Societe Generale, in collaboration with the Singapore Exchange (SGX), has released of a new series of high leverage daily leverage certificates (DLCs) with a seven leverage factor, adding to the first 10 DLCs marketed in Singapore by the French bank in the summer of 2017.
SG decided to introduce seven times DLCs on the back of an increasing retail investor demand for leverage products as suggested by the S$14m (US$10.7m) of average daily turnover recorded by the first suite of DLCs, "vis-à-vis the S$58m of average daily turnover of all structured warrants traded on SGX in the full year of 2017", according to Keith Chan (pictured), head of cross-asset listed distribution at SG in Asia Pacific. "Societe Generale has also provided a tight bid-ask spread with consistent size," said Chan. "This allows investors to experience consistent liquidity, which leads to positive trading experiences."
The Hang Seng Index (HIS) is up 13.4% since the DLC suite was launched, which resulted in the five times DLC Long HSI paying out +70.5%, due to positive compounding effect and low volatility, while the five times DLC Short HSI was down 58.3%. On the other hand, the Hang Seng China Enterprises Index (HSCEI) was up 9.1%, while the five times DLC Long HSCEI was up 27.9%, with negative compounding effect, according to Chan. "This was due to a more volatile performance from HSCEI over the period," said Chan. "All in all, the DLCs performed according to the stated formula in the term sheet, and hence there were no surprises."
Chan noted that using the daily return of the HSI in 2017, the largest daily rise and fall of a five times DLC (before cost and fees), would be 11.2% and 10.7%, while, for seven times it would be 15.7% and 15%, respectively. Similarly, for HSCEI in 2017, the largest daily rise and fall of five times DLCs (before cost and fees) would be 8.3% and 7.3%, and the seven times DLC would have provided 11.7% and 10.3%, according to Chan. "Investors welcome higher leveraged products, so we expect trading of seven times DLCs to grow at a faster pace than that of the three or five-times DLCs on their inception," said Chan. "This is particularly relevant for the HSCEI, which has been low in daily volatility in the past."
The demand for the DLCs is derived from their transparency and flexibility and the fact that the bank offers, "liquidity with consistency, as well as the commitment to investor education", according to Chan. "There are investors who trade DLC to capture short-term directional market moves, as well as some investors who traded the short DLCs to hedge against their long positions in stocks," said Chan.
There has been a strong pick up in investor appetites for listed structured products in Singapore - structured warrants generated a daily average turnover of S$58m in 2017 (90% more than in 2016), according to Chan. "And our first batch of DLCs also recorded S$14m of average daily turnover only within six months since launch in July 2017," he said.
Regionally, listed structured products continue to be in high demand, with Hong Kong the largest listed products market in the world by volume, with a daily turnover of approximately 20-25% of total market. "In Hong Kong, we expect the total turnover of callable bull/bear contracts and warrants to account for 20% of total market turnover in 2018, potentially hitting HK$5trn," said Chan. "The bullish market continued into 2018, with the HSI breaching historical highs. On January 2018, the total warrant and CBBC turnover in Hong Kong reached HK$50.9bn, which broke the highest turnover per day since 2007."
Despite the strong appetite for leveraged trading in Singapore, DLCs remain the first product of their kind in Singapore and Asia, to be launched over the last 10 years, and because of their transparency and simplicity they offer a "fresh trading option for Singaporean investors to capture short term market moves", according to Chan.
"Due to the complexity of warrants, many investors turned to trade contracts for difference (CFDs) on overseas indices, commodities and Forex," said Chan. "Greater investor awareness of DLCs may lead to the healthy growth of DLC turnover, outstanding positions and overall transaction volumes."
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