Exotic SocGen Product Shorting Singapore Air Is Now Worth Zero

(Bloomberg) -- The value of some of the leveraged short positions in Singapore Airlines Ltd. got wiped out on Wednesday after the carrier’s share price surged due to an adjustment for a rights issue of stock and convertible bonds.

A price movement of more than 20% within 15 minutes led to one of Societe Generale SA’s products shorting the stock -- DLC SG5xShort SIA -- losing all its value after a so-called airbag trigger was activated, the French bank said in a Friday statement. Trading of the instrument has since been permanently suspended.

Structured-product investors have faced billions in losses during the global stock rout in March, which was exacerbated by traders taking on more leverage. Singapore Airlines’ shares, adjusted for the company’s rights issue, surged as much as 21% on Wednesday.

With five times leverage on the daily performance of the underlying stock, the DLCs provide investors with the ability to make enhanced returns in a short period of time but there’s also the risk of substantial losses if the shares move against the investor, according to Singapore stock exchange’s website.

Exotic SocGen Product Shorting Singapore Air Is Now Worth Zero

The trigger level for the SocGen product was S$4.266792, based on a 15% increase from a theoretical price of S$3.71, adjusted for rights and convertible bonds, according to the statement. The bank explained that once the “airbag” mechanism is triggered, the certificate takes into account the highest price of the stock during the 15-minute period, which was S$4.59 and represented a 23.7% move from the adjusted close, thus resulting in it crashing to zero value. The certificate will be delisted from the Singapore bourse at a later date.

In the week ended May 1, more than 1.8 million of the short DLCs worth S$1.4 million were in the hands of investors, according to the Business Times. The return on long positions taken via daily leverage certificates jumped by 93% on May 6, SocGen said.

A SocGen spokesperson declined to comment on whether the bank will compensate investors for their losses.

©2020 Bloomberg L.P.

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