1. Resolutions
  • Resolutions may be passed by circularization and signing by all members except for two cases where the matter must be put to members at a general meeting as an ordinary resolution:
  • Removal of auditors before expiration of term of office, and
  • Removal of a director before his term of office
  • Special resolution required with at least 75% of members at a general meeting with 21 days notice of intention, to pass resolution for:
    • Reduction of share capital
    • Winding up of the company voluntarily or by the court
    • Alteration of objects, articles or conditions in memorandum that could have been included in the articles, and
    • A printed copy of a special resolution must be lodged with the Registrar of Companies within 15 days of passing
  • An ordinary resolution is not defined and generally is a resolution passed by a simple majority of those present and voting at a meeting of members. Notice of the resolution and meeting must have been given
[For Paper 2 practice questions, go to – Paper 2]


2. SFC Advisory Committee
  • Advises the SFC on policy matters concerning regulatory objectives and functions
  • No executive powers and does not police the SFC
  • Chaired by the SFC Chairman
[For Paper 2 practice questions, go to – Paper 2]


3. Exclusions from Regulated Activities

A number of parties are not required to be licensed for certain activities, including:

  • Professional accountants, solicitors, and counsel conducting Types 4, 5, 6 and 9 regulated activities that are wholly incidental to their profession
  • Trust companies conducting Types 4, 5, 6 and 9 regulated activities, wholly incidental to the discharge of their trustee duties
  • Persons licensed or registered to conduct Type 9 regulated activity who carry out Types 1, 2, 4 and 5 regulated activities solely for the purposes of their Type 9 regulated activity
  • Corporations carrying out Types 4, 5, 6 and 9 regulated activities solely for their wholly owned subsidiaries, holding companies holding all their issued shares or other wholly owned subsidiaries of the holding company
[For Paper 2 practice questions, go to – Paper 2]




4. Financial Resources Requirements
  • A licensed corporation must meet the requirements before obtaining a license and continue to maintain sufficient capital at all times.
  • The required level of paid-up share capital for a licensed corporation is:
Dealing in securities:

  •  where it provides securities margin financing
  • others

HK$10 million

HK$5 million

Advising on securities (except if client assets not held)HK$5 million
Securities margin financingHK$10 million
  • If a corporation is licensed for more than one activity, the capital requirement will be the highest amount for all such activities.
  • Approved introducing agents and securities advisers not holding client assets do not have paid-up share capital requirements
  • A licensed corporation must maintain at all times minimum LC as follows:
Dealing in securities (there are additional

requirements for SEHK participants)

HK$3 million


Advising on securities:

  • where it does not hold client assets
  • where it holds client assets


HK$3 million

Securities margin financingHK$3 million
[For Paper 2 practice questions, go to – Paper 2]


5. Failure to Meet Financial Resources Requirements
  • A licensed corporation that cannot meet the LC requirements must notify the SFC promptly and must cease trading unless permitted by SFC to continue.
  • The SFC has the power to require a licensed corporation to report its financial position at any time.
  • Failure to comply with the requirements, without reasonable excuse, is a criminal offence. A breach with intent to defraud carries a maximum sentence of HK$1 million and seven years’ imprisonment.
[For Paper 2 practice questions, go to – Paper 2]


 6. Client Securities Rules
  • The Securities and Futures (Client Securities) Rules apply to all intermediaries and associated entities.
  • The Client Securities Rules apply to client securities or securities collateral of an intermediary that are:
    • listed on a recognized stock market (ie SEHK);
    • interests in an SFC authorized CIS; and
    • received or held in Hong Kong by an intermediary (or its associated entity) in the course of conducting a regulated activity
  • The Client Securities Rules do not apply to securities of an intermediary in an account in a client’s name, set up by that client with persons other than the intermediary or its associated entity:

[Rules only apply to Hong Kong stocks held in Hong Kong received by an intermediary or associated entity in the course of conducting regulated activities]

  • Securities held for professional investors are covered by the Rules.
 [For Paper 2 practice questions, go to – Paper 2]


7. Client Authority
  • An intermediary must obtain one of the following from the client before it can withdraw or deal with the securities in the segregated account:
    • A specific client direction – special instruction for the intermediary to act in a certain manner in relation to a specific amount of client securities
    • A standing authority:
      • This is a written notice authorizing the intermediary to deal with client assets as specified
      • The effective period specified in the authority cannot exceed 12 months but it may be renewed on the written request of the client (or deemed to be renewed after giving 14 days notice to the client) at any time prior to expiry for further periods each not exceeding 12 months
      • A deemed renewal must be confirmed by the intermediary within a week after expiry
      • No time limit for renewal applies to Professional Investors
[For Paper 2 practice questions, go to – Paper 2]


8. Client Money Rules
  • The Client Money Rules prescribe how licensed corporations and their associated entities should deal with client money received or held in Hong Kong
  • The Rules do not apply to client money that:
    • Is received or held outside Hong Kong
    • Is moved outside Hong Kong
    • Is held in a bank account by the client in his own name
  • Client money to be safeguarded includes all amounts received by the licensed corporation or its associated entity, from or on behalf of clients, less amounts due from the clients and any proper charges due
  • The licensed corporation/associated entity holding client money should have one or more segregated accounts (designated as a trust or a client account) maintained with an AFI or another SFC-approved person (ie open a separate bank account)
  • Within one business day of receiving client money, the licensed corporation/associated entity should pay the money:
    • Into a segregated account;
    • To the client directly;
    • In accordance with a written direction; or
    • In accordance with a standing authority
  • If any money held in a segregated account is found to be not client money, the licensed corporation or AE must move it out within one day of being aware of the fact.
  • Client money to be safeguarded includes:
    • amounts received from securities dealing on behalf of a client:
      • less brokerage commission
      • except settlement amounts due to be paid within two business days
      • except amounts owed by a client to a licensed corporation
[For Paper 2 practice questions, go to – Paper 2]


9. Investor Compensation Fund
  • The SFO allows for investor compensation arrangements to compensate investors for losses arising from defaults of market intermediaries on account of insolvency and dishonesty. Relevant Rules are:
    • Securities and Futures (Investor Compensation – Levy) Rules
    • Securities and Futures (Investor Compensation – Claims) Rules
    • Securities and Futures (Investor Compensation – Compensation limits) Rules

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$1.4 billion and reinstated when the Fund falls below HK$1 billion

Permitted Claimants

  • 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:
    • bankruptcy or winding up of the intermediary; or
    • any breach of trust, defalcation, fraud or misfeasance committed by the intermediary or its employees.
  • The Scheme does not cover losses on A shares bought through the Shanghai-Hong Kong Stock Connect as a result of intermediary default
  • Institutional investors are not entitled to claim compensation, only retail investors

Limits and Timing of Claim

  • A maximum of HK$150,000 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$300,000.
  • An aggrieved investor must lodge a claim before the deadline given in the claims notice published by the ICC.
[For Paper 2 practice questions, go to – Paper 2]




10. Management Liability
  • Responsible officers, executive officers and persons involved in management of a regulated business will be liable for the misconduct of a licensed corporation or a registered institution where they consented, connived or were neglectful in respect of misconduct
  • SFO gives details of liability for breaches of certain fundamental regulatory requirements
    • Where a regulated person (i.e. a licensed person, responsible officer or management of licensed corporation) is guilty of misconduct or is not a fit and proper person, the SFC can revoke a licence, prohibit further approval and order the payment of a fine
    • Where a licensed corporation commits an offence aided or abetted by an officer, the officer will be guilty of the offence
    • Discharge from liability is available if the officer honestly and reasonably believed failure would not occur
  • The Code of Conduct states that responsible officers and executive officers, or senior management should
    • be primarily responsibility for ensuring maintenance of appropriate standards of conduct and adherence to proper procedures
    • properly manage risk associated with the business, including periodic evaluation of risk management processes
    • understand the nature of the business, its internal control procedures and its policies on the assumption of risk
    • understand the extent of their own authority and responsibilities
    • have access to all relevant information on a timely basis
    • have appropriate advice on the business and their own responsibilities
[For Paper 2 practice questions, go to – Paper 2]


11. Code of Conduct – Diligence
  • A licensed/registered person should act with due skill, care and diligence, in the best interests of its clients and the integrity of the market. Some practical examples of this are:
    • Client orders should be executed promptly in accordance with clients’ instructions – prompt execution
    • Client orders should be executed on the best available terms – best execution
    • Orders executed for clients should be promptly and fairly allocated to those clients – prompt and fair allocation
    • Advice should be given to clients with due skill, care and diligence
    • Separate accounts should be kept for each client and for securities, futures, cash and margin accounts
    • All orders should be timed stamped on receipt
  • Telephone orders should be centrally recorded. Recordings should be kept for at least 6 months
  • The use of mobile phones for taking client orders is discouraged, but not banned – time of order receipt and details should be recorded immediately
  • The best interests of the clients should be considered when recommending the services of an affiliated person
  • Collect promptly from clients any amount due as margin
  • Not offer any gift other than a discount on fees or charges when promoting a specific investment product
[For Paper 2 practice questions, go to – Paper 2]


12. Code of Conduct – Information about clients
  • A licensed/registered person should establish a client’s:
    • True and full identity
    • Financial situation or strength
    • Investment experience
    • Investment objectives
  • Before executing any transaction for a client, the intermediary must establish the identity of the ultimately responsible for origination the transaction – exception is a CIS
  • The SFC’s Client Identity Rule Policy requires the identity of the ultimate client to be provided by the intermediary to the SFC within 2 business days of the request
  • Recommendations made to clients should be suitable, given their circumstances. The primary obligation relating to suitability rests with the licensed/registered person, not the client
  • When a client without knowledge of derivatives wishes to invest in a derivative product, the risks should be explained
[For Paper 2 practice questions, go to – Paper 2]


13. Risk Management Techniques

Credit risk

  • Establish and maintain effective system to evaluate client and counterparty credit worthiness
  • Set Appropriate credit limits for all clients
  • Check
    • Client’s credit rating
    • Past payment record and defaults
    • Client’s capital base
    • Known events which might have an adverse impact
  • Monitor exposure to clients, including pre-settlement and settlement
  • Make appropriate haircuts to market value of securities pledged where credit extended for margin trading

Market risk

  • Place restrictions on instruments which can be traded
  • Establish controls to ensure restrictions complied with
  • Place trading and position limits on proprietary trading
  • Risk managers should control open positions
  • Establish measures to check effect of adverse market conditions, such as
    • Value at Risk methodology for general market risk
    • Sensitivity checks
    • Stress testing

Liquidity risk

  • Use liquidity measures
  • Set concentration limits for products, markets and business counterparties
  • Measure mismatches in timing of receipts and payables, receipt and delivery of products
  • Monitor level of arrears and defaults
  • Establish default procedures so liquidity managers have adequate time to take action

Operational risk

  • Segregation of duties
  • Keeping secure, reliable, proper and up-to-date records
  • Analysis of records to highlight adverse trends and to detect errors
  • Employment of skilled and experienced staff
  • Effective business continuity and disaster recovery plan
  • Adequate insurance
[For Paper 2 practice questions, go to – Paper 2]


14. Options Client Agreement
  • All registered persons engaged in exchange traded options business (including exchange participants) should enter an options client agreement containing:
    • Client’s disclosure in writing on true identity of account owner
    • Client’s acceptance of terms of contract
    • Client’s agreement to provide registered person with margin (cash, securities or other assets)
    • Client’s agreement to indemnify registered person against all losses and expenses resulting from breach of obligations
    • Client’s right to have recourse to compensation fund if registered person defaults
    • Client’s confirmation he has read and agreed to terms, which have been explained to him in preferred language
    • Risk disclosure statements
    • Registered person’s undertaking to:
      • Keep client’s options account confidential (except from SFC, SEHK and clearing houses)
      • Provide client with product specifications for options contracts
      • Notify client of material changes in its business
[For Paper 2 practice questions, go to – Paper 2]


15. Drug Trafficking (Recovery of Proceeds) Ordinance
  • It is an offence to deal with property known to, or believed to, represent the proceeds of drug trafficking
  • Any person who knows or suspects that property relates to drug trafficking, should report it to a police officer, a customs and excise officer, or the Joint Financial Intelligence Unit (JFIU) – failure to disclose is an offence
  • It is an offence to disclose to another person that a disclosure has been made, as above
  • A person making a disclosure is excused from any resulting contract breach or professional obligation
[For Paper 2 practice questions, go to – Paper 2]




16. The Hong Kong Exchanges and Clearing Limited
  • The Hong Kong Exchanges and Clearing Limited (“HKEx”) is:
    • A company listed on the SEHK
    • The exchange controller as defined in the SFO
    • Regulates listed companies, trading on the exchanges and the related clearing and settlement functions
    • Owns subsidiaries operating the 2 exchanges:
      • Stock Exchange of Hong Kong Limited (“SEHK”) with the Main Board (securities and options of established companies with profitable operating track record) and the Growth Enterprise market (“GEM”) (securities of growth companies)
      • Hong Kong Futures Exchange Limited (“HKFE”) (futures contracts)
    • Owns subsidiaries operating the 3 clearing houses
  • The 3 clearing houses are:
    • The Hong Kong Securities Clearing Company Limited (“HKSCC”), an independent corporation, which operates the Central Clearing and Settlement System (“CCASS”) for cash business
    • The SEHK Options Clearing House Limited (“SEOCH”), a wholly owned subsidiary of the SEHK, for options
    • The HKFE Clearing Corporation Limited (“HKCC”), a subsidiary of HKFE, for the futures business
  • Note that the SFC regulates intermediaries engaged in trading, not the HKEx
[For Paper 2 practice questions, go to – Paper 2]


 17. Exchange Participants
  • To trade through the exchanges, an intermediary must become an exchange participant and hold at least one stock exchange trading right
  • Trading rights are non-transferable (since 2010)
  • An exchange participantship is NOT transferable
  • To clear trades you must become a clearing participant of the relevant clearing house
  • Deposits and subscriptions must be paid to the relevant exchange and clearing house by participants
  • Membership of HKEx is no longer needed to trade on the exchanges nor to clear trades
  • An Exchange Participant must always:
    • be of good financial standing and integrity
    • observe at all times all provisions of SFO, subsidiary legislation, codes of conduct, guidelines, rules and regulations administered by SFC and exchange
    • be a holder of a stock exchange trading right
    • be licensed for Type I activity under the SFO
    • be a corporation limited by shares and incorporated in Hong Kong
[For Paper 2 practice questions, go to – Paper 2]


18. Equity Securities Traded on the SEHK
  • Ordinary shares (most of SEHK turnover) and preference shares
  • Securities listed on overseas exchanges traded under pilot programmes
  • Securities traded under the pilot programme for trading US securities are different to Main Board and GEM traded securities and are:
    • listed on NASDAQ or AMEX
    • may also include a number of exchange traded funds
    • have no public offering in Hong Kong
    • not regulated as listings on SEHK’s Main Board or GEM
    • admitted to SEHK for trading only
    • regulated by Hong Kong laws and SEHK rules
  • Shares of companies incorporated in PRC and approved by CSRC for listing in Hong Kong (“H-shares”)
  • Shares of companies (“Red Chip”) where:
    • Mainland China entities hold more than 30% of capital and are single largest shareholder (in aggregate), or
    • Mainland China entities hold more than 20% of capital and there is strong influential presence of Mainland China-linked individuals on company’s Board of directors

GEM targets growth companies and has lower listing requirements to accommodate growth companies without a track record

[For Paper 2 practice questions, go to – Paper 2]


19. Structured Products

Equity Warrants

  • Equity warrants carry the right to subscribe for equity securities of an issuer or any of its subsidiaries at a pre-determined price at any time before maturity (US style) (European style can only subscribe at maturity)
  • Minimum term of 1 year, maximum of term of 5 years

Derivative Warrants

  • Derivative warrants are similar to equity warrants but are issued by a party that is independent of the issuer of the underlying securities of the company and its subsidiaries
  • Majority in Hong Kong are settled in cash
  • Can be call or put warrants
  • May be issued over assets other than securities (such as currencies or commodities)
[For Paper 2 practice questions, go to – Paper 2]


20. Hong Kong Listing Rules
  • The Listing Rules are intended to ensure:
  • Suitability of applicants for listing
  • Fair and orderly issue and marketing of securities
  • Provision of sufficient, material and timely information which might concern the issuer and affect the price
  • Fair and equal treatment of shareholders
  • Directors act in the interests of all shareholders
[For Paper 2 practice questions, go to – Paper 2]


21. Stock Trading
  • The Orion Trading Platform (OTP-C) is “order-driven” with participants for buyers finding participants for matching sellers
  • All transactions are concluded by auto matching except:
    • Non-automated trades (which are concluded as odd lot transactions and must be reported to SEHK so that information on trades can be given to all participants in market to ensure transparency)
    • Cross trades (direct business transactions)
    • Isolated trades to effect a buy-in
    • Orders exceeding the maximum order size limit
    • Transactions intentionally concluded outside OTP-C
[For Paper 2 practice questions, go to – Paper 2]


22. Clearing and Settlement Services
  • The Central Clearing and Settlement System (CCASS) is operated by HKSCC for clearing and settlement of securities transactions on the SEHK
  • HKSCC’s Investor Account Service allows individual and corporate investors to open direct stock accounts in CCASS
  • CCASS stock accounts:
    • 01 account: clearing account where a CCASS Clearing Participant maintains stocks for settlement
    • 02 account: for the handling of stock dividends
    • 03 onwards: safe custody stocks, house investments and securities collateral
  • The clearing and settlement system is as follows:

During Trading Day (T)

  • Trade data automatically transferred from SEHK trading system to CCASS
  • Clearing Participants receive Provisional Clearing Statements through CCASS terminals after 5pm (current day’s SEHK trades) and after 8pm (exercised option trades)
  • Trades reconciled with internal records


  • Final clearing statements available after 2pm
  • Continuous Net Settlement (CNS) system offsets stock transactions in the same security on the same day resulting in a single net stock position for the day
  • Through novation, HKSCC guarantees both sides of the trade


  • SEHK trades settled by electronic debit and credit entries to CCASS CP’s stock accounts


  • Money settlement by CPs through designated banks confirmed in the morning
  • CPs who do not have sufficient stock in their CCASS accounts will be subject to a compulsory buy-in
[For Paper 2 practice questions, go to – Paper 2]


23. Transaction Costs
  • Commission (brokerage): freely negotiable between exchange participant and client (investor). Brokerage for IPO transactions is set at 1% of application money
  • Trading fee:005% per side of the consideration of a transaction payable by buyer and seller to SEHK (other than options, pilot programme and certain other products and market making trades in designated Exchange Traded Funds)
  • Trading tariff: HK$0.50 payable by buyer and seller to SEHK on each and every purchase or sale transaction
  • Transaction levy:0027% of the value of each purchase or sale of securities per side of a transaction payable by buyer and seller to SFC
  • Investor compensation levy:002% per side of the consideration of a transaction payable by buyer and seller and collected for SFC. Suspended since 19 December 2005
  • Ad valorem stamp duty:1% (rounded up to nearest dollar) on the value of the transaction, payable by both buyer and seller. There is no stamp duty on derivative warrants, callable bull and bear certificates and options trading
  • Transfer deed stamp duty: HK$5.00 payable by the registered holder of the share certificates (the seller) to the Government on each new transfer deed (regardless of number of shares traded)
  • Transfer fee: HK$2.50 per share certificate payable by the registered holder for each new share certificate issued (the buyer) to the registrar of each listed company on each new certificate issued (regardless of number of shares on the certificate)
  • Others: Intermediaries and custodians may pass on fees paid for using the clearing, settlement, custody and nominee services of the HKSCC
[For Paper 2 practice questions, go to – Paper 2]




24. Approved Introducing Agent (AIA)
  • AIA is a licensed corporation recognized under the Financial Resources Rules (FFR) that:
    • Only conducts business of receiving and passing on client trades or introducing client to SEHK participant or other intermediary:
    • Does not handle client assets; and
    • Incurs no legal liability on introduced business
  • AIA has lower risks so lower capital requirements:
    • No paid-up share capital
    • Liquid capital requirement is HK$500,000
  • AIA is required to comply with all other obligations of licensed corporations except does not need to:
    • Comply with rules on handling of client securities and money
    • Issue contracts notes or receipts to client (done by executing intermediary)
    • Contribute to investor compensation fund
[For Paper 2 practice questions, go to – Paper 2]
25. Securities Margin Financing (SMF)
  • SMF is the provision of financial accommodation to facilitate:
    • Acquisition of listed securities (in HK or elsewhere)
    • Continued holding of listed securities
  • Applies even if securities are pledged to support accommodation
  • Type 8 license required for activity except where provision of accommodation is:
    • For underwriting, sub-underwriting and acquisition under a prospectus
    • For a Type 1 licensee providing securities margin finance for own clients
    • To finance investment in collective investment scheme by CIS issuer
    • For AFIs for holdings by its clients
    • By an individual to a company in which he owns more than 10%
    • By an intermediary that provides an introduction to a related corporation
  • Financial accommodation may be a loan or credit, such as an overdraft or guarantee
  • The portion of the purchase cost that the investor deposits is the “margin”
  • Security is normally required as collateral for a margin loan facility
  • Investors use margin financing to increase their purchasing power and leverage their investments
[For Paper 2 practice questions, go to – Paper 2]


26. Short Selling
  • Under the SFO:

A person shall not sell securities through a recognized stock market unless, at the time he sells them, he or his principal has (or he believes he or his principal has) a presently exercisable and unconditional right to vest the securities in the buyer

  • Securities charged or pledged to secure a loan may still give a person an unconditional right to vest the securities, depending upon details of the charge/pledge
  • Covered short sale: a short sale which satisfies the above general rule
  • Naked short sale: a short sale which does not satisfy the above general rule. Considered an offence
  • It may only be undertaken in securities designated by SEHK, of which there are a large number
  • Exchange Participants must indicate short sell orders when inputting the orders to the trading system
  • Exchange participants must make stock borrowing arrangements for settlement before the short sale
  • A short sale cannot be made below the best current ask price (the tick rule)
[For Paper 2 practice questions, go to – Paper 2]


27. Advising on Securities
  • Advising on securities is defined in the SFO as:
    • The giving of advice
    • The issuing of analyses or reports to allow recipients to make decisions on the buying or selling of securities
  • Persons exempted from requiring a Type 4 license are:
    • Solicitors, counsel, professional accountants, trust companies and Type 9 licensees who give advice wholly incidental to their professions
    • Financial journalists and broadcasters who give investment advice or issue analyses/reports on investments to the public on subscription or otherwise
    • Corporations giving advice/issuing analyses and reports to wholly owned subsidiaries/holding companies/fellow wholly owned subsidiaries
    • Type 1/2 licensees giving advice wholly incidental to their dealing activities
  • Corporate finance advisers and asset managers require separate Type 6 and Type 9 licenses
[For Paper 2 practice questions, go to – Paper 2]


28. Alternative Liquidity Pools (ALP)
  • ALP means an electronic system operated by a licensed/registered person allowing crossing/matching of orders involving Hong Kong and overseas listed securities
  • Code of Conduct applies to ALP operators

Management and Supervision

  • An ALP operator should have written policies and procedures to ensure that:
    • There is at least one responsible/executive officer responsible for overall ALP management and supervision
    • There are controls to manage the risks of ALP operations
    • There is a formal governance process with input from risk and compliance functions
    • There are clearly defined reporting lines
  • Regarding access to and operation of ALPs, an ALP operator should:
    • Ensure only qualified investors can become ALP users
    • Ensure client orders have priority over proprietary orders
    • Revise/update as necessary the ALP Guidelines
[For Paper 2 practice questions, go to – Paper 2]




29. Options Trading and Clearing Systems
  • HKATS is a transaction-based network system
  • Orders are placed electronically into the HKATS’ Central Orderbook for auto-matching based on price/time priority
  • During pre-market opening period, calculated opening prices are established before the open to maintain market order
  • DCASS provides a common platform for clearing and settlement of SEHK Traded Options and HKFE index futures and options, single stock futures and options
  • Matched trades are passed to the SEOCH for registration, clearing and settlement
  • SEOCH acts as the clearing house and is responsible for monitoring risks
  • SEOCH is the counterparty for all trades and the guarantor of performance in respect of money settlement and stock delivery
  • SEOCH participants enter exercise instructions for house or client positions using DCASS terminals
  • SEOCH performs assignment and novation and the resultant stock transactions are passed to CCASS for settlement
[For Paper 2 practice questions, go to – Paper 2]


30. Options Exchange Participants
  • Only SEHK Exchange Participants may have access to the trading systems and facilities of Traded Options
  • To conduct any exchange-traded options business for clients, an exchange participant must be registered with the exchange as an options exchange participant under either one of the following sub-categories:
    • Options Trading Exchange Participant (Trading Participant); or
    • Options Broker Exchange Participant (Broker Participant)
  • A Trading Participant must:
    • be an Exchange Participant and Type 1 licensed
    • be a SEOCH Clearing Participant or have entered into a clearing agreement with a SEOCH General Clearing Participant
    • have installed computer hardware and software , as specified by SEHK, to gain access to HKATS
    • have staff and operating and security procedures in place that allow constant access to HKATS to conduct its traded options business
  • A Broker Participant must:
    • be an Exchange Participant and Type 1 licensed
    • have an options broking agreement exclusively with one Trading Participant, which is a SEOCH Direct or General Clearing Participant
    • have staff and systems in place to enable constant access to updated price information on Traded Options
[For Paper 2 practice questions, go to – Paper 2]


31. SEHK Options Clearing House Participants
  • There are two types of SEOCH participants:
    • Direct clearing participants (DCP): can register and clear trades for its own and clients’ accounts
    • General clearing participants (GCP): can register and clear trades for its own account, its clients’ accounts and other Trading Participants’ own and clients’ accounts
  • Each SEOCH participant must:
    • Be a trading participant and therefore a Type 1 licensee
    • Be in good standing and in compliance with the Options Trading Rules
    • Have appropriate procedures and back-office systems
    • Maintain minimum liquid requirements (DCP HK$5 million, GCP HK$20 million)
    • Deliver collateral to SEOCH for initial contribution to the reserve fund (DCP HK$1.5 million, GCP HK$5 million)
[For Paper 2 practice questions, go to – Paper 2]


32. OTC Derivatives Trading
  • The SFC requires licensed or registered persons, who are trading OTC derivatives, to have regard to the following matters:
    • Framework of risk management: clear policies overseen by board of directors or senior management body
    • Independent market risk management: monitor risk limits and approve pricing and valuation models (including mark to market mechanisms)
    • Independent credit risk management: set and monitor credit limits; review leverage, concentration and risk reduction arrangements
    • In-house expertise and resources
    • Risk reduction techniques: can include master agreements, netting arrangements, collateralisation of transactions, third party credit enhancements (letters of credit and guarantees) and contingency planning
    • Valuations and exposure: daily risk valuations; exposures may be aggregated as long as netting arrangements are acceptable and enforceable
    • Systems: includes accounting, risk management and information systems
    • Liquidity, funding arrangements and financial performance: continuous monitoring required
[For Paper 2 practice questions, go to – Paper 2]


33. Independent Credit Risk Management
  • OTC derivatives traders must have an independent credit risk management function to set and monitor credit limits, review leverage, concentration and risk reduction arrangements
  • Credit risk function should:
    • Assess each new client application
    • Ensure no trader conducts business with a client unless assessed and has a credit limit set
    • Should be considered a breach of in-house procedures if a credit limit is exceeded without senior management approval
    • Function should have similar importance to other account opening procedures with a due diligence approach to opening accounts
    • Need to assess appetite for risk, quality of credits, level of concentration, reliance on credit enhancements, measurement methodologies and separation of sales supervision from exposure supervision
    • Master agreements with standard terms should be used to ensure terms understood and clarity over jurisdiction
[For Paper 2 practice questions, go to – Paper 2]


34. OTC Derivatives: Valuations and Exposures
  • Daily accurate risk valuations using acceptable pricing methodology to mark-to-market and identify concentrations should be made
  • Exposures to credit and market risk should be calculated
  • Legal netting arrangements can be taken into account
  • Value at risk (VAR) models and notional value assessments may be used, subject to regulatory approval and evidence of effective and adequate back-testing
[For Paper 2 practice questions, go to – Paper 2]




 35. Market Misconduct Under the SFO
  • There are six categories of market misconduct:
    • Insider dealing
    • False trading
    • Price rigging
    • Disclosure of information about prohibited transactions
    • Disclosure of false or misleading information inducing transactions
    • Stock market manipulation
  • Legal proceedings against the accused can be criminal in the courts or civil under the Market Misconduct Tribunal (MMT), but not both
[For Paper 2 practice questions, go to – Paper 2]
 36. Market Misconduct Tribunal
  • The MMT is chaired by a judge with 2 other members who cannot be public officers. All 3 are appointed by the Chief Executive of HKSAR
  • Can compel and receive evidence relevant to hearings
  • A ‘balance of probabilities’ standard of proof is applied
  • At the conclusion of proceedings, the MMT will issue a public report giving details of the market misconduct and the disciplinary orders handed out
  • Appeals against MMT findings can be made to the Court of Appeal
  • The MMT is subject to judicial review
  • Orders that may be made by MMT against those found to have committed market misconduct include:
    • disqualification for up to 5 years from holding office as director, liquidator, receiver or taking part in the management of a corporation;
    • prohibition on investing or trading in HK markets for up to 5 years (cold shoulder order);
    • prohibition of further market misconduct as specified in the order;
    • payment of profits made or loss avoided, plus compound interest, to the Government;
    • payment of reasonable costs incurred by the Government and the SFC; and
    • disciplinary referral orders recommending that a professional body of which the person is a member should take disciplinary action against him
[For Paper 2 practice questions, go to – Paper 2]


 37. Unsolicited Calls (Cold calls)
  • Unsolicited calls include most possible forms of communication made by an intermediary with any person without his express invitation
  • It is an offence to engage in the following acts during an unsolicited call:
    • Offering to make agreements to buy/sell financial products regulated by the SFC
    • Offering SMF
    • Offering to provide profits, income or other returns from dealing in such financial products
  • The provisions are intended to protect the investing public from:
    • Recklessly giving personal details and money to a stranger
    • Believing a person giving financial advice without checking the person’s status or background
    • Buying stock without checking the background of the issuer
    • Opening an account without taking proper precautions
  • Persons exempt from the prohibition:
    • Existing clients
    • Licensed persons
    • Registered institutions
    • PIs
    • Solicitors/accountants acting in their professional capacity
    • Money lenders
  • The prohibition on unsolicited calls does not apply to an agreement to buy or sell securities to/from a person who already holds such securities
  • Unsolicited calls occur when responses are required immediately
  • A person who enters into an agreement as a result of such a call may rescind the agreement by giving written notice within 28 days of entering into the agreement or within 7 days of finding out about the contravention, whichever is the earlier
[For Paper 2 practice questions, go to – Paper 2]


 38. Improper Practices
  • This section considers some unethical practices and market malpractices which are likely to involve a breach of one or more SFC codes, affecting the fitness and properness of an intermediary to hold a license
  • Some of these practices may also be illegal
    • Boiler room activities
    • Churning
    • Corporate mis-governance
    • Front running
    • Rat trading
    • Unsuitability
    • Unauthorized trades
[For Paper 2 practice questions, go to – Paper 2]


 39. Disclosure of Inside Information
  • Listed companies must disclose inside information to the public as soon as reasonably practicable after the information comes to their knowledge, subject to specific exemptions
  • Inside information has come to a listed corporation’s knowledge if:
    • An officer of the corporation, in the course of performing his duties, has knowledge of the inside information
    • A reasonable person, acting as an officer of the corporation, would consider the information to be inside information with regard to the corporation
  • Exemptions to the disclosure requirement include:
    • Disclosure is prohibited by an enactment or a court order; or
    • Confidentiality of the information is preserved and
      • The information concerns an incomplete proposal or negotiation
      • The information is a trade secret
      • The SFC grants a waiver on disclosure as it is prohibited by overseas legislation or restriction orders
    • For breach of the disclosure requirement by the listed corporation:
      • An officer will be liable if the breach is caused by intentional, reckless or negligent conduct
      • The listed corporation and/or its directors may be subject to civil liability of a regulatory fine up to HK$8m and/or other sanctions
[For Paper 2 practice questions, go to – Paper 2]


 40. Boiler Room Activities
  • The use of high pressure tactics to sell securities to the public, involving the promise of very high returns
  • Features include:
    • Sole use of telephone/email/fax – no face-to-face meetings
    • Seller is often located overseas
    • Investment is being offered to a select group of people for a short time only
    • Investor is pressured into making a down-payment into a bank account followed by calls for further payments
    • Products are exotic-sounding options/bonds/commodities
[For Paper 2 practice questions, go to – Paper 2]

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