What is Daily Leverage Certificates (DLC)

Daily Leverage Certificates (DLC) are exchange-traded financial products that enable investors to take a leveraged exposure to an Underlying Asset, such as an equity index or a single stock. Daily Leverage Certificates replicate the performance of an Underlying Asset versus its previous day closing level, with a fixed leverage factor.

The leverage effect means that any movements in the Underlying Asset are amplified. Daily Leverage Certificates will leverage the investment exposure by a fixed amount, e.g. 2, 3, 5 or 7 times. Therefore, the daily percentage return of Daily Leverage Certificates will be equal to the daily percentage return of the Underlying Asset multiplied by the fixed leverage factor, before costs and fees.

 

Air Bag Mechanism is a mechanism that is built into the Daily Leverage Certificates. It is designed to reduce the actual exposure of the Daily Leverage Certificates to changes in the Underlying Asset in case of significant adverse movement in the Underlying Asset during the day.

 

Underlying Type	Product	Airbag Trigger
Equity Index	2x Daily Long	-20%
Equity Index	2x Daily Short	+20%
Equity Index	3x Daily Long	-20%
Equity Index	3x Daily Short	+20%
Equity Index	5x Daily Long	-10%
Equity Index	5x Daily Short	+10%
Equity Index	7x Daily Long	-10%
Equity Index	7x Daily Short	+10%
Single Stock	5x Daily Long	-15%
Single Stock	5x Daily Short	+15%

 

If the Underlying Asset is an Equity Index, for a 3 times Daily Leverage Certificates, the Air Bag will be triggered when the Underlying Asset moves against the Daily Leverage Certificates by 20%, and for 5 times Daily Leverage Certificates by 10% compared to previous close, or previous New Observed Level (as defined below) if an Air Bag has already occurred on the same trading day.

If the Underlying Asset is a Single Stock, for a 5 times Daily Leverage Certificates, the Air Bag will be triggered when the Underlying Asset moves against the Daily Leverage Certificates by 15% compared to previous close, or previous New Observed Price if an Air Bag has already occurred on the same trading day.

Investors should note that the airbag can only be triggered during trading hours of the relevant stock exchange for the Index or Stock. For example, the airbag for a DLC on Hang Seng Index and DLC on S&P500 Index can only be triggered during HKEx trading hours and US trading hours respectively when the underlying index is quoted. For details on the airbag mechanism relating to DLCs with US underlying indices.

 

Air Bag will NOT be triggered on the DLC that is in line with the market direction, i.e. on Long DLC when Underlying Asset is going up, or Short DLC when Underlying Asset is going down.

Investors should note however that the Air Bag Mechanism will also maintain a reduced exposure to the Underlying Asset even if the Underlying Asset starts to move in favor of the DLCs after the Air Bag Mechanism has been triggered, thereby reducing its ability to recover losses for investors.

There is no guarantee the Air Bag Mechanism will prevent investors from losing the entire value of their investment if the underlying continues to move beyond the airbag trigger.

For a 5 times DLC, In the case of a big overnight drop of more than 20% (or 20% drop within the 15-minute observation period), the DLC would also result in a total loss. (Similarly, 15% for 7x and 34% for 3x)

 

How it works in practice

The Air Bag Mechanism is triggered when the Underlying Asset reaches the stated Airbag Trigger Level (denoted by "A" in the next diagram). When the Air Bag Mechanism is triggered, the trading of the Daily Leverage Certificates is suspended, and a 15-minute observation period begins.

During the 15-minute observation period the lowest level (for a Daily Long), or highest level (for a Daily Short) of the Underlying Asset is recorded, this level is termed the new observed level (denoted by "M" in the next diagram).

Resumption in trading of the Daily Leverage Certificates (denoted by "R" in the next diagram) happens 30 to 45 minutes after the Air Bag Mechanism has been triggered and the leverage of the Daily Leverage Certificates is subsequently applied to the performance of the Underlying Asset computed from the observed level instead of the last closing level.

The Air Bag Mechanism can only be triggered when the underlying market is open, which may not be at the same time as when the DLC is trading.

The Air Bag Mechanism can be triggered more than once per day, and the new trigger level will be based on the new observed level.