HKSI Licensing Examination Paper 1 (Regulation) — All Questions

Which body is the statutory regulator of Hong Kong's securities and futures markets?

• a.The Hong Kong Monetary Authority (HKMA)
• b.Hong Kong Exchanges and Clearing Limited (HKEX)
• c.The Securities and Futures Commission (SFC)✓
• d.The Financial Services and the Treasury Bureau

The SFC is the independent statutory body established under Part II of the SFO to regulate Hong Kong's securities and futures markets. The HKMA regulates banks, HKEX operates the exchanges and clearing houses, and the FSTB is a government policy bureau.

Which of the following is a regulatory objective of the SFC under the SFO?

• a.To set interest rates for the banking sector
• b.To guarantee that ordinary investors always earn a positive return on any listed securities bought through a Hong Kong intermediary
• c.To maintain the fairness, efficiency, transparency and orderliness of the securities and futures industry✓
• d.To manage the Exchange Fund

SFO s.4 sets out the SFC's regulatory objectives: maintaining fair, efficient, transparent and orderly markets, protecting the investing public, minimising financial crime and reducing systemic risk. It does not guarantee profits, set interest rates, or manage the Exchange Fund (an HKMA function).

What is the principal role of Hong Kong Exchanges and Clearing Limited (HKEX)?

• a.It administers the Investor Compensation Fund
• b.It operates the Stock Exchange of Hong Kong and the Hong Kong Futures Exchange and their clearing houses✓
• c.It licenses individual securities dealers
• d.It investigates and prosecutes insider dealing and other market misconduct in the Hong Kong criminal courts on its own authority

HKEX is the recognised exchange controller that owns and operates SEHK and HKFE together with the clearing houses (HKSCC, SEOCH, HKCC). Licensing is done by the SFC, criminal prosecution by the courts, and the Investor Compensation Fund is administered by the SFC under Part XII of the SFO.

A Hong Kong bank that carries on regulated activities does so as a 'registered institution'. Which regulator is its front-line supervisor for that securities business?

• a.The Stock Exchange of Hong Kong
• b.The Companies Registry
• c.The Investor Compensation Company
• d.The Hong Kong Monetary Authority (HKMA)✓

Banks that carry on regulated activities are registered institutions, and the HKMA is their front-line regulator under a memorandum of understanding with the SFC. SFC conduct standards such as the Code of Conduct still apply to their securities business.

The SFC is financially independent of the Government. It is funded principally by:

• a.Profits from trading shares on its own account
• b.Fees and charges paid by market participants and levies on securities and futures transactions✓
• c.General taxation only, appropriated to the Commission each year by the Government through the ordinary annual public budget process of the territory
• d.Donations from listed companies

The SFC is funded by transaction levies and by fees and charges paid by the industry it regulates, which supports its operational independence from the Government. It does not trade for profit, and its independence is a key feature of Hong Kong's regulatory design.

The members of the SFC board (including its Chairman and Chief Executive Officer) are appointed by:

• a.The Chief Executive of the Hong Kong Special Administrative Region✓
• b.The board of the Stock Exchange of Hong Kong, acting together with the Listing Committee of that same exchange in each instance
• c.A vote of listed companies
• d.The Hong Kong Monetary Authority

The SFC board comprises executive and non-executive directors appointed by the Chief Executive of the HKSAR. The mix of executive and independent non-executive members supports balanced governance and accountability of the regulator.

Which of the following is one of the SFC's operating divisions?

• a.The Listing Committee
• b.The Enforcement Division✓
• c.The Market Misconduct Tribunal
• d.The Deposit Protection Board

The SFC is organised into operating divisions such as Corporate Finance, Intermediaries, Investment Products, Enforcement, and Supervision of Markets. The Listing Committee belongs to the Stock Exchange, the MMT is an independent tribunal, and the Deposit Protection Board is separate.

Hong Kong Exchanges and Clearing Limited (HKEX) operates the securities and derivatives markets through its subsidiaries. Which of the following is a clearing house within the HKEX group?

• a.The Hong Kong Monetary Authority
• b.The Companies Registry
• c.Hong Kong Securities Clearing Company Limited (HKSCC)✓
• d.The Securities and Futures Commission, which both regulates the market and directly operates the central clearing and settlement system

HKSCC, which operates the Central Clearing and Settlement System (CCASS) for securities, is a clearing house within the HKEX group, alongside SEOCH (stock options) and HKCC (futures). The SFC and HKMA are regulators, not clearing houses.

Which body regulates insurers and insurance intermediaries in Hong Kong?

• a.The Hong Kong Monetary Authority
• b.The Mandatory Provident Fund Schemes Authority
• c.The Securities and Futures Commission
• d.The Insurance Authority (IA)✓

The Insurance Authority is the independent statutory regulator of insurance companies and insurance intermediaries in Hong Kong, having taken over from the former Office of the Commissioner of Insurance. It sits alongside the SFC, HKMA and MPFA in Hong Kong's regulatory architecture.

The Mandatory Provident Fund Schemes Authority (MPFA) is responsible for:

• a.Setting bank interest rates
• b.Prosecuting insider dealing
• c.Regulating the listing of shares and the conduct of listed issuers under the Listing Rules that are administered by the exchange
• d.Regulating and supervising MPF schemes and their trustees✓

The MPFA regulates and supervises the Mandatory Provident Fund system, including approving and overseeing MPF trustees and schemes. Listing, monetary policy and market-misconduct enforcement fall to the SEHK/SFC, HKMA and SFC/courts respectively.

The front-line day-to-day regulation of companies applying to list, and of listed issuers' compliance with the Listing Rules, is administered by:

• a.The Mandatory Provident Fund Schemes Authority
• b.The Listing Division of the Stock Exchange of Hong Kong, under the Listing Committee✓
• c.The Insurance Authority
• d.The Hong Kong Monetary Authority, acting as the front-line regulator of every company that seeks to obtain a listing on the exchange

The Stock Exchange's Listing Division administers the Listing Rules on the front line, with listing decisions made by the Listing Committee. The SFC has a statutory oversight role, including dual filing, and can object to prospectuses, but the Exchange runs day-to-day listing regulation.

Under the 'dual filing' regime, when a company applies to list, disclosure documents filed with the Stock Exchange are also filed with the SFC. This allows the SFC to:

• a.Guarantee that the shares will rise in price once trading in them begins on the exchange following the completion of the whole listing process
• b.Take over running the company
• c.Exercise its statutory powers, including to object to a listing or prospectus where disclosure is materially false, incomplete or misleading✓
• d.Set the offer price

Dual filing under the Securities and Futures (Stock Market Listing) Rules gives the SFC a statutory backstop over listing disclosure: it can object to a listing application or prospectus (and take enforcement action) where the information is materially deficient, while the Exchange handles day-to-day vetting.

Takeovers, mergers and share buy-backs of public companies in Hong Kong are regulated principally through:

• a.The MPF Schemes Ordinance
• b.The Codes on Takeovers and Mergers and Share Buy-backs, administered by the SFC's Corporate Finance Division and overseen by the Takeovers and Mergers Panel✓
• c.The Banking Ordinance, which is said to set out all of the detailed rules that govern the takeovers, mergers and share buy-backs of public companies in Hong Kong
• d.The Personal Data (Privacy) Ordinance

The non-statutory Takeovers and Share Buy-backs Codes are administered by the SFC (through the Executive) and overseen by the Takeovers and Mergers Panel. Though not law, they are enforced through the SFC's powers, and a mandatory general offer is triggered at 30% of voting rights.

The body established to promote investor and financial education among the Hong Kong public is the:

• a.Investor and Financial Education Council (IFEC)✓
• b.Takeovers and Mergers Panel
• c.The Market Misconduct Tribunal, which is said to run the public financial-education programmes that are provided for investors
• d.Hong Kong Deposit Protection Board

The Investor and Financial Education Council, a subsidiary of the SFC, promotes financial literacy and investor education across the community. It supports the SFC's investor-protection objective by helping the public make informed financial decisions.

The Financial Dispute Resolution Centre (FDRC) provides a means for individual clients and financial institutions to resolve monetary disputes through:

• a.Mediation and, if necessary, arbitration✓
• b.Bringing criminal prosecutions against the financial institution concerned in the ordinary Hong Kong courts
• c.Delisting the institution
• d.A public referendum

The FDRC offers an independent 'mediation first, arbitration next' scheme to resolve eligible monetary disputes between individual clients and financial institutions, providing an accessible alternative to litigation. It does not prosecute or discipline firms.

The Investor Compensation Fund is administered by:

• a.The Stock Exchange Listing Committee
• b.The Hong Kong Monetary Authority, which is said to administer the Fund on behalf of the whole of the securities industry
• c.The Investor Compensation Company Limited, a subsidiary of the SFC✓
• d.The Insurance Authority

The Investor Compensation Company Limited (ICC), a wholly owned subsidiary of the SFC, administers the Investor Compensation Fund and handles claims. The Fund compensates investors for losses from a licensed intermediary's or authorised institution's default in relation to exchange-traded products.

Hong Kong's legal system, within which securities and futures regulation operates, is based on:

• a.The common law, preserved under the Basic Law after 1997✓
• b.The civil-law codified system that was said to have been inherited directly from the Mainland of China after the year 1997
• c.Purely customary trade practice
• d.Religious law

Under Article 8 of the Basic Law, the common law, rules of equity, ordinances and customary law previously in force are maintained after 1997. Hong Kong retains a common-law system distinct from the Mainland's civil-law system, shaping how the SFO is interpreted and applied.

Hong Kong Exchanges and Clearing Limited (HKEX) also owns which overseas metals exchange?

• a.The New York Stock Exchange, together with its affiliated equity-options trading market in the United States
• b.The Tokyo Stock Exchange
• c.The London Metal Exchange (LME)✓
• d.The Frankfurt Stock Exchange

HKEX acquired the London Metal Exchange, the world's leading base-metals trading venue, giving the HKEX group an international commodities dimension in addition to its Hong Kong securities and derivatives markets. This is a distinctive feature of HKEX's group structure.

The single company that operates the Central Clearing and Settlement System (CCASS) for Hong Kong-listed securities is:

• a.The Companies Registry
• b.Hong Kong Securities Clearing Company Limited (HKSCC)✓
• c.The Insurance Authority
• d.The Securities and Futures Commission, acting in the role of the statutory operator of the central settlement system

HKSCC, part of the HKEX group, operates CCASS, through which exchange trades in Hong Kong-listed securities are cleared and settled, generally on a T+2 basis. Its role is central to the safe and efficient settlement of the securities market.

Which statement best describes Hong Kong's overall approach to regulating its securities and futures markets?

• a.It relies solely on the criminal courts with no regulator
• b.It combines statutory regulation by the SFC with front-line market operation and regulation by HKEX, supported by codes and guidelines✓
• c.It has no formal regulator
• d.It relies solely on self-regulation by the industry itself, with market participants setting and then enforcing all of their own standards of conduct

Hong Kong uses a blend: the SFC is the statutory regulator, HKEX operates and provides front-line regulation of the markets and listed issuers, and non-statutory codes and guidelines (Code of Conduct, Takeovers Codes) fill in conduct standards. The model balances statutory oversight with market operation.

The regulator responsible for banking stability and the front-line supervision of banks (including banks' securities business as registered institutions) is the:

• a.Hong Kong Monetary Authority (HKMA)✓
• b.Stock Exchange of Hong Kong
• c.Insurance Authority
• d.The Securities and Futures Commission, acting as the front-line prudential supervisor of all of the banks in Hong Kong

The HKMA is Hong Kong's central banking institution and regulates authorised institutions under the Banking Ordinance, including the securities business banks conduct as registered institutions. The SFC sets the applicable conduct standards, while the HKMA provides front-line supervision.

Government financial-services policy in Hong Kong is set principally by:

• a.The Investor Compensation Company
• b.The Stock Exchange
• c.The Securities and Futures Commission, which is said to set the overall government policy for the whole of the financial-services sector
• d.The Financial Services and the Treasury Bureau (FSTB), under the Financial Secretary✓

The Financial Services and the Treasury Bureau is the Government policy bureau for financial services, operating under the Financial Secretary. The SFC is the operationally independent statutory regulator that implements and enforces the law, distinct from Government policymaking.

Which company within the HKEX group operates the market for exchange-traded stock options in Hong Kong?

• a.The SEHK Options Clearing House (SEOCH)✓
• b.The Insurance Authority
• c.The Securities and Futures Commission
• d.Hong Kong Securities Clearing Company (HKSCC)

SEOCH (The SEHK Options Clearing House) clears exchange-traded stock options, while HKCC clears futures and HKSCC handles securities settlement via CCASS. Together these clearing houses within the HKEX group support Hong Kong's cash and derivatives markets.

In market terminology, the 'primary market' refers to:

• a.The market in which securities are first issued and sold by the issuer to raise capital✓
• b.The market where the SFC buys shares
• c.The trading of already-issued shares between one investor and another on the secondary market of the Stock Exchange of Hong Kong
• d.The market for foreign exchange only

The primary market is where new securities are issued and sold by the issuer (for example, in an IPO) to raise capital. The secondary market is where investors subsequently trade those securities among themselves, for example on the Stock Exchange.

The scheme that protects bank depositors in Hong Kong (as opposed to securities investors) is the:

• a.Takeovers and Mergers Panel scheme
• b.Mandatory Provident Fund
• c.The Investor Compensation Fund, said to be administered by the SFC in order to protect the deposits that are placed by savers at banks
• d.Deposit Protection Scheme, overseen by the Hong Kong Deposit Protection Board✓

The Deposit Protection Scheme, overseen by the Hong Kong Deposit Protection Board, compensates depositors if a Scheme member bank fails. It is distinct from the SFC's Investor Compensation Fund, which covers investors for defaults in relation to exchange-traded securities and futures products.

The SFC's codes and guidelines, such as the Code of Conduct and the Fit and Proper Guidelines, are:

• a.Primary legislation that is passed directly by the Legislative Council after it has been taken through the full three readings in the usual way
• b.Administered by the Stock Exchange
• c.Entirely voluntary with no regulatory consequence
• d.Non-statutory in form, but breaches reflect on a person's fitness and propriety and can lead to disciplinary action✓

The Code of Conduct and similar guidance are not themselves statute, but a failure to comply reflects adversely on a person's fitness and propriety and can ground SFC disciplinary action. They set the practical conduct standards expected of intermediaries.

An 'Exchange Participant' that trades on the Stock Exchange of Hong Kong must:

• a.Simply be any member of the public at all who wishes to buy or sell shares through the exchange for their own personal account
• b.Be approved only by the Insurance Authority
• c.Hold a trading right and be a licensed corporation (or registered institution) permitted to trade on the Exchange✓
• d.Be a listed company

To trade directly on SEHK, a firm must be an Exchange Participant, which requires holding a trading right and being appropriately SFC-licensed (or an HKMA-registered institution). This links exchange access to the licensing regime, ensuring only fit-and-proper firms trade on the market.

The SFC is a signatory to the IOSCO Multilateral Memorandum of Understanding. The main benefit of this is to:

• a.License overseas banks
• b.Facilitate cross-border co-operation and information-sharing with other securities regulators for enforcement✓
• c.Set Hong Kong's interest rates
• d.Guarantee profits to Hong Kong investors who choose to trade through firms that are members of the relevant international regulatory bodies

As an IOSCO MMoU signatory, the SFC can request and share information with counterpart regulators worldwide, supporting cross-border investigations and enforcement of securities laws. This co-operation is increasingly important as markets and misconduct become more international.

The Securities and Futures Appeals Tribunal (SFAT) and the Market Misconduct Tribunal (MMT) differ in that:

• a.They are the same body under two names
• b.The SFAT reviews specified SFC decisions (such as licensing and disciplinary decisions), while the MMT adjudicates alleged market misconduct✓
• c.The SFAT prosecutes criminal market-misconduct offences in the courts, while the MMT is instead made responsible for the setting of Hong Kong's interest rates
• d.Both are divisions of the Stock Exchange

The SFAT, under Part XI of the SFO, provides an independent review of specified SFC decisions, whereas the MMT, under Part XIII, determines whether market misconduct has occurred and imposes civil orders. Both are chaired by judges but perform different functions.

Hong Kong Exchanges and Clearing Limited (HKEX) is best described in the SFO framework as:

• a.A subsidiary of the SFC
• b.A Government department that sits within the Financial Services and the Treasury Bureau and is responsible for running the markets
• c.A licensed corporation supervised as an intermediary
• d.A recognized exchange controller that owns and operates the exchange and clearing companies✓

HKEX is the recognized exchange controller under the SFO, owning the operating companies (SEHK, HKFE) and the clearing houses. It is itself a listed company and is overseen by the SFC, which has particular responsibility for regulating HKEX given its central market role.

The independent panel that reviews the SFC's internal operational procedures for handling complaints and cases (to enhance transparency and accountability) is the:

• a.Deposit Protection Board
• b.Listing Committee
• c.Process Review Panel✓
• d.Takeovers and Mergers Panel

The Process Review Panel independently reviews whether the SFC has followed its own internal procedures in handling regulatory cases and complaints, promoting accountability and public confidence. It examines process, not the merits of individual regulatory decisions.

The Investor Compensation Fund does NOT compensate an investor for:

• a.Default of an authorised institution in relation to covered products
• b.Ordinary loss because the market price of a share the investor bought simply fell✓
• c.Loss caused by a licensed broker's insolvency in relation to exchange-traded products
• d.Loss caused by a licensed intermediary's misappropriation of the investor's assets

The Investor Compensation Fund covers pecuniary loss arising from an intermediary's default (such as insolvency or misappropriation) in relation to exchange-traded products, subject to a per-investor limit. It does not compensate for ordinary investment losses due to market movements.

Hong Kong Exchanges and Clearing Limited was formed in 2000 by the merger of:

• a.Two large overseas banks that combined their Hong Kong securities operations together into a single listed holding company at the time
• b.The SFC and the HKMA
• c.The Companies Registry and the Inland Revenue Department
• d.The Stock Exchange of Hong Kong, the Hong Kong Futures Exchange and their associated clearing houses✓

In 2000, the Stock Exchange of Hong Kong, the Hong Kong Futures Exchange and their clearing houses merged and were placed under a single holding company, HKEX, which itself listed. This consolidation aimed to strengthen the competitiveness and efficiency of Hong Kong's market infrastructure.

In Hong Kong's regulatory framework, the SFC's relationship with the Government is best described as:

• a.A department of Government that takes daily instructions from the Financial Secretary on precisely how it should decide each individual case that comes before it
• b.A private company owned by listed issuers
• c.A committee of the Stock Exchange
• d.An independent statutory body that is operationally independent but accountable, with the Financial Secretary and FSTB responsible for overall policy✓

The SFC is an independent statutory body with operational independence in regulation and enforcement, while overall financial-services policy rests with the Financial Secretary and the FSTB. This separation protects regulatory decisions from day-to-day political interference while preserving accountability.

Which company within the HKEX group clears exchange-traded futures contracts?

• a.The SEHK Options Clearing House (SEOCH)
• b.The Investor Compensation Company
• c.HKFE Clearing Corporation (HKCC)✓
• d.Hong Kong Securities Clearing Company (HKSCC)

HKCC (HKFE Clearing Corporation) clears exchange-traded futures contracts, complementing SEOCH (stock options) and HKSCC (securities settlement via CCASS). Central clearing reduces counterparty risk by interposing the clearing house between buyer and seller.

The regulatory objective of maintaining a fair, efficient, transparent and orderly market benefits investors mainly because:

• a.It fosters confidence, so investors can trade on reliable information at fair prices with reduced risk of manipulation and abuse✓
• b.It guarantees rising share prices for the investors who choose to trade in an orderly and transparent market of this particular kind over the longer term
• c.It removes all investment risk
• d.It fixes returns for every investor

Fair, efficient, transparent and orderly markets underpin investor confidence: prices reflect information, participants are treated fairly, and misconduct is deterred. This is one of the SFC's s.4 objectives, but it does not and cannot guarantee profits or remove market risk.

Which of the following bodies is an independent statutory regulator in Hong Kong's financial system, rather than a market operator or industry body?

• a.The Stock Exchange of Hong Kong Limited
• b.A licensed asset-management company
• c.The Securities and Futures Commission✓
• d.An Exchange Participant firm

The SFC is an independent statutory regulator established under the SFO. SEHK is a market operator (within the HKEX group) with front-line regulatory duties, while Exchange Participants and asset managers are regulated market participants, not regulators.

Which of the following most accurately describes the role of the SFC in the listing of shares in Hong Kong?

• a.The SFC alone vets every single listing application on the front line itself, and then it goes on to make the final decision on whether or not a company will be permitted to list its shares
• b.The SFC has a statutory oversight role (including dual filing) and can intervene on disclosure, while the Stock Exchange administers the Listing Rules on the front line✓
• c.The SFC guarantees the success of every IPO it reviews
• d.The SFC has no involvement in listings at all

Front-line administration of the Listing Rules and listing decisions rests with the Stock Exchange (Listing Division and Listing Committee), while the SFC holds statutory oversight, receives dual filings, and can object to defective disclosure or take enforcement action. The two operate under a defined division of responsibility.

A mandatory general offer under the Codes on Takeovers and Mergers is generally triggered when a person acquires voting rights carrying:

• a.5% or more of the voting rights
• b.75% or more of the voting rights
• c.30% or more of the voting rights✓
• d.10% or more of the voting rights

Under the Takeovers Code, a person (with parties acting in concert) who acquires 30% or more of the voting rights of a company is generally required to make a mandatory general offer to the remaining shareholders. The Code is administered by the SFC and overseen by the Takeovers and Mergers Panel.

The SFC is funded principally by:

• a.An annual budgetary grant voted and appropriated by the Legislative Council each year
• b.Profits from trading on its own account
• c.Donations from listed companies
• d.Levies on securities and futures transactions together with fees and charges✓

The SFC is largely self-funded through transaction levies collected on market turnover, plus licensing and other fees. This funding model supports its operational independence as a statutory regulator under the SFO.