Recent Updates to HKSI Paper 1 Version 3.2 Manual– Fundamentals of Securities and Futures Regulation

The following updates are examinable from 7 November 2020

TOPIC 1 – REGULATORY OVERVIEW OF THE HONG KONG FINANCIAL INDUSTRY

• No updates

TOPIC 2 – PRINCIPLES OF RELEVANT HONG KONG LAW AND THE COMPANIES ORDINANCE

• No updates

TOPIC 3 – SECURITIES AND FUTURES ORDINANCE

• No updates

TOPIC 4 – LICENSING AND REGISTRATION, AND SUBSIDIARY LEGISLATION

• No updates

 TOPIC 5 – BUSINESS CONDUCT AND CLIENT RELATIONS

Material added relating to margin requirements for non-centrally cleared OTCD transactions:

• As part of the post-2008 financial crisis reforms to the OTC derivative market, minimum standards for margin requirements for NCC OTCDs has been established
• Objectives of the requirements are to reduce systemic risk and promote central clearing
• The Code of Conduct provides for the collection of initial margin (IM) and variation margin (VM)
• IM and VM refer to collateral that has to be posted by one party to the other to protect the receiving party from the giving party defaulting
• IM reflects the potential future exposure at the time of entering into the OTCD transaction, whereas VM reflects the current exposure incurred as the mark-to-market value changes over time
• IM and VM are normally posted and collected by both parties, protecting each party from the possibility of default
• The requirements apply to any licensed person who is a contracting party to an OTCD transactions. The do NOT apply to registered institutions
• The margin requirements may not apply in three circumstances:

1. Where there is reasonable doubt about the enforceability of a netting agreement in respect of IM or VM or collateral protection arrangements
2. Intragroup transactions where risk is managed on a consolidated basis
3. The licensed person has notified the SFC that it will perform substituted compliance – licensed person will adhere to margin requirements of another jurisdiction

• IM and VM must be exchanged where the average aggregate notional amount of NCC OTCDs exceeds the relevant threshold
• IM does not need to be exchanged where the licensed person has no counterparty risk
• IM received by a licensed person should be protected by using a third party custodian should be treated as client assets
• IM requirements will start from 1 September 2021; VM requirements took effect from 1 September 2020
• Assets accepted as collateral: cash, marketable debt securities, gold and listed share
• Assets not acceptable as collateral:
  • Securities issued by a company in the same consolidated group as the licensed person
  • Securities significantly correlated with the counterparty’s creditworthiness or the OTCD’s value
  • Securities that are not of investment grade

TOPIC 6 –BUSINESS OPERATIONS AND PRACTICES

• No updates

TOPIC 7 –PARTICIPATING IN THE HONG KONG EXCHANGES

• Material updated relating to the Volatility Control Mechanism

TOPIC 8 –ACCESSING PUBLIC CAPITAL

• Material updated relating to listing of debt securities

TOPIC 9 –MARKET MISCONDUCT AND IMPROPER TRADINGPRACTICES

• No updates