HKSI Licensing Examination Paper 8 (Securities) — All Questions

Under Stock Connect, a 'Special Segregated Account' (SPSA) mainly benefits institutional investors by:

• a.Guaranteeing them a profit on the A-shares that they buy
• b.Letting them hold Northbound A-shares in a segregated account so shares can be verified before a sale, easing pre-trade checking✓
• c.Permitting them to undertake unlimited naked short selling
• d.Removing all trading fees, stamp duty and settlement charges on the investor's Northbound trades in eligible Shanghai and Shenzhen A-shares

The SPSA model lets an institutional investor hold its Northbound shares in a dedicated segregated account, so custodians can confirm the shares are available before executing a sale. This addresses the pre-trade delivery-checking concern that institutions had with Stock Connect.

A hedge fund differs from a typical authorised retail fund in that a hedge fund usually:

• a.Uses strategies such as leverage, short selling and derivatives and is offered mainly to professional investors✓
• b.Is prohibited by law from investing any of its assets in shares
• c.Is freely marketed, advertised and openly sold to all members of the general retail public without any professional-investor restriction
• d.Guarantees investors a fixed and certain return each year

Hedge funds pursue less-constrained strategies, including leverage, short selling and derivatives, aiming for absolute returns. Because of their complexity and risk they are generally restricted to professional investors rather than being sold to the general retail public.

A 'fund distributor' in the collective-investment market is the party that:

• a.Audits the fund's financial statements each year
• b.Decides which securities the fund invests in and when
• c.Markets and sells fund units to investors, often earning a commission✓
• d.Holds the fund's assets in safe custody as trustee

A distributor sells fund units to investors (for example a bank or brokerage), typically earning a subscription or trailer commission. It is distinct from the fund manager (who invests the assets), the trustee/custodian (who safekeeps them) and the auditor.

The reason each regulated activity of a licensed corporation must have at least two Responsible Officers is to:

• a.Double the firm's proprietary trading profit
• b.Ensure there is always proper management supervision of the regulated activity, including cover for absence✓
• c.Owning and operating the central clearing house that novates and settles the market's trades as central counterparty
• d.Satisfy the Exchange's rules on board-lot sizes

Requiring at least two Responsible Officers per regulated activity ensures continuous, competent supervision and provides cover if one is unavailable. It strengthens accountability and reduces the risk of a regulated activity being left without proper oversight.

A person who executes buy and sell orders in securities for clients on the Exchange, as a business, is carrying on:

• a.Type 6 regulated activity (advising on corporate finance)
• b.Type 1 regulated activity (dealing in securities)✓
• c.Type 9 regulated activity (asset management)
• d.Type 4 regulated activity (advising on securities)

Dealing in securities, that is, buying or selling securities for clients as a business, is Type 1 regulated activity and requires the appropriate SFC licence. Advising, managing portfolios and corporate-finance advice fall under Types 4, 9 and 6 respectively.

The main reason ordinary investors must trade through an Exchange Participant rather than directly on SEHK is that:

• a.Only Exchange Participants hold the trading rights and access to the Exchange's trading system✓
• b.The Stock Exchange operates no electronic order-matching system
• c.Investors are barred by statute from ever holding or beneficially owning any shares that are listed on the Stock Exchange
• d.Brokers are legally required to guarantee investors a profit

Direct access to the Exchange's order-matching system is limited to Exchange Participants holding a trading right. Investors therefore route their orders through a broker (Exchange Participant), which executes on the market and handles clearing and settlement on their behalf.

A firm advising a company on a takeover or a new share issue would generally need to be licensed for:

• a.Type 2 (dealing in futures contracts), the activity of a futures broker
• b.Type 6 (advising on corporate finance)✓
• c.Type 9 (asset management), the activity of running portfolios
• d.Type 1 (dealing in securities), the activity of executing trades

Advising on corporate-finance matters such as takeovers, mergers and share issues is Type 6 regulated activity. Sponsors of IPOs are a specific category of Type 6 licensees, reflecting the specialised nature and heightened responsibilities of that work.

The 'front office' and 'back office' of a securities firm are separated so that:

• a.The firm can lawfully avoid paying stamp duty on trades
• b.Those who deal are kept apart from those who confirm, settle and record trades, strengthening internal control✓
• c.The firm is able to justify charging its clients materially higher dealing commissions and custody and administration fees than its competitors
• d.Individual traders are able to settle their own executed trades

Separating the dealing (front office) from settlement, confirmation and record-keeping (back office) enforces segregation of duties, reducing the risk of error, unauthorised trading and fraud. It is a fundamental internal-control and operational-risk safeguard.

A custodian collecting a cash dividend on shares it holds for a client is performing a:

• a.Corporate-action and income-collection service on the client's behalf✓
• b.Regulatory enforcement action against the listed company
• c.Underwriting commitment given at the time of the listing
• d.Market-making function by quoting prices in the shares

Collecting dividends and interest, and processing other corporate actions such as rights, bonuses and takeovers, is a core custody service. The custodian ensures the client receives the entitlements attaching to the securities it safekeeps, and accounts for them accurately.

Which statement about the SFC and HKEX is correct?

• a.HKEX is the statutory body that regulates, licenses and disciplines the SFC and the licensed intermediaries operating in the market
• b.The SFC and HKEX are simply two names for the same single organisation
• c.Both the SFC and HKEX are ordinary departments of the Government
• d.The SFC is the statutory regulator, while HKEX is a listed company that operates the market and is itself overseen by the SFC✓

The SFC is the independent statutory regulator of the securities and futures markets. HKEX operates the exchanges and clearing houses and is itself a listed company; as a listed market operator it is subject to SFC oversight, including for its own listing matters.

A pension fund and a unit trust are both examples of participants that:

• a.Set the rate of ad valorem stamp duty on share transactions
• b.Regulate and supervise the conduct of the securities market
• c.Pool many investors' money and invest it collectively as institutional investors✓
• d.Own and operate the central clearing and settlement system

Pension funds and unit trusts are collective, institutional investors: they aggregate contributions from many individuals and invest the pooled capital across securities, giving members diversification and professional management they could not easily achieve alone.

The requirement that intermediaries assess a product's suitability for a client before recommending it is designed mainly to:

• a.Speed up the settlement of the resulting transactions
• b.Increase the amount of commission and other remuneration that the recommending intermediary is able to earn from the transaction
• c.Reduce the amount of stamp duty payable by the client
• d.Protect investors by ensuring recommended products match their circumstances, needs and risk tolerance✓

The suitability obligation requires an intermediary to know the client and recommend only products reasonably suitable for that client's financial situation, objectives and risk appetite. It is a central investor-protection duty in the conduct rules for market participants.

A 'sub-custodian' appointed by a global custodian in a particular market is responsible for:

• a.Deciding the investment strategy pursued by the underlying client
• b.Setting the level of fees that the global custodian charges its clients
• c.Regulating and supervising the local securities exchange in that market
• d.Holding and settling the securities locally in that market on the global custodian's behalf✓

A global custodian appoints local sub-custodians in each market to provide on-the-ground safekeeping and settlement, since local market access and infrastructure are required. The global custodian consolidates the reporting and oversees the sub-custodian network.

The overall function of the various participants in Hong Kong's securities market, taken together, is to:

• a.Fix the exchange rate of the Hong Kong dollar against other currencies
• b.Enable capital raising, trading, clearing, custody and regulation so the market operates efficiently and with integrity✓
• c.Eliminate every kind of investment risk faced by investors
• d.Guarantee that the prices of the shares and other securities listed on the Exchange will steadily and reliably keep rising over time

Issuers, intermediaries, market operators, clearing houses, custodians, institutional and retail investors, and regulators each play a distinct role. Together they allow companies to raise capital, investors to trade and hold securities safely, and the market to be regulated fairly, none of which removes investment risk.

The statutory body responsible for regulating and inspecting the auditors of Hong Kong listed entities is the:

• a.Mandatory Provident Fund Schemes Authority (MPFA)
• b.Hong Kong Monetary Authority (HKMA)
• c.Accounting and Financial Reporting Council (AFRC)✓
• d.Listing Division of the Stock Exchange

The AFRC is the independent regulator that registers, inspects and disciplines the auditors of public-interest (listed) entities in Hong Kong. The HKMA supervises banks, while the MPFA oversees retirement schemes.