What are Constant Laverage Certificates

What are Leverage Indices

Constant Leverage Certificates are financial instruments without capital protection that offer the opportunity to invest with the aim of replicating the performance of a Leverage Index. Constant Leverage Certificates provide for a fee charged to the investor called Variable Management Fee or VMFₜ which is calculated by applying a predetermined formula that takes into account the AMF Percentage and the VMF Percentage and that implies a decrease of the settlement amount reserved to the investor. Being calculated progressively and daily, it affects the market value of the Certificate throughout its entire life. Such Certificates are designed for short and very short-term transactions, including intra-day transactions.

Constant Leverage Certificate

The underlying asset of a Constant Leverage Certificate is a Leverage Index. Leverage Indices are managed and calculated by index administrators, i.e. third parties other than the Issuer, in order to amplify the daily performance¹ of a Reference Asset (such as a stock index, a share, a commodity or its related future contract) by applying the Constant Leverage, with an upward (Long Leverage Indices) or downward (Short Leverage Indices) strategy. Leverage Indices therefore incorporate a performance amplifying mechanism through the Constant Leverage.

Who are these Constant Laverage Certificates for?

This type of Certificate is for investors with a significant risk appetite since the investment is exposed to the potential loss of the entire invested capital; Constant Leverage Certificates are designed for short and very short-term transactions, including intra-day transactions. In addition, through the application of the Variable Management Fee, a Constant Leverage Certificate is subject to a fee charged to the investor, which is calculated progressively and on a daily basis, and consequently affects the market value of the Certificate throughout its life. The aim of this Certificate is to replicate the performance of a Leverage Index; the Leverage Index is calculated by an index administrator, i.e. a third party other than the Issuer and from the latter independent, in order to incorporate a mechanism that allows such Index to amplify the daily performance1 of a Reference Asset by applying the Constant Leverage, with an upward (Long Leverage Indices) or downward (Short Leverage Indices) strategy.

Financial instruments that replicate the performance of a Leverage Index

Listing and trading of Constant Laverage Certificates

Constant Leverage Certificates are financial instruments that, in Italy, can be bought or sold on the SeDeX Multilateral Trading Facility of Borsa Italiana. The trading methods and hours on this Multilateral Trading Facility are specified in the related regulation available on Borsa Italiana’s website. For example, continuous trading on SeDeX may take place on open market days from 9:05 a.m. to 5:30 p.m.

Characteristics of Constant Laverage Certificates

ISIN: the alphanumeric code that uniquely identifies the Certificate;
UNDERLYING: Leverage index
ISSUER: the financial entity that issued the Certificate;
MINIMUM UNIT: the minimum number of Certificates that can be bought or sold;
MULTIPLE: the amount of underlying controlled by each Certificate;
MATURITY: the date on which the Certificate is paid and ceases to exist;
AMF Percentage: annual percentage value that is part of the formula with which the VMFₜ is calculated;
VMF Percentage: annual percentage value that can vary within a certain range and is part of the formula with which VMFₜ is calculated;
Variable Management Fee or VMFₜ: fee charged to the investor, calculated on a daily basis taking into account the AMF Percentage and the VMF Percentage and expressed as an adjustment coefficient (less than 1), calculated progressively and daily during the life of the Certificate. It is applied to the value of the underlying asset and it determines the actual contribution of the performance of the underlying asset to the performance of the Certificate. This coefficient is updated after the daily closing of the trading market.

Characteristics of Leverage Indices

LEVERAGE INDEX: managed by an index administrator (a third party other than the Issuer and from the latter independent), it amplifies the daily performance of a Reference Asset by applying the Constant Leverage, with an upward (Long Leverage Indices) or downward (Short Leverage Indices) strategy.

REFERENCE ASSET:
by way of example a stock index, a share, a commodity or its related future contract;
CONSTANT LEVERAGE:
a factor which, multiplied by the daily performance of the Reference Asset, allows to amplify the exposure of the Leverage Index on it and, consequently, of the Certificate that replicates the Leverage Index;
TYPE OF LEVERAGE INDEX (LONG OR SHORT):
the direction of the Leverage Index which can be Long (if the Leverage Index replicates the Reference Asset upwards) or Short (if the Leverage Index replicates the Reference Asset downwards);
VALUE OF THE LEVERAGE INDEX - DAILY CALCULATION OF THE PERFORMANCE OF THE REFERENCE ASSET:
the value of the Leverage Index is determined on the basis of a daily calculation mechanism of the performance of the Reference Asset on its closing level on the previous day. The reference value of the Leverage Index is initially fixed at the issue date of the Certificates. Subsequently, on a daily basis, the Leverage Index is recalculated by applying to the closing value recorded by the Leverage Index on the previous business day an amount determined on the basis of the performance of the Reference Asset multiplied for Constant Leverage²;
COMPOUNDING EFFECT:
over a period of two or more days, the calculation mechanism on a daily basis of the performance of the Reference Asset generates a Compounding Effect. This means that the overall performance of the Leverage Index and consequently of the Constant Leverage Certificates, over a period of time longer than a single day of negotiation, may differ from the performance of the Reference Asset multiplied by the Constant Leverage².
EXTRAORDINARY ADJUSTMENTS FOR EXTREME MARKET MOVEMENTS:
in the event of significant and adverse changes in the performance of the Reference Asset, an intra-day recalculation mechanism (intra-day reset) is provided in order to prevent the value of the Leverage Index becoming negative due to the Constant Leverage. In particular, when the performance of the Reference Asset exceeds a certain threshold (trigger value), the index administrator sets a new basis for calculating the daily performance of the Reference Asset and consequently it will determine an adjustment of the value of the Leverage Index. Therefore, in this case, the performance of the Leverage Index may differ significantly from the performance of the Reference Asset multiplied by the Constant Leverage

For more information on the features of Leverage Indices, please refer to the website of the index administrator that manages the Leverage Index.

How Constant Laverage Certificates work

Constant Leverage Certificates are instruments whose aim is to replicate the performance of the Leverage Index, which in turn amplifies the daily performance¹ of a Reference Asset by applying the Constant Leverage. The settlement amount is decreased by a fee charged to the investor (Variable Management Fee or VMFₜ). Investment in Constant Leverage Certificates does not directly benefit from the proceeds distributed over time by the underlying financial asset and causes the renouncement of those proceeds, unless the underlying financial asset is a Total Return type of index, where the related performance benefits from the proceeds distributed over time by the “components” of the index.

What is a Leverage Index?

The Underlying asset is the activity such as a share, stock index currency, commodity or any other real( e.g. raw materials) or financial asset( an exchange rate or interest rate) upon which the value and price of the Certificate is dependent asset of a Constant Leverage Certificate is a Leverage Index. A Leverage Index is managed and calculated by an index administrator, i.e. a third party other than the Issuer, in order to amplify the daily performance1 of a Reference Asset (such as, for example, a stock index, a share, a commodity or its related future contract) by applying the Constant Leverage, with an upward (Long Leverage Indices) or downward (Short Leverage Indices) strategy. A Leverage Index therefore incorporates a performance amplifying mechanism through the application of the Constant Leverage.

Example of Constant Leverage Certificate operation

Assuming a Constant Leverage Certificate³ having as underlying asset the Alpha Leverage Long 7x Index and with the following features:

Initial reference value of the Alpha Leverage Long 7x index (day T0)	10,000 points
Initial value of the Reference Asset	10,000 points
Constant Leverage Long	7
Maturity after	3 years
Issue Price	100 €
Annual Management Fee Percentage (AMF Percentage)	3.20%
Variable Management Fee Percentage (VMF Percentage)	4.5%
Multiple	0.01

The Certificate after one business day (t₁) may have one of the following values based on the value of the Reference Asset at t₁ and, consequently, of the Alpha Leverage Long 7x Leverage Index:

the value of the Reference Asset on the following day is 10,200 points, with a positive performance over the period equal to 2%. Therefore, the value of the Alpha Leverage Long 7x Leverage Index the next day, amplifying the daily performance of the Reference Asset by applying the Constant Leverage to it, is 11,400 points, with a positive performance equal to 14%.
The VMFₜ (the fee charged to the investor, calculated on a daily basis taking into account the AMF Percentage and the VMF Percentage and expressed as an adjustment coefficient) after one day will be 0.9998631.The potential value of the Certificate therefore increases to 113.98 euro:

11,400 x 0.01 x 1 x 0.9997892 = 113.98 euro (+13.98% compared to the price of the previous day)
the value of the Reference Asset on the following day is 9,800 points, with a negative performance over the period equal to 2%. Therefore, the final reference value of the Alpha Leverage Long 7x Leverage Index the next day, amplifying the daily performance of the Reference Asset by applying the Constant Leverage to it, is 8,600 points, with a negative performance equal to -14%.
The potential value of the Certificate falls to 85.98 euro.

8,600 x 0.01 x 1 x 0.9997892 = 85.98 euro (-14.02% compared to the price of the previous day)

Chart showing an example of Leva Fissa Certificate

1 With the exception of the occurrence of an intra-day reset which may cause a significant misalignment between the performance of the Leverage Index and the performance of the Reference Asset multiplied by the Constant Leverage.

2 The calculation of the value of the Leverage Index by the index administrator is based on the daily performance of the Reference Asset and takes into account some figurative financial costs, consequently the performance of the Leverage Index will be different from the performance of the Asset of Reference multiplied by the Constant Leverage.

3 The following example does not consider (i) the figurative financial costs taked into account by the index administrator for the calculation of the Leverage Index and (ii) the fees charged to the investor and relating to the Constant Leverage Certificate.

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