Leveraged SocGen financial product shorting SIA shares now worth zero

Trading of the instrument has since been permanently suspended.
Trading of the instrument has since been permanently suspended.PHOTO: REUTERS

SINGAPORE (BLOOMBERG) - The value of some of the leveraged short positions in Singapore Airlines (SIA) got wiped out last Wednesday (May 6) 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 per cent within 15 minutes led to one of Societe Generale's products shorting the stock - DLC SG5xShort SIA - losing all its value after a so-called "airbag" mechanism was triggered, the French bank said in a statement on Friday. 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. SIA shares, adjusted for the company's rights issue, surged as much as 21 per cent on Wednesday.

With five times leverage on the daily performance of the underlying stock, the daily leverage certificates (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.

The trigger level for the SocGen product was $4.266792, based on a 15 per cent increase from a theoretical price of $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 $4.59 and represented a 23.7 per cent 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 $1.4 million were in the hands of investors, according to The Business Times. The return on long positions taken via DLCs jumped by 93 per cent on May 6, SocGen said.

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

This article has been edited for clarity.