Participants in the Markets
This topic maps the cast of the Hong Kong securities market and, crucially, who is licensed for what. The exam distinguishes finely between investor types, intermediary roles, custody and infrastructure entities, and the regulators, so keep the boundaries between each role sharp.
Investors: retail, institutional and professional
Retail investors are individuals dealing for themselves in relatively small amounts. Institutional investors deploy large pooled sums and include pension funds, Mandatory Provident Fund (MPF) schemes, insurance companies and asset managers; their size, sophistication and long horizons make them major market participants. Under SFC rules a person may be treated as a 'professional investor' if they meet asset or portfolio thresholds (for an individual, an investment portfolio at or above a specified amount), which permits a lighter set of conduct protections; confirm the exact threshold against the current SFC rules, as it is defined by regulation. A hedge fund differs from a typical authorised retail fund by using leverage, short selling and derivatives, and by being open mainly to professional investors rather than the public.
Intermediaries and the licensing framework
Only an Exchange Participant may trade directly on SEHK's system, which is why ordinary investors must route orders through a broker. Firms carry on 'regulated activities' (RAs) and must be licensed accordingly: Type 1 is dealing in securities, Type 4 is advising on securities, Type 6 is advising on corporate finance and Type 9 is asset management (discretionary management of client portfolios). A firm advising a company on a takeover or new issue needs Type 6; a firm making buy/sell decisions for client portfolios needs Type 9; a firm giving recommendations without discretion or execution is advising (Type 4). Within a licensed corporation, a Responsible Officer (RO) supervises a regulated activity and each RA must have at least two ROs to ensure continuity of proper management; a Licensed Representative is an individual accredited to carry on the activity for the firm. A Licensed Corporation is a non-bank firm licensed by the SFC, whereas a Registered Institution is a bank registered with the SFC but primarily supervised by the HKMA.
The IPO syndicate's people
An IPO gathers many specialised parties. The sponsor (Type 6) runs due diligence and manages the listing application. The bookrunner or lead manager builds and runs the order book and coordinates marketing and pricing. Underwriters commit to take up unsold shares, and sub-underwriters share that risk. A placing agent finds investors to take up placed shares. The stabilising manager may support the aftermarket price within strict limits using the over-allotment option. The receiving bank processes public subscription monies. The reporting accountant and external auditor verify the financial information, and the issuer's legal advisers ensure the prospectus and structure comply with the rules. Cornerstone investors are large investors who commit to substantial allocations before the offer, subject to a lock-up, lending credibility to the deal.
Custody, nominees and registrars
A custodian holds securities in safekeeping and handles settlement, income collection and corporate actions for clients; a global custodian coordinates holdings across many markets and appoints a local sub-custodian in each. A nominee holds legal title on behalf of a beneficial owner, which is why HKSCC Nominees Limited appears on many registers as the registered holder of shares deposited in CCASS. A share registrar maintains the company's register of members, processes transfers and pays dividends. A prime broker bundles financing, securities lending, custody and execution for hedge funds. For an SFC-authorised fund, the trustee or custodian's core duty is to hold the fund's assets safely and independently of the manager, protecting investors; under the MPF system, scheme assets must likewise be held by an approved trustee.
Market infrastructure and CCASS participants
HKEX (Hong Kong Exchanges and Clearing Limited) is the holding company that owns and operates the market infrastructure: the Stock Exchange of Hong Kong (SEHK) for securities, the Hong Kong Futures Exchange (HKFE) for futures and options, and the clearing houses. The Hong Kong Securities Clearing Company (HKSCC) operates CCASS and acts as central counterparty, standing between buyers and sellers to guarantee settlement and managing default risk through margins and a guarantee fund. CCASS has tiers of participant: Direct Clearing Participants clear their own trades; General Clearing Participants can also clear for others; Custodian Participants hold securities but do not trade on the Exchange; and Investor Participants are individuals holding stock in their own CCASS account. The HKMA operates the Central Moneymarkets Unit (CMU) for debt securities. Market makers, liquidity providers and ETF participating dealers supply continuous two-way quotes and create or redeem units to keep prices close to fair value.
Regulators and investor safeguards
The Securities and Futures Commission (SFC) is the statutory regulator of the securities and futures markets, with objectives that include maintaining fair, efficient and transparent markets and protecting investors; the Hong Kong Monetary Authority (HKMA) supervises banks, including their securities activities as Registered Institutions. HKEX operates the market but is itself a listed company overseen by the SFC. Several safeguards recur in exam questions: brokers must keep client money in segregated trust accounts so it is protected if the firm fails; the Investor Compensation Fund can compensate retail investors for certain losses caused by a licensed intermediary's default; front office (dealing) and back office (settlement and records) are separated to prevent errors and fraud; and intermediaries must assess a product's suitability for a client before recommending it. Investor education is led by the Investor and Financial Education Council.
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