Recent Updates to HKSI Paper 2 Version 2.7 Manual – Regulation of Securities

The following updates are examinable from 20 January 2021

TOPIC 1 – REGULATORY FRAMEWORK

Material updated regarding SFC Operational Divisions

• • Corporate Finance Division:
    • Vets listing applications alongside the SEHK and intervenes in early stages of suspected serious misconduct in listing applications and corporate transactions
    • Reads announcements made by listed companies to identify misconduct or irregularities
    • Administers Codes on Takeovers and Mergers and Share Buy-backs
    • Oversees listing related functions of the SEHK
    • Reviews and recommends changes to the Listing Rules
    • Reviews and authorises prospectuses and marketing materials for unlisted shares or debentures
  • Enforcement Division:
    • Monitors markets and enquires into irregularities
    • Investigates market misconduct and has the power to discipline regulated intermediaries
    • Inspects books and records of listed companies where impropriety is suspected involving directors, officers or substantial shareholders
    • Co-operates with domestic and overseas regulatory bodies
  • Investment Products Division:
    • Develops and implements codes/guidelines for authorisation and registration of investment products
    • Regulates and approves investment products that are offered to the public and subject to the SFO
    • Registers and regulates open-ended fund companies
    • Monitors disclosures and ongoing compliance of authorized investment products and open-ended fund companies
    • Formulates policies for the regulation of asset management
  • Supervision of Markets Division:
    • Supervises conduct, operation and internal systems of the exchanges and clearing houses
    • Strengthens market infrastructure and boosts links with Mainland China and international markets
    • Supervises the Investor Compensation Company and manages the Investor Compensation Fund
    • Authorises Authorised Trading Services (ATS) providers
    • Regulates approved share registrars

TOPIC 2 – REQUIREMENTS OF RELEVANT SUBSIDIARY LEGISLATION

Updates made to the rules regarding the Investor Compensation Fund

Investor Compensation Fund Company (ICC)

• The body responsible for management and administration of the fund.
• An independent company recognized and regulated by the SFC.
• Both the seller and buyer of securities (some exemptions) traded on the SEHK have to pay a levy of 0.002% to the compensation fund (now suspended)
• Levy is collected by the SEHK on behalf of ICC
• The levy is waived when the net asset value of the Fund exceeds
  HK$3 billion and reinstated when the Fund falls below HK$2 billion

Permitted Claimants

• An investor of any nationality, who suffers a loss in relation to Hong Kong exchange traded products, can claim against the fund
• A claim may be made on the fund by a client of a covered intermediary who sustains a loss due to a default of the intermediary, with default defined as:
  • Insolvency, bankruptcy or winding up of the intermediary; or
  • any breach of trust, defalcation, fraud or misfeasance committed by the intermediary or its employees.
• Institutional investors are not entitled to claim compensation, only retail investors

Limits and Timing of Claim

• • A maximum of HK$500,000 may be awarded to one claimant for loss in securities trading.
  • The same maximum exists for futures. An investor who suffers loss for both securities and futures trading with the same intermediary may be awarded a maximum of HK$1,000,000
  • Each holder of a joint account is able to claim a maximum of HK$500,000
  • An aggrieved investor must lodge a claim before the deadline given in the claims notice published by the ICC.

TOPIC 3 – MANAGEMENT AND SUPERVISION OF SECURITIES BUSINESS

New material added under Information Management, covering Use of External Electronic Data Storage

• • Licensed Corporations should be aware of their obligations when using external electronic data storage providers (EDSPs), such as:
    • Public and private cloud services
    • Servers and devices at conventional data centres
    • Other forms of virtual storage and technology services involving generating and accessing information
  • When storing data exclusively with an EDSP (and not the licensed corporation), SFC approval is required before using the EDSP
  • Prior SFC approval is not required when the data is kept by the licensed corporation and the EDSP is used soley to back-up data
  • Before using EDSP services, proper due diligence should be conducted on the EDSP’s controls

TOPIC 4 – DEALING IN SECURITIES TRADED ON THE SEHK

Slight adjustments made to the Volatility Control Mechanism material:

• A five-minute cooling-off period will be imposed for a particular stock/contract if the market price moves by more than the specified triggering thresholds from its last traded price 5 minutes before. Normal continuous trading will resume when the 5-minute cooling-off period ends – there is a maximum of one trigger per continuous trading session
• The instrument will still be allowed to trade during the cooling off period, but within certain price limits
• VCM applies to all securities of the three Hang Seng Composite Indices
• VCM does not apply to the first 15 minutes of morning and afternoon continuous trading sessions and the last 15 minutes of the afternoon session

 TOPIC 5 – OTHER SECURITIES ACTIVITIES

• No updates

TOPIC 6 –EXCHANGE TRADED OPTIONS AND OVER-THE-COUNTER (OTC) DERIVATIVES

Material added regarding 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 have been established jointly by the Bank of International Settlements and IOSCO
• 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

TOPIC 7 –MARKET MISCONDUCT AND IMPROPER TRADING PRACTICES

• No updates