag Trigger
    Equity Index Long 5x Daily Long -10%
    7x Daily Long -10%
    Short 5x Daily Long 10%
    7x Daily Long 10%
    Single Stock Long 5x Daily Long -15%
    Short 7x Daily Long 15%

    Any prices stated in the materials are for information purposes only and do not represent valuations for individual circumstances or other financial instruments. There is no representation that any transaction can or could have been effected at prices stated in the materials, and such prices do not necessarily reflect internal books, records or theoretical model-based valuations and may be based on certain assumptions.

    Taking 5x Long Single Stock DLC as an example, when the stock goes down by 15% in one day from its previous close, Air Bag Mechanism will be triggered on this Long DLC. The Long DLC will be suspended for at least half an hour before it resumes trading. The first 15-minute period after a DLC is triggered Air Bag is called Observation Period which is followed by a Reset Period^ of at least 15 minutes before a DLC resumes trading. The lowest price/level of the Underlying Asset in the observation period is determined and regarded as the 'New Observed Price' (for single stock) or ‘New Observed Level’ (for index).

    After the DLC resumes, its exposure will be reduced – subsequent movement of the DLC will be referenced to the New Observed Price, instead of the previous close of the Underlying Asset. If the Underlying Asset continues to go down, the DLC will decrease less than if the air bag mechanism is not in place (Scenario 1).

    Scenario 1 - Downward Trend after Air Bag Trigger

    Any prices stated in the materials are for information purposes only and do not represent valuations for individual circumstances or other financial instruments. There is no representation that any transaction can or could have been effected at prices stated in the materials, and such prices do not necessarily reflect internal books, records or theoretical model-based valuations and may be based on certain assumptions.

    Scenario 2 - Upward Trend after Air Bag Trigger

    Any prices stated in the materials are for information purposes only and do not represent valuations for individual circumstances or other financial instruments. There is no representation that any transaction can or could have been effected at prices stated in the materials, and such prices do not necessarily reflect internal books, records or theoretical model-based valuations and may be based on certain assumptions.

    Underlying Daily Performance
    Leverage Strategy Daily Performance without Air Bag
    Leverage Strategy Daily Performance with Air Bag

    ^ The Reset Period (and consequently the resumption of trading) is subject further to SGX-ST’s requirements, including at least 30 minutes from the time of publication of an announcement on the exchange in respect of the Air Bag Mechanism being triggered, and at least 15 minutes after the SGX-ST grants an approval to resume trading, whichever is later, rounded to the next quarter of an hour.

    If the Underlying Asset (for 5x Long DLC) decreases by equal to or more than 20% in the observation period, the DLC will lose all of its value and will not resume trading, and will subsequently be delisted.

    Please note that Air Bag mechanism will only be triggered on the DLC that is against the market direction, i.e. if the Underlying Asset is going down, air bag will only be triggered on the Long DLCs, Short DLCs will continue to trade as usual and investors who are holding such Short DLCs will be able to sell it back to the DMM or other market participants to profit.

  • Costs & Fees

    Investors are subject to different types of costs & fees when trading DLCs. Some of them are charged by the exchange or broker, while some are charged by the issuer to reflect the costs involved if investors were to replicate the same exposure, such as funding cost, rebalancing costs etc.

    When investors trade intra-day (buying and selling DLCs on the same Trading Day), they are subject to brokerage fee from brokers, trading fee from SGX and bid/offer spread from the issuer.

    When investors hold the DLCs overnight, they will be subject to overnight holding costs & fees which include funding cost, stock borrowing cost (for short DLCs only), rebalancing cost, gap premium and management fee.

    All the costs & fees from issuer are embedded in the bid and offer quotes provided by the Designated Market Maker (DMM). Investors do not need to pay the costs separately.

    Costs and fees are transparent and can be computed with published data using the formula. They can be found in the individual product page or relevant listing documents.

    Trading intra-day Held overnight Charged by Issuer
    Brokerage Fee Yes Yes No
    Trading fee Yes Yes No
    Bid/Ask Spread Yes Yes Yes
    Funding Cost* No Yes
    Stock Borrowing Costs* (for Short DLC only) No Yes
    Rebalancing Costs* No Yes
    Gap Premium No Yes
    Management Fee No Yes
    *Embedded in the Leveraged exposure

    Any prices stated in the materials are for information purposes only and do not represent valuations for individual circumstances or other financial instruments. There is no representation that any transaction can or could have been effected at prices stated in the materials, and such prices do not necessarily reflect internal books, records or theoretical model-based valuations and may be based on certain assumptions.

When you trade a DLC
  • Where can I trade a DLC?

    DLCs are listed on the SGX. In general investors should be able to find them on the platform of every broker that has access to the SGX.

    Before you trade a DLC, you may want to check with your broker if you are qualified to trade Specified Investment Products (SIPs). DLCs are classified as SIPs and hence require investors to be qualified before they can trade such type of products.

    For more information about SIPs, investors can visit here.

  • Market making

    UBS is the issuer as well as the Designated Market Maker (DMM).

    A DMM is obligated to provide continuous bid and offer quotes on the DLCs during SGX trading hours. Investors can expect liquidity to be provided by the DMM even if there is no other market participants trading the DLCs (when it is newly listed for example).

    There are certain conditions under which liquidity may not be provided, including but not limited to:

    • When the Underlying Asset is not trading
    • When the DLC is worthless
    • When the DLC is sold out, DMM will only provide bid

    UBS is committed to providing quality liquidity for investors to express bullish and bearish views to navigate through market ups and downs.

    For more information about market making, investors can refer to the relevant listing documents.

  • What are the usual strategies to trade a DLC?

    DLCs are leveraged products with simple and transparent product structure. They can be used for different types of trading strategies and holding horizons. But because of their leveraged nature, it is recommended that investors mainly use the products for short-term investment horizons.

    • Day trading

      DLCs can be used for day trading to capture Underlying Asset's ups and downs intraday. For certain Underlying Asset, leveraged return even for just day trading can be substantial. Of course investors should always be aware that the downside risk is also magnified.

    • Swing trading

      Because of the compounding nature, DLCs can provide better return when investors are able to capture a 'trend'. Swing trading strategies, which normal ranges from a few days to a couple of weeks, can allow investors to be more likely to benefit from compounding effect.

    • Short-term hedging

      Short DLCs can be a good instrument to hedge against short-term market downturn. For example, investors can buy a 5x Short index DLCs to hedge against their stock portfolio. This is provided that their portfolio has a high-enough correlation with the index. Because of the 5x leverage, investors only need to set aside 20% capital to enter into this short DLC for the hedging. And by doing this investors do not need to sell their stock holdings and subsequently buying them back, which can incur higher broker commission charge.