HKSI Licensing Examination Paper 1 (Regulation) — All Questions

Securities traded on the Stock Exchange of Hong Kong are normally settled through CCASS on a:

• a.A rolling ten-business-day (T+10) basis, with paper certificates delivered physically between the brokers involved
• b.Same-day (T+0) basis
• c.T+2 basis (two business days after the trade)✓
• d.Monthly netting basis

Exchange trades in HK-listed securities settle through the Central Clearing and Settlement System (CCASS), operated by HKSCC, on a T+2 basis, with money settlement following the same cycle.

A general offer to acquire control of a Hong Kong listed company is regulated principally by:

• a.The Basic Law
• b.The Stamp Duty Ordinance
• c.The Companies Registry's internal administrative rules, which set the terms on which control of a listed company may change
• d.The Codes on Takeovers and Mergers and Share Buy-backs administered by the SFC✓

Takeovers, mergers and share buy-backs of public companies are governed by the SFC-administered Codes on Takeovers and Mergers and Share Buy-backs. Though non-statutory, they are enforced through the SFC's powers, and a mandatory general offer is triggered at 30% of voting rights.

Equity securities on the Stock Exchange of Hong Kong may be listed on:

• a.The Main Board or GEM (Growth Enterprise Market)✓
• b.The Main Board only, since GEM has now been abolished
• c.A single unified board only
• d.Any of five separate exchanges

The SEHK operates two equity boards: the Main Board for larger, established issuers and GEM for smaller companies. Each has its own set of listing eligibility requirements under the Listing Rules.

A new applicant for a Main Board listing must generally ensure that at least what proportion of its total issued shares is held by the public?

• a.25%✓
• b.10%
• c.5%
• d.51%

The Listing Rules require a minimum public float of at least 25% of the issuer's total issued shares (a lower percentage may be accepted for very large issuers). This ensures an open market and adequate liquidity in the shares.

Under the Main Board profit test, a new applicant must generally have an aggregate profit over the three-year track record period of at least:

• a.There is no minimum profit requirement at all under any of the current Main Board listing eligibility tests
• b.HK$80 million (with a minimum in the most recent year and in the two preceding years combined)✓
• c.HK$500 million
• d.HK$5 million

Following the 2022 increase, the Main Board profit test requires an aggregate profit of at least HK$80 million over the three-year track record - HK$35 million in the most recent year and HK$45 million in aggregate for the two preceding years. Alternative market-cap-based tests also exist.

Besides the profit test, which of the following is one of the alternative financial eligibility tests for a Main Board listing?

• a.The market capitalisation / revenue test (a minimum market cap plus a minimum revenue in the latest year)✓
• b.A test based on the chairman's net worth
• c.A test based purely on the total number of full-time employees the applicant company currently has on its payroll
• d.A test based on the age of the company

The Main Board offers three tests: the profit test, the market-cap/revenue test (market cap of at least HK$4 billion and revenue of at least HK$500 million in the latest year), and the market-cap/revenue/cash-flow test. An applicant must satisfy at least one.

GEM (the Growth Enterprise Market) is designed primarily for:

• a.The very largest and most well-established blue-chip companies already listed in Hong Kong
• b.Smaller and growth companies that may not meet the Main Board's profit requirement✓
• c.Foreign banks only
• d.Government bonds only

GEM caters to smaller and growth companies, applying lower entry thresholds than the Main Board (for example, a positive operating cash-flow requirement rather than a profit test). It carries correspondingly higher investment risk.

In a Hong Kong IPO, the role of the sponsor is to:

• a.Buy up any shares left unsold in the public offer itself in every single case, acting as the underwriter
• b.Manage the listing application and conduct due diligence to ensure the applicant is suitable for listing✓
• c.Guarantee the share price after listing
• d.Set the level of stamp duty payable

The sponsor - which must be a licensed or registered firm carrying on Type 6 regulated activity (advising on corporate finance) - manages the listing application, conducts due diligence and is responsible to the Exchange for the applicant's suitability and disclosure. It does not guarantee the price.

Under the Listing Rules, a sponsor must be formally appointed at least how long before the submission of a listing application?

• a.There is no minimum period
• b.1 week
• c.5 years
• d.2 months✓

The Listing Rules require a sponsor to be appointed at least two months before submission of the listing application, giving adequate time for proper due diligence. This 'two-month rule' reinforces the sponsor's gatekeeping responsibilities.

The Listing Rules that govern the listing and continuing obligations of issuers are made and administered by:

• a.The Companies Registry
• b.The Inland Revenue Department
• c.The Hong Kong Monetary Authority, acting as the front-line regulator for all Hong Kong listed issuers
• d.The Stock Exchange of Hong Kong (part of HKEX), through its Listing Division and Listing Committee✓

The Listing Rules are administered by SEHK through the Listing Division (day-to-day vetting) and the Listing Committee (policy and significant decisions). Although not statute, they are enforced contractually and backed by the SFC's oversight.

Under the 'dual filing' arrangement for new listings, listing application documents filed with the Exchange are:

• a.Also filed with the SFC, which can object to the listing if disclosure is materially deficient✓
• b.Reviewed only after listing has been approved
• c.Kept secret from the SFC entirely
• d.Sent only to the Companies Registry for registration, instead of to the Exchange or the SFC at all

Under the Securities and Futures (Stock Market Listing) Rules, listing applicants' disclosure documents are filed with the SFC in parallel with the Exchange ('dual filing'). The SFC may object where the prospectus contains materially false or incomplete information.

Before a prospectus for a public offer of shares can be issued in Hong Kong, it must be registered with:

• a.The Hong Kong Monetary Authority
• b.The Stock Exchange's own central clearing house (HKSCC)
• c.The Companies Registry (Registrar of Companies)✓
• d.The Market Misconduct Tribunal

A prospectus must comply with the content requirements of, and be registered with the Registrar of Companies under, the Companies (Winding Up and Miscellaneous Provisions) Ordinance before it is issued. Registration is a precondition to a lawful public offer of shares.

A person who authorises the issue of a prospectus that contains an untrue statement may face:

• a.Both civil liability to compensate investors and potential criminal liability✓
• b.No consequences, since a prospectus is only marketing
• c.Civil liability arising only if the company itself later becomes insolvent and cannot pay
• d.Only a warning letter from the Exchange

The prospectus regime imposes both civil liability (to compensate subscribers who suffer loss) and criminal liability on persons responsible for untrue statements in a prospectus, subject to statutory defences such as reasonable belief in the statement's truth.

The 'clawback' mechanism commonly used in Hong Kong IPOs operates to:

• a.Force the sponsor to buy back shares
• b.Recover previously allotted shares from investors after listing if the market price subsequently falls below the offer price
• c.Reallocate shares from the placing tranche to the public offer tranche when the public offer is heavily oversubscribed✓
• d.Refund stamp duty to retail investors

The clawback increases the proportion of shares allocated to the public subscription tranche (and reduces the placing tranche) as the level of public oversubscription rises. It ensures retail demand is met when public interest is strong.

An 'over-allotment option' (greenshoe) in an IPO allows the underwriters to:

• a.Guarantee investors a minimum share price in the aftermarket indefinitely for the benefit of all subscribing investors
• b.Set the stamp duty rate
• c.Cancel the listing at will
• d.Allot additional shares (commonly up to 15% of the offer) to cover over-allocations and support price stabilisation✓

The over-allotment or greenshoe option lets underwriters allot more shares than the base offer (typically up to 15%), which they can cover by buying in the aftermarket during the stabilisation period. It is a recognised, disclosed price-support tool.

Price stabilisation activity by underwriters after an IPO is:

• a.Permitted indefinitely after listing without any conditions, disclosure or applicable time limit whatsoever
• b.Always prohibited as market manipulation
• c.Decided solely by the issuer's chairman
• d.Permitted for a limited period (up to 30 days after listing) subject to disclosure and conditions✓

Stabilisation is permitted, as an exception to the manipulation rules, only within a defined window (up to 30 days after the commencement of dealings), within disclosed limits and subject to strict conditions. Outside those bounds it could amount to price rigging or manipulation.

In a Hong Kong public offer, an investor using a 'white form' eIPO application will, if successful, have the allotted shares:

• a.Automatically sold on listing day
• b.Issued in the investor's own name (a physical/registered holding)✓
• c.Credited automatically to the listing sponsor's own securities account instead
• d.Converted into a bond

A white form application results in shares being issued in the applicant's own name, whereas a yellow form application results in the shares being deposited directly into CCASS. Both are electronic public-offer application methods.

On the SEHK, listed shares are generally traded in multiples of a 'board lot', which is:

• a.The number of shares that must be sold each day
• b.The minimum number of shares in one trading unit, as set by the issuer✓
• c.Fixed at 1,000 shares for every company by law
• d.The maximum number of shares that any single investor is permitted to hold

A board lot is the standard trading unit set by each issuer (e.g. 500, 1,000 or 2,000 shares). Orders are normally placed in whole board lots; odd lots trade in a separate market at a possible discount.

Orders on the SEHK are executed through:

• a.An open-outcry trading floor where brokers shout orders using paper slips
• b.Telephone negotiation between brokers only
• c.An electronic automatic order-matching system operated by the Exchange✓
• d.A daily auction conducted by the SFC

SEHK trading is conducted through an electronic automatic order-matching and execution system, which matches orders on a price and time priority basis. Manual open-outcry trading has long been replaced by the electronic platform.

Clearing and settlement of SEHK securities trades is carried out through CCASS, which is operated by:

• a.Hong Kong Securities Clearing Company Limited (HKSCC)✓
• b.Each individual broker firm for all of its own client trades
• c.The SFC
• d.The Companies Registry

The Central Clearing and Settlement System (CCASS) is operated by HKSCC, the securities clearing house within the HKEX group. It provides book-entry settlement, so most securities are held and transferred electronically rather than by physical certificates.

Under the Continuous Net Settlement (CNS) system in CCASS, a clearing participant's many trades in a stock on a day are:

• a.Settled only in physical share certificates
• b.Novated to HKSCC and netted to a single net position per security to be settled✓
• c.Settled individually, one trade at a time, directly with each separate counterparty
• d.Left unsettled until the end of the year

Under CNS, trades are novated to HKSCC (which becomes the counterparty) and netted so each participant has a single net receivable or deliverable position per security. This reduces settlement volume and counterparty risk.

Money settlement for CCASS securities transactions normally takes place on:

• a.The trade day itself (T+0)
• b.The second business day after the trade (T+2), in line with stock settlement✓
• c.The tenth business day after the trade date (T+10), following physical delivery
• d.A quarterly cycle

Both stock and money settlement in CCASS follow a T+2 cycle - two business days after the trade date. Money settlement is effected through designated banks under a direct-debit arrangement with clearing participants.

Hong Kong stamp duty on a transfer of Hong Kong stock is currently charged at what rate, and on whom?

• a.0.1% of the consideration on each of the buyer and the seller✓
• b.1% on the buyer only
• c.There is no stamp duty payable on Hong Kong share transfers at all
• d.0.5% on the seller only

Stamp duty on Hong Kong stock transfers is charged ad valorem at 0.1% of the consideration on each side of the transaction (i.e. both the buyer and the seller pay 0.1%). It is a transaction cost distinct from brokerage and levies.

Which of the following is NOT normally a cost incurred when trading listed shares in Hong Kong?

• a.Brokerage commission
• b.The SFC statutory transaction levy
• c.Capital gains tax on the profit✓
• d.Stamp duty

Hong Kong does not impose a capital gains tax, so trading profits are not taxed as gains. Typical trading costs are brokerage commission, stamp duty, the SFC transaction levy, the trading fee and CCASS fees.

The SFC transaction levy on securities trades is:

• a.A fixed HK$1,000 per trade
• b.Charged only on the seller
• c.A small percentage of the consideration charged on both the buyer and the seller, funding the SFC✓
• d.Payable only on IPO subscription applications, and never on any ordinary secondary market trades at all

The SFC transaction levy is charged as a small percentage of the transaction value on both sides of a trade and helps fund the SFC's operations. It is one of several statutory and exchange charges collected on each transaction.

Brokerage commission charged by Hong Kong securities firms is:

• a.Prohibited entirely
• b.Freely negotiable between the firm and the client following deregulation✓
• c.Fixed by the SFC at a minimum rate
• d.Set by the Financial Secretary at a fixed minimum rate each and every year

Minimum brokerage commissions were abolished (deregulated in 2003), so commission is now freely negotiable between the intermediary and the client. Other charges such as stamp duty and levies remain fixed by statute or the Exchange.

Short selling of securities on the SEHK is:

• a.Permitted only as covered short selling of designated securities; naked (uncovered) short selling is prohibited✓
• b.Allowed only for overseas investors
• c.Completely prohibited in all circumstances
• d.Permitted entirely without restriction, including uncovered or so-called naked short selling of any listed stock

Only covered short selling of securities designated as eligible by the Exchange is permitted; the seller must have a presently exercisable and unconditional right to vest the securities. Naked short selling - selling without such a right - is prohibited.

The 'tick rule' applying to covered short selling on the SEHK provides that a short-sale order:

• a.Can only be entered during the pre-opening auction session each day
• b.Must be at least 10% below the last traded price
• c.May be entered at any price the seller wishes
• d.Must not be made at a price below the best current ask price✓

The short-selling tick rule restricts short sales to a price not lower than the best current ask price, preventing short sellers from aggressively driving the price down. It is a key safeguard within the regulated short-selling framework.

Under the Listing Rules' classification of notifiable transactions, a 'very substantial acquisition' arises where any applicable percentage ratio is:

• a.5% or more but less than 25%
• b.100% or more✓
• c.Less than 5%
• d.Exactly 1%

Notifiable transactions are classified by percentage ratios: discloseable (5% to under 25%), major (25% to under 100%) and very substantial acquisition (100% or more). Higher classifications require more disclosure and, from 'major' upward, shareholder approval.

A 'major transaction' by a Main Board issuer is one where an applicable percentage ratio is:

• a.Always fixed at precisely 50% or more
• b.100% or more
• c.25% or more but less than 100%✓
• d.Below 5%

A major transaction has a percentage ratio of 25% or more but less than 100%. It requires an announcement, a circular and, importantly, shareholders' approval, reflecting its significance to the issuer under the Listing Rules.

A transaction where the highest applicable percentage ratio is 5% or more but less than 25% is classified as a:

• a.Discloseable transaction✓
• b.Connected transaction
• c.Share transaction requiring no disclosure
• d.Very substantial disposal

A discloseable transaction is one with a percentage ratio of 5% to under 25%. It requires an announcement and notification to the Exchange but not, by reason of its size alone, shareholders' approval under the Listing Rules.

'Connected transactions' under the Listing Rules are transactions between a listed issuer and:

• a.The Government
• b.Any ordinary retail customer
• c.A connected person, such as a director, controller or their associates✓
• d.Its appointed external auditor or reporting accountants only, and no others

Connected transactions involve connected persons (directors, chief executives, substantial/controlling shareholders and their associates). They are subject to disclosure and, unless exempt, independent shareholders' approval, to guard against conflicts of interest and unfair terms.

A Main Board issuer must publish its annual report within how long after the end of its financial year?

• a.Within 12 months
• b.Within 4 months✓
• c.Within 30 days
• d.There is no time limit

The Listing Rules require a Main Board issuer to publish its annual report within four months of its financial year-end (with earlier deadlines for the preliminary results announcement). Timely periodic reporting is a core continuing obligation.

Under the Codes on Takeovers and Mergers, the 'creeper' provision requires a person or group holding between 30% and 50% of the voting rights of a company to make a general offer if, in any 12-month period, they acquire additional voting rights of more than:

• a.2%✓
• b.20%
• c.0.1%
• d.49%

A holder of 30% to 50% who acquires more than 2% additional voting rights in any 12-month period triggers a mandatory general offer under the 'creeper' rule. This complements the 30% mandatory-offer threshold in preventing creeping acquisitions of control.

The Codes on Takeovers and Mergers and Share Buy-backs:

• a.Are administered by HKEX's Listing Committee
• b.Are non-statutory but administered and enforced by the SFC (through its Takeovers Executive and the Takeovers Panel)✓
• c.Are statutory laws passed by the Legislative Council
• d.Have no practical force at all and amount to purely voluntary guidance that the SFC has no power to enforce in any way

The Codes are non-statutory but are administered by the SFC's Takeovers Executive and enforced through the Takeovers and Mergers Panel, with sanctions such as public censure and 'cold shoulder'. They regulate general offers, share buy-backs and related conduct.

Which entity acts as the clearing house (and central counterparty) for cash-market securities trades on the SEHK?

• a.The Hong Kong Futures Exchange
• b.The Securities and Futures Commission itself acting directly
• c.Hong Kong Securities Clearing Company Limited (HKSCC)✓
• d.The Hong Kong Monetary Authority

HKSCC operates CCASS and acts as the central counterparty for SEHK securities trades. Separate clearing houses (SEOCH for stock options, HKCC for futures) handle the derivatives markets within the HKEX group.

Most retail investors hold their Hong Kong listed shares:

• a.Directly on the issuer's register in every case
• b.In a central securities register account personally maintained on their behalf by the Financial Secretary
• c.As physical certificates locked in the SFC's vault
• d.Indirectly, through their broker's CCASS account, with HKSCC Nominees Limited as the registered holder✓

Under the CCASS book-entry system, shares deposited by brokers are registered in the name of HKSCC Nominees Limited, with investors holding a beneficial interest through their broker. Investors can alternatively open an Investor Participant account to hold securities directly in CCASS.

A CCASS 'Investor Participant' account allows an individual investor to:

• a.Avoid paying stamp duty
• b.Place and execute securities trades directly on the Exchange order book without using any broker at all
• c.Borrow money interest-free from HKSCC
• d.Hold securities directly in CCASS in their own name, rather than through a broker's account✓

An Investor Participant (IP) account lets an investor hold and settle securities directly in CCASS under their own name, giving greater control and transparency over their holdings. Trading still requires an Exchange Participant (broker) to execute orders.

The SEHK trading day for equities typically begins with:

• a.An open-outcry trading session conducted on the exchange floor
• b.A monthly settlement session
• c.A random start time chosen daily
• d.A pre-opening auction session before continuous trading✓

The equity trading day starts with a pre-opening auction session, during which orders are entered and matched at a single auction price, before continuous order-matching trading begins. A closing auction session operates at the end of the day for eligible securities.

Stock Connect (Shanghai-Hong Kong and Shenzhen-Hong Kong) is a scheme that:

• a.Applies only to Hong Kong government bonds
• b.Allows unlimited trading of any security in any market
• c.Provides mutual market access, allowing Northbound trading of eligible Mainland shares and Southbound trading of eligible Hong Kong shares✓
• d.A scheme that legally merges the Hong Kong and the Mainland stock exchanges together into one single combined and jointly listed exchange company

Stock Connect links the Hong Kong and Mainland exchanges to give mutual market access: Northbound investors trade eligible Shanghai/Shenzhen-listed shares, and Southbound (Mainland) investors trade eligible Hong Kong-listed shares, each within eligibility lists and quotas.