Traders cry foul over losses from SocGen actions on SIA shorts

Issuer of daily leveraged certs used what some say is an aggressive formula to calculate the price of SIA shares ex-rights

TRADERS in the 5x Short Singapore Airlines (SIA) daily leverage certificates (DLCs) saw their positions go to zero on Wednesday when SIA shares rose more than 20 per cent upon trading ex-rights.

The short squeeze was exacerbated after Societe Generale (SocGen), the issuer of the certificates, used what some traders said is an aggressive formula to calculate the price of SIA shares ex-rights. SocGen also gave them very little time to hedge their bets in reaction, the traders said.

The full damage is not known but in the week ended May 1, over 1.8 million short DLCs worth S$1.4 million were in the hands of investors.

DLCs are instruments that move either up or down based on the price of an underlying asset. A 5x Short DLC will move inversely to the underlying asset price by a factor of five, so a 20 per cent increase in SIA's share price would produce a 100 per cent loss on the 5x Short SIA DLC.

At 8.38am on Wednesday, after the market's pre-open session began at 8.30am, SocGen announced via a Singapore Exchange (SGX) filing that the theoretical ex-rights price (TERP) of SIA shares based on the previous close would be adjusted to S$3.71 - much lower than the S$4.16 many had assumed.

In March, SIA had announced it would raise S$8.8 billion through a rights issue and another S$3.5 billion via a mandatory convertible bond (MCB) issue.

In its offer document, SIA had calculated a TERP that did not take into account the MCBs. This formula would have yielded the S$4.16 price. SocGen's calculation, on the other hand, assumes that all the MCBs would be held until maturity and fully converted into shares at S$4.84.

DLCs are predominantly traded on an intra-day basis. An SIA spokesperson said: "It would not be relevant to calculate the TERP based on MCBs prior to their maturity given the different nature and trading characteristics of both types of securities (eg no market quote/ price for MCBs prior to its issuance, compared to ordinary shares traded on an exchange)."

The rights MCBs will trade from May 13 to May 21.

But a SocGen spokesperson, in response to questions from The Business Times, said: "The principle of a corporate action adjustment is to ensure any dilutive or concentrative effect on the underlying asset price is offset by way of adjusting the terms of the DLC.

"Since both the rights shares and rights MCBs may have a dilutive impact on the stock price, in our opinion both need to be taken into account for the adjustment. This was done in accordance with the listing documents for single stock DLCs."

To be sure, even if SocGen had used the TERP of S$4.16, the intraday rise in SIA shares was still more than 20 per cent. SIA shares reached an ex-rights high of S$5.04 on Wednesday.

But traders said they would have had more time to react if the higher price was used or if SocGen had made its position clear sooner. Instead, a so-called "airbag mechanism" was triggered 56 seconds after 9am on Wednesday - as soon as SIA shares hit S$4.27, an increase of more than 15 per cent from SocGen's TERP.

The airbag for a 5x stock DLC causes the DLC to be suspended for 30 minutes if the underlying stock moves adversely by 15 per cent, to slow the rate of loss to investors during extreme market swings. But SIA shares continued to rise sharply while the DLCs were suspended.

Trading in the 5x Short SIA DLCs is now permanently suspended as they will not recover in value even if the underlying stock trades at a lower price, SocGen said.

Phillip Securities trader Robin Ho told BT: "Many investors who invested in this had used S$4.16 as a benchmark and nobody knew that they (SocGen) would use another benchmark, S$3.71. That's why the investors who lost money are saying that it's not a fair game. They didn't know why the airbag burst."

He added: "If I had known that the airbag was going to burst, before the market opened I would have hedged my position or cut my losses, knowing that when the airbag bursts there's going to be a lot of short-covering in the market."

SIA shares reached an ex-rights high of S$5.04 on Wednesday, which works out to a pre-ex-rights price of more than S$8.00. For comparison, SIA shares closed at S$5.91 on Tuesday.

Mr Ho believes the surge in SIA shares and Long SIA DLCs on Wednesday was partly due to traders having to quickly hedge their positions. "SIA's fundamentals remain poor, nothing justifies why the price would go up."

SIA was the most active counter on the SGX that day, with 48.8 million shares changing hands.

Remisier Ellain Tan said: "(For leveraged products), there is a significant difference between S$3.71 and S$4.16. SocGen's ex-rights adjustment created a disproportionate disadvantage to the short side, and a disproportionate advantage to the long side. Whoever realised the mispricing could quickly buy up the long side, creating demand for the mother shares and this would spiral (upwards)."

Asked what prevented it from making the adjustment formula known at an earlier date even if the May 5 close price was not known yet, so that investors could anticipate the adjustment, SocGen replied: "Due to the unprecedented and complex nature of the rights issue, a significant amount of time has been spent to assess the impact of the rights issue both on the theoretical value of the ordinary shares of SIA and on the SIA DLCs. Further, the TERP could only be determined after market close on May 5."

It added: "We fully appreciate the importance of keeping investors informed in a timely manner of significant events impacting our products. We will, in any event, continue to review our processes and take steps to ensure that investors' interests continue to be carefully considered."

There is also the question of unusual trading activity during SIA's pre-close session on Wednesday, when a block of 3 million shares changed hands just before 5.05pm, pushing the share price down from S$4.63 to S$4.40, where it eventually closed. On Friday, SIA shares finished one cent higher at at S$4.41.

Some traders questioned if a party had been privy to how SocGen would make its ex-rights adjustments, and chose to take advantage of this by first pushing the stock up then letting go of a chunk of it later.

Mr Ho said: "Finding out who is the party who dumped the shares during the after-market matching exercise is important, and only SGX and the MAS (Monetary Authority of Singapore) have the means to do it."

BT understands that some traders have complained to SGX and MAS about SocGen's handling of the ex-rights adjustment. SGX oversees the listing and regulation of DLCs.

In response to queries from BT, an SGX spokesperson said: "SGX RegCo notes that the adjustment announcement from SocGen on the SIA DLCs was announced via SGXNet on May 6 at 8.38am despite the announcement document carrying the date May 5.

"Under the terms and conditions of the DLC, SocGen is required to make known via SGXNet the adjustment announcement as soon as practicable. SGX RegCo also requires DLC issuers to announce the adjustment on SGXNet once determined, but in no event later than the market day prior to the effective date of the adjustment. In light of these developments, we are reviewing the situation."

SGX also noted investor queries on the adjustment factor and said it has asked SocGen for more details. "We have also reviewed trading around the relevant period on May 6, 2020 and have thus far found nothing to suggest unusual activities," it said.

An MAS spokesperson said: "SGX RegCo is reviewing the issues relating to SocGen's adjustment announcement on the DLC in question. MAS will look into the matter if there are any irregularities in the trading of the relevant securities."

Remisier Terry Tang suggested that the regulators take steps to ensure that traders don't get wrongfooted again.

For instance, trading in DLCs should be halted when there is a complex corporate action in the underlying counter, he said, with trading to resume only after the issuer clarifies its adjustment formula.