Recent Updates to HKSI Paper 7 Version 3.5 Manual – Financial Markets

The following updates are examinable from 1 March 2026

 

TOPIC 1 – THE GLOBAL FINANCIAL SYSTEM

One more global financial system participant added:

• Financial Stability Board (FSB): an international body affiliated to the BIS that was set up in 2009 in response to the 2008 global financial crisis. It aims to monitor and promote global financial stability

One more financial market type added:

Commodity Market

• A marketplace where raw or primary products are traded
• Hard commodities: oil and gold are examples
• Soft commodities: wheat and coffee are examples
• Trading may take place on exchanges or OTC, in both spot markets, where transactions involve physical delivery at or near settlement, and in derivative markets involving futures, options, forwards and swaps
• In Hong Kong, the Hong Kong Gold Exchange (HKGX) serves as a member-based spot marketplace for trading precious metals such as gold and silver
• The Hong Kong Futures Exchange (HKFE) deals in a variety of commodity derivatives, such as London Metal Mini Futures and Gold Futures

Material added relating to types of financial markets:

Virtual Assets (VAs)

• VAs are digital representations of value that can be transferred, stored and traded electronically for a variety of purposes, including payment, investment, gaming, governance and more
• Virtual asset trading began with the launch of Bitcoin in 2009. A wide range of products is available in the virtual asset market with most trades supported by distributed ledger technology (DLT), one of which is blockchain
• DLT allows direct transactions between buyers and sellers without going through an intermediary (eg banks, securities firms), thereby saving transaction costs
• VAs can be classified into several distinct categories based on their characteristics and functions, with primary functions giving the following categories:
  • Cryptocurrencies
  • Security tokens
  • Non-fungible tokens (NFT)
  • Asset-backed tokens
  • Utility tokens
  • Governance tokens
  • Hybrid tokens
• Security tokens, including tokenised securities, are considered “securities” as defined in the SFO. As such, offering and trading of security tokens are regulated accordingly
• Though non-security tokens fall outside the SFC’s jurisdiction, they are covered by the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO)
• Under the Stablecoin Ordinance, any entity issuing fiat-referenced stablecoins must apply for a stablecoin issuer license from the HKMA and be subject to its supervision
• Benefits of VAs:
  • Diversification: VAs provide a way to diversify investment portfolios beyond traditional asset classes
  • Efficiency: smart contracts and other DLT-based tools can streamline the transaction and settlement process
  • Transparency: DLT enables greater transparency and traceability of VA transactions
  • Cost–effectiveness: VAs often have lower transaction costs due to their decentralised nature
• Risks of VAs:
  • Volatility: VAs not backed by physical assets may be frequently affected by short term speculation and a fragmented liquidity pool
  • Liquidity: the scale and number of users of many VAs are not large and trading may not be active leading to liquidity risk and potential market manipulation
  • Valuation: a lack of agreed valuation standards can lead to potential misinterpretation of value and opportunities for market manipulation
  • Cybersecurity: system weaknesses may result in significant losses due to hacking or other cyber incidents
  • Financial crime: VAs can be used for financial crimes such as fraud, money laundering and terrorist financing due to anonymity in ownership and trading
  • Regulatory: lack of consistent regulation across jurisdictions means that some VAs may not be subject to the same level of statutory protection in different jurisdictions
• Virtual asset trading platforms (VATPs) offering security token trading are regulated by the SFC – centralised VATPs using an automated trading engine and those providing custody services as an ancillary service must obtain a license from the SFC
• Central banks are starting to introduce their own digital currencies – virtual money. The HKMA’s wholesale central bank digital currency projects focus on cross-border efficiency, interbank settlement and tokenisation

Environment, Social and Governance (ESG)

• Awareness of ESG has grown from negative megatrends such as climate change, pollution, forced labour, social inequality and corporate governance failure
• ESG investing involves investors explicitly incorporating ESG factors in their investment decisions, with long-term return in mind
• ESG considerations in the investment process include corporate policies addressing climate change, pollution, deforestation, resource depletion, as well as positions taken on social issues and corporate governance
• There are three elements critical to improving the transparency, comparability and reliability of ESG measurement:
  • ESG reporting: a company’s disclosure of performance to communicate positive and negative impacts on ESG matters
  • Green taxonomy: a classification system that identifies economically sustainable activities or investments, providing a clear reference for authorities and market participants to make informed decisions regarding environmentally friendly investments
  • Regulations: rules, laws or guidelines established by governments, regulators or self-regulatory bodies to govern matters such as ESG due diligence, climate and sustainability disclosure
• Investors can use two types of investment products to implement their ESG investment strategies:
  • ESG-screened investments: individual investments, such as equity, bonds, loans and real estate investment trusts that have been screened against ESG criteria
  • ESG funds: investment funds that invest in a portfolio of financial instruments that meet certain ESG criteria
• There is a growing consensus to adopt a market-based approach to transition to a decarbonised economy by reducing greenhouse gas. Approaches include: carbon taxes, a compliance carbon market and a a voluntary carbon market

 

Material added relating to Lessons from Financial Crises:

The Oil Crisis in 1973

• After Israel’s territorial gains in the 1967 Six-Day War, Egypt and Syria, backed by Saudi Arabia, launched a surprise attack on Israel during Yom Kippur War in 1973. Israel requested, and received, military aid from the US
• In response, the Gulf states imposed an oil embargo on the US and its allies, quadrupling oil prices from USD2.90 to USD11.65 per barrel by January 1974
• Rapid economic growth after World War II in Europe and Japan, coupled with US domestic oil production limits, price controls and low spare capacity, left the oil market vulnerable to oil supply shocks
• The embargo’s immediate economic and financial market impacts were severe, leading to rising oil prices and inflation, higher interest rates, which in turn, led to equity market declines, bond yield spikes and currency volatility
• Lessons learnt from the 1973 oil crisis are:
  • Global market interconnectedness: geopolitical events in one region can destabilise global financial markets through commodity prices and inflation expectation
  • Energy security through diversification: the crisis emphasised the necessity of diversifying energy sources to shield economies from geopolitical shocks and to maintain financial market stability
  • Transparency and accurate market information: the lack of reliable supply and demand data fuelled panic and misinformation. Timely, accurate market information is essential to reduce panic, speculation and mispricing in commodity and financial markets as well as stabilising markets during shocks
  • International cooperation and communication: coordinated global responses and clear communication mechanisms are crucial to prevent competition from worsening supply disruptions and to manage crises without escalation
  • Flexible and resilient markets: government intervention can distort supply and demand, delay necessary adjustments and worsen disruptions. Market-driven mechanisms and financial instruments can help absorb shocks with less long-term damage
• Countries responded to the 1973 oil crisis with policies to reduce reliance on imported oil and strengthen economic resilience
• From a policy perspective, countries diversified energy sources, investing in nuclear, coal, and renewables, while also promoting conservation through fuel rationing, speed limits, and efficiency measures.
• Monetary and fiscal tools were adjusted to contain inflation, and incentives supported domestic production and efficiency
• Internationally, the International Energy Agency was established in 1974 to improve coordination, while developing countries relied on borrowing and policy shifts to manage the strain of higher oil prices.

Black Monday in 1987

• The 1987 Black Monday stock market crash was a combination of economic vulnerabilities and emerging technological factors
• Leading up to 19 October 1987, slowing economic growth, rising inflation, and increasing stock market volatility created an atmosphere prone to panic
• On Black Monday, the Dow Jones Industrial Average plummeted 508 points, a 22.6% drop, erasing approximately USD500 billion in market value
• Key catalysts were computerised program trading, portfolio insurance and index arbitrage strategies, which amplified the sell-off through automatic triggers
• Economic pressures such as rising interest rates, persistent US trade and budget deficits, a weakening dollar and inflation concerns further intensified the decline
• The simultaneous expiration of key stock options and futures contracts exacerbated market instability
• The crash had global effects: Hong Kong’s Hang Seng Index fell approximately 10.5% on the day and over 40% in USD terms during the crash, marking it as one of the most severe declines among international markets
• Trading in Hong Kong’s stock and futures exchanges was suspended for the remainder of the week amid fears of disorderly markets and investor defaults
• Prompt interventions, including liquidity injections by the Exchange Fund in Hong Kong and the Federal Reserve in the US, stabilised markets and facilitated a rapid recovery by mid-1988
• Unlike the prolonged Great Depression following the 1929 crash, the 1987 Black Monday crash was sharp, but relatively short-lived
• Lessons learnt from the 1987 Black Monday crisis:
  • Risks of automated trading: automated trading systems can create dangerous feedback loops that accelerate market declines under stress
  • Market psychology and panic: investor behaviour can drive crisis-level sell-offs, even without a single triggering event
  • Regulatory safeguards: circuit breakers and trading halts are essential to maintain orderly markets and prevent freefall scenarios
  • Global market interconnectedness: market shocks spread rapidly worldwide, requiring coordinated international policy responses
  • Central bank crisis management: swift liquidity provision and proactive monetary policy can enhance market confidence, contain financial crises, and prevent systemic collapse
  • Regional market vulnerabilities: emerging markets are especially sensitive to global shocks, requiring emergency liquidity support and regulatory oversight
• Markets and global regulators implemented structural reforms following Black Monday
• In Hong Kong, lessons learnt led to the creation of the Securities and Futures Commission (SFC)
• Central banks, particularly the Federal Reserve, signalled liquidity support and eased policy to restore confidence
• Corporations conducted share buybacks to stabilise prices, while regulators emphasised transparency, coordination, and communication
• These measures strengthened market resilience, enabling rapid recovery after Black Monday and helped guide responses to later crises, such as the 2020 market turmoil triggered by the outbreak of the COVID-19 pandemic

 

TOPIC 2 – FINANCIAL SYSTEM IN HONG KONG

A new section covering Relevant Government Agencies and Advisory Bodies

Financial Secretary

• The Hong Kong Government’s Financial Secretary supported by various departments, plays a key role in assisting the Chief Executive in overseeing policy formulation and implementation covering a variety of matters, including financial, monetary and economic issues
• The Financial Secretary is responsible for the monetary system, the Exchange Fund, public finance, the financial system, and maintaining the Hong Kong’s status as an international financial centre
• Regarding the monetary system and the Exchange Fund, the Financial Secretary determines the monetary policy objective and exercises control over the Exchange Fund, assisted by the HKMA
• The Secretary for Financial Services and the Treasury, who heads the Financial Services and the Treasury Bureau (FSTB), assists the Financial Secretary in formulating specific policies

Financial Services and the Treasury Bureau (FSTB)

• The FSTB is the policy bureau of the HKSAR Government responsible for developing and executing government policy on finance and treasury
• Its aims include maintaining the financial stability of Hong Kong and enhancing Hong Kong as a global financial centre
• It looks to consolidate Hong Kong’s status as an international financial centre, an asset and wealth management centre and an offshore renminbi business hub, pursuing breakthroughs in green finance and financial technology developments
• It works closely with market regulators and participants to exploit opportunities for Hong Kong’s financial services sector

Financial Services Development Council FSDC)

• The FSDC acts as an advisory body to the financial services industry in terms of formulating proposals and identifying strategic directions to promote the further development of the industry in Hong Kong
• Its key objectives are to:
  • advise the HKSAR Government on how to expand the scope of Hong Kong’s financial markets, as well as enhance the competitiveness of Hong Kong as an international financial centre
  • support Hong Kong’s financial services industry to develop core competencies and knowledge of its practitioners
  • promote Hong Kong’s financial services industry, and Hong Kong as an international financial centre, in the Chinese Mainland and overseas

Hong Kong Police Force (HKPF)

• The HKPF is the primary investigatory authority for corporate or business fraud and financial crime in Hong Kong via the following bureaus:
  • Financial Intelligence and Investigation Bureau (FIIB): handles money laundering and terrorist financing investigations, financial intelligence analysis, intelligence exchange with law enforcement agencies and liaises with financial institutions
  • Commercial Crime Bureau: investigates serious commercial and financial crime, forgery of monetary instruments, identity documents, payment cards, currencies and coins. It collaborates with law enforcement agencies worldwide, exchanging intelligence and investigation requests for cross-jurisdictional crimes
  • Cyber Security and Technology Crime Bureau: handles technology crime prevention and investigations, and supports critical infrastructure in Hong Kong

Hong Kong Customs and Excise Department (C&ED)

• The C&ED is one of the law enforcement agencies responsible for AML/CFT matters
• The Customs Financial Investigation Bureau investigates and initiates applications for freezing and confiscating crime proceeds derived from various offences related to the C&ED, including drug trafficking, smuggling and counterfeiting
• The C&ED handles the licensing regime for money service operators and the registration regime for dealers in precious metals and stones under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance
• It also conducts intelligence analysis and risk assessment of information collected under the declaration and disclosure system to identify suspicious cross-boundary cash movements to combat money laundering and terrorist financing activities

Material added relating to financial system participants:

Financial Advisers, Private Wealth Managers and Family Offices

• Financial advisers, also known as financial planners, assist individual investors to develop their financial plans, using special analytical tools to determine their clients’ financial goals and objectives. They then help to execute the clients’plans
• Financial advisers target a more general audience, while private wealth managers cater to the financial needs of high-net-worth individuals and families by providing a range of services, including investment management, brokerage and tax and estate planning
• Ultra-high net worth individuals (“UHNWIs”), especially self-made UHNWIs, may set up a family office to facilitate long-term wealth transfer to future generations or to segregate family wealth from the family business
• A family office can also handle non-financial lifestyle issues, such as travel arrangements, and other miscellaneous matters
• A family office providing comprehensive private wealth management solutions requires the coordinated services of a team of professionals covering legal, insurance, investment, estate, business and tax disciplines.
• Material added relating to Chinese Mainland economy:

Investment

• Hong Kong is the dominant financial gateway to China, is an important RMB financing centre and hosts the largest offshore RMB bond market
• To meet growing demand for RMB financing, HKMA has established the RMB Liquidity Facility and the RMB Business Facility to support banks in providing RMB funding
• Investment programs such as Qualified Foreign Institutional Investor (“QFII”) and Renminbi Qualified Foreign Institutional Investor (“RQFII”) schemes have further facilitated cross-border capital inflows
• QFII and RQFII, jointly referred to as Qualified Foreign Investor (“QFI”), holders are permitted to buy onshore RMB bonds in the Chinese Mainland on an organised exchange or in the interbank bond market
• Hong Kong investors can gain indirect access to the onshore RMB bonds through QFI funds
• Many China-based securities firms set up their operations in Hong Kong, helping institutions and individuals from China trade Hong Kong listed stocks
• The mutual market access schemes between Hong Kong and China, including Stock Connect, Bond Connect and Swap Connect, have ensured Hong Kong’s status as a unique financial hub connecting investors from overseas and China. These schemes attract a great deal of capital flow to Hong Kong
• China’s commitment to reform and opening-up continues with the development of the Greater Bay area (GBA) bringing together Guangdong, Hong Kong and Macao
• Plans are in place to allow the GBA to reinforce its leading fintech position and enhance Hong Kong’s competitive position by strengthening fintech supervisory exchanges in an environment of rapidly advancing technology
  
• Material added relating to the impact of technology:

The Impact of Technology

• As technology reshapes the financial sector, Hong Kong is rapidly emerging as a global hub for financial innovation, driven by cutting-edge technologies such as artificial intelligence, data analytics, and blockchain
• In response, regulators/institutions, including the HKMA, Cyberport, and HKEX are spearheading transformative initiatives that balance innovation with market integrity
• Artificial intelligence is increasingly applied in financial services to improve client interaction, risk management, fraud detection, operational efficiency, and investment analysis
• The HKMA and Cyberport have introduced initiatives such as the Generative Artificial Intelligence (GenA.I.) Sandbox, which provides a controlled environment for financial institutions to test GenA.I
• HKEX has launched the HKEX Data Marketplace, a comprehensive web-based platform that offers investors access to historical and reference data, including shareholding and full book data, from securities and derivatives markets
• Blockchain technology is being explored to enhance transparency, security, and efficiency:
  • The HKMA has launched the Supervisory Incubator for Distributed Ledger Technology, which supports banks in trialling distributed ledger technology (“DLT”) solutions under supervisory guidance, focusing initially on tokenised deposits and promoting industry-wide best practices in DLT risk management
  • The HKMA has also introduced Project Ensemble Sandbox to facilitate the testing of tokenisation use in controlled environments

 

TOPIC 3 – THE EQUITY MARKET

Updates on the structure of the stock market:

• SEHK has introduced several additional listing regimes to the Main Board for maintaining its overall competitiveness and to encourage innovative companies, which are unable to meet traditional listing requirements, to access the Hong Kong capital market:
  • Biotech companies (at the pre-profit/pre-revenue stage) and specialist technology companies (both commercial and pre-commercial companies), which are primarily engaged in research and development (“R&D”) and the commercialisation of biotech/specialist technology products, and which meet certain criteria set out in the Main Board Listing Rules (MBLR) are able list
  • SEHK also introduced the listing of Special Purpose Acquisition Companies (SPACs) in January 2022. A SPAC is a company that does not have any commercial operation and is formed to raise capital through an IPO for the sole purpose of acquiring a business within a pre-defined time period after listing. SPAC shares are only available to professional investors.

 

TOPIC 4 – THE DEBT MARKET

• No significant changes or updates

 

 TOPIC 5 – THE FOREIGN EXCHANGE AND DERIVATIVES MARKETS

Material added relating to the structure of the derivatives market:

• Swap Connect is a mutual market access programme between Hong Kong and the Chinese Mainland, establishing a connection between Hong Kong and Chinese Mainland interbank derivatives markets for the trading and clearing of OTC swap products
• Currently, only Northbound trading of onshore CNY interest rate swap (IRS) products has been established, allowing eligible institutional investors in Hong Kong to trade Chinese Mainland’s interbank IRSs with eligible IRS dealers

 

TOPIC 6 – FINANCIAL RISK MANAGEMENT

Material added relating to “other risks”:

• Concentration risk: arises from an excessive exposure to a single counterparty, sector, geographic region, or asset class, increasing vulnerability to adverse events affecting that concentration
• Climate-related risk: encompasses financial risks related to climate change, including physical risks from extreme weather events and transition risks from the shift to a low-carbon economy
• Geo-political risk: involves risks arising from political instability, conflicts, trade tensions or changes in government policies that can impact markets and business operations globally

The FTX case has been added to “lessons from the past”:

The FTX Case

• The collapse of FTX in November 2022 exposed major failures in governance, risk management, and transparency within the crypto industry
• Founded by Sam Bankman-Fried (“SBF”), FTX became a leading crypto exchange, closely connected with Alameda Research, which also served as a major market maker. The close integration of these entities and weak controls led to a significant breakdown
• A major issue was the unlawful commingling of customer funds with Alameda’s trading activities. Billions of dollars of client deposits were lent to Alameda without consent, violating US securities laws and damaging customer trust
• Corporate governance was weak, with power concentrated in a small, inexperienced group and no independent board members. This lack of oversight contributed to poor decision-making and unchecked risks
• There was no Chief Financial Officer nor any proper accounting functions, resulting in unreliable financial information and incomplete records
• This case highlights a number of risk management requirements:
  • Strict segregation of client assets
  • Robust independent governance
  • Transparent and accurate financial reporting
  • Clear conflict-of-interest policies
  • Comprehensive risk management practices specifically tailored to the unique challenges of crypto markets
  • Effective liquidity management
  • Proactive engagement with regulators

 

TOPIC 7 – APPLICATIONS IN THE FINANCIAL SECTOR

• No additional materials or updates