HKSI Licensing Examination Paper 8 (Securities) — All Questions

The primary statutory objective of the Securities and Futures Commission (SFC) includes:

• a.Setting the interest rates that banks charge on loans and deposits
• b.Guaranteeing that all investors earn a profit on their holdings
• c.Maintaining and promoting the fairness, efficiency and transparency of the securities and futures markets and protecting investors✓
• d.Operating the automatic order-matching and settlement systems on behalf of the Exchange Participants and clearing participants that use them

The SFC's statutory objectives centre on market integrity: fairness, efficiency, competitiveness and transparency of the markets, investor protection, and reducing systemic risk. It regulates and licenses intermediaries but does not run the trading system or set monetary policy.

An ETF listed on SEHK relies on a 'participating dealer' (market maker) to:

• a.Regulate and supervise the conduct of the ETF's manager
• b.Independently audit the exchange-traded fund's annual financial statements and report to unit holders on their accuracy and fairness
• c.Guarantee a fixed annual dividend to every unit holder
• d.Create and redeem ETF units and provide liquidity so the market price stays close to net asset value✓

Participating dealers create new ETF units (by delivering the underlying basket or cash) and redeem them, arbitraging any gap between market price and net asset value. This creation/redemption mechanism, plus on-screen market making, keeps the ETF trading near its NAV.

A 'designated specialist' or liquidity provider for a listed structured product (such as a derivative warrant or CBBC) is required to:

• a.Guarantee to holders that the derivative warrant or callable bull/bear contract will ultimately produce a profit at expiry
• b.Provide continuous or responsive quotes so that investors can trade the product in the secondary market✓
• c.Grant final approval for the product to be listed on the Exchange
• d.Hold investors' subscription cash in a segregated custody account

Because there is usually only one issuer for a given warrant or CBBC, a liquidity provider must supply bid/offer quotes (continuously or on request) so investors can buy and sell. Without it, these single-issuer products could be effectively untradeable.

The requirement that a broker keep client money in a segregated client trust account exists to:

• a.Protect clients' money by keeping it separate from the firm's own funds, especially if the firm fails✓
• b.Allow the broker to use client funds freely for proprietary trading
• c.Reduce the amount of stamp duty the client has to pay
• d.Increase the broker's own trading profit and the interest income it can earn by placing the pooled client balances on deposit

Client-money segregation ring-fences investors' cash in designated trust accounts, separate from the firm's own money, so that client funds are protected and cannot be used to meet the firm's liabilities if it becomes insolvent. It is a core client-asset protection rule.

Insurance companies are important participants in the securities market mainly because they:

• a.Compile and publish the market's benchmark equity index
• b.Own, operate and provide the risk management for the central clearing house that settles the whole market's securities trades
• c.Invest large premium reserves in bonds, equities and other assets to meet future policy liabilities✓
• d.Act as the statutory regulator supervising stockbrokers

Insurers collect premiums and must invest these reserves to meet future claims, making them major institutional investors, particularly in bonds and other income assets that match their long-term liabilities. This channels long-term capital into the markets.

The external auditor of a company seeking to list contributes to the IPO process by:

• a.Fixing the final offer price at the close of bookbuilding
• b.Providing continuous market-making quotes after the listing
• c.Examining and reporting on the company's financial statements to give assurance on their reliability✓
• d.Underwriting the whole of the share offer and committing to take up any shares that are left unsubscribed by other investors

The auditor independently examines the issuer's financial statements and reports whether they give a true and fair view, lending credibility to the accounts on which investors rely. This is separate from the sponsor's due-diligence and the underwriter's risk-taking roles.

In the Stock Connect scheme, on the Northbound leg the central counterparty facing Hong Kong investors' trades on the Mainland side is:

• a.Each individual investor, personally settling with the Mainland exchange
• b.The board of directors of HKEX in its corporate capacity
• c.The Securities and Futures Commission acting for investors
• d.China Securities Depository and Clearing (ChinaClear), with HKSCC acting as the nominee holder✓

For Northbound trades, HKSCC connects to ChinaClear, the Mainland's central securities depository and clearing house; HKSCC holds the A-shares as nominee on behalf of Hong Kong and overseas investors. This linkage lets investors trade Mainland shares within familiar Hong Kong arrangements.

A 'discretionary account' managed by a licensed firm means the firm:

• a.May make investment decisions and execute trades within the mandate without seeking approval for each one✓
• b.Is prohibited from charging the client any management fee
• c.Must obtain the client's specific written approval in advance for each and every trade before it may be executed in the account
• d.Only holds the client's cash on deposit without ever investing it

Under a discretionary mandate the client authorises the manager to buy and sell within agreed parameters without confirming each trade in advance. This differs from an advisory or execution-only account, where the client makes the decisions. Discretionary management is Type 9 activity.

A 'sub-underwriter' in an IPO is a party that:

• a.Maintains the issuing company's register of members
• b.Agrees to buy the shares at a guaranteed premium after listing
• c.Takes on part of the underwriting risk passed down by the lead underwriter✓
• d.Is charged with regulating the conduct of the lead underwriter

The lead underwriter often spreads its commitment by sub-underwriting, allocating portions of the take-up obligation to other institutions in return for a share of the fee. This distributes the risk of unsubscribed shares across several parties.

The 'settlement bank' (designated bank) role in CCASS is to:

• a.Approve new companies' applications to list on the Exchange
• b.Effect the money movements between participants for the cash leg of settlement✓
• c.Match buy and sell orders in the Exchange's order-matching system
• d.Provide personal investment advice to retail clients

Designated settlement banks hold participants' money-settlement accounts and move funds between them to settle the cash side of CCASS transactions. They are the banking backbone of settlement, working alongside the stock movements handled by HKSCC.

A 'Non-Clearing Participant' Exchange Participant differs from a clearing participant in that it:

• a.Is not permitted to execute any trades at all on the Exchange, whether for its own account or for the accounts of its clients
• b.Is responsible for regulating and disciplining other brokers
• c.Trades on the Exchange but must settle its trades through a General Clearing Participant✓
• d.Is not required to hold any licence from the SFC to operate

A Non-Clearing Participant can execute trades on SEHK but does not clear directly with HKSCC; instead it appoints a General Clearing Participant to settle on its behalf. This lets brokers focus on execution while outsourcing clearing operations.

The Central Moneymarkets Unit (CMU) operated by the HKMA provides:

• a.Continuous market-making quotes in listed ordinary shares
• b.A retail equity trading platform on which individual investors can place orders to buy and sell listed ordinary shares directly
• c.Clearing, settlement and custody services for debt securities such as bonds and Exchange Fund paper✓
• d.Deposit insurance protecting bank depositors against loss

The CMU is the HKMA-run clearing and custody system for debt securities, handling settlement of bonds, notes and Exchange Fund Bills and Notes. It plays for the debt market a role analogous to what CCASS does for equities.

The legal adviser to the issuer in an IPO is chiefly responsible for:

• a.Setting the company's dividend and distribution policy
• b.Collecting subscription monies from the public applicants
• c.Advising on legal and regulatory compliance and helping prepare the listing documents✓
• d.Acting as a market maker in the newly listed shares and quoting continuous bid and offer prices after the listing

Legal advisers ensure the offering complies with the Listing Rules, company law and securities regulation, and they help draft and verify the prospectus and related agreements. Separate legal teams typically act for the issuer and for the underwriters/sponsor.

HKSCC Nominees Limited appears on many companies' registers as the registered holder because it:

• a.Guarantees the payment of dividends to all shareholders
• b.Acts as the statutory regulator of the listed companies concerned
• c.Beneficially owns the majority of the listed shares in its own right
• d.Holds, as nominee, the shares that are immobilised within CCASS on behalf of participants✓

Shares deposited in CCASS are registered in the name of HKSCC Nominees Limited, which holds them as nominee for clearing and custodian participants (and, through them, beneficial investors). This is why a single nominee often appears as the largest registered holder.

A clearing house such as HKSCC manages the risk of a participant defaulting mainly by:

• a.Refusing to settle any trades until all risk has disappeared
• b.Collecting margin and marks, maintaining a guarantee fund, and novating trades as central counterparty✓
• c.Setting the market price of each listed share every day
• d.Guaranteeing that every investor trading on the market will earn a profit rather than a loss on the trades that it clears and settles

As central counterparty, HKSCC novates trades and protects the system through risk-management tools: collecting margin and marks from participants, maintaining a guarantee (clearing) fund, and imposing admission and financial standards, so one member's default does not cascade.

Which body is responsible for investor education and financial literacy programmes in Hong Kong?

• a.The Hong Kong Futures Exchange, part of the HKEX group
• b.The Investor and Financial Education Council (IFEC)✓
• c.The receiving bank appointed for public share offers
• d.The share registrar maintaining companies' registers

The Investor and Financial Education Council promotes financial literacy and investor education across Hong Kong. It helps the public make informed decisions but is an educational body, not a market operator, regulator or settlement provider.

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 Hang Seng Index (HSI) is calculated using which weighting method?

• a.Daily turnover, so the most actively traded share dominates
• b.Each constituent is given an equal weight regardless of its size
• c.Freefloat-adjusted market capitalisation, subject to a cap on any single constituent's weight✓
• d.Share price, so the highest-priced share has the greatest influence

The HSI is a freefloat-adjusted market-capitalisation-weighted index: each stock's weight reflects the market value of its publicly available shares, with a cap applied to limit single-stock concentration. It is not equal-, price- or volume-weighted.

The Hang Seng China Enterprises Index (HSCEI) principally tracks:

• a.US-listed Chinese ADRs only
• b.Mainland China enterprises (including H-shares) listed on the Hong Kong Stock Exchange✓
• c.Hong Kong government bonds
• d.The 30 largest global technology firms, chosen regardless of where in the world they happen to be listed

The HSCEI (the 'H-share index') measures the performance of Mainland Chinese enterprises listed in Hong Kong, such as H-shares. It is a benchmark for Mainland exposure, distinct from the broad-market HSI.

How often is the constituent list of the Hang Seng Index normally reviewed?

• a.Quarterly✓
• b.Only when a constituent is delisted
• c.Never once the index is set
• d.Once every five years

The HSI constituents are reviewed on a regular quarterly cycle so that the index continues to reflect the largest and most representative stocks. Companies may be added or removed at these reviews based on published selection criteria.

A cap on any single stock's weight within the Hang Seng Index is applied mainly to:

• a.increase the index's day-to-day volatility so that it moves more sharply than the underlying market
• b.match the S&P 500 methodology exactly
• c.guarantee that the index rises over time
• d.prevent one very large company from dominating the index✓

A weighting cap limits the influence of the largest constituents so that the index stays diversified and no single mega-cap dominates its movements. This is a standard feature of capped market-capitalisation indices.

The Stock Exchange of Hong Kong's morning continuous trading session normally runs from:

• a.4:00 p.m. to 6:00 p.m.
• b.9:30 a.m. to 12:00 noon✓
• c.1:00 p.m. to 4:00 p.m.
• d.8:00 a.m. to 9:00 a.m.

Continuous auction trading in the morning runs from 9:30 a.m. to 12:00 noon, following the Pre-opening Session. The afternoon session then runs from 1:00 p.m. to 4:00 p.m.

The SEHK afternoon continuous trading session normally runs from:

• a.4:10 p.m. to 5:00 p.m.
• b.9:00 a.m. to 12:00 noon
• c.1:00 p.m. to 4:00 p.m.✓
• d.12:00 noon to 1:00 p.m.

The afternoon continuous session runs from 1:00 p.m. to 4:00 p.m., after the midday break. The Closing Auction Session then follows to set closing prices.

During the Pre-opening Session, orders entered are:

• a.not accepted at all
• b.executed only for bonds
• c.matched continuously on price-time priority
• d.matched at a single calculated auction price that becomes the opening price✓

The Pre-opening Session is an order-matching auction: orders are accumulated and then executed at one calculated price that maximises the volume matched, establishing the day's opening price. Continuous price-time matching begins only afterwards.

The Closing Auction Session (CAS) on SEHK:

• a.establishes securities' closing prices through an auction✓
• b.sets the next day's opening price only
• c.halts trading for the remainder of the week
• d.is the session during which listed companies pay their declared cash dividends to registered shareholders

The CAS is a single-price auction held after the continuous session to determine official closing prices in an orderly way, reducing the impact of last-second trades. It sets the close, not the next open.

The Volatility Control Mechanism (VCM) on SEHK:

• a.guarantees a minimum share price
• b.applies only to newly listed shares in their first week
• c.triggers a short cooling-off period when a price would move beyond a preset band from a reference price✓
• d.permanently suspends a stock for the rest of the year once triggered

The VCM is a circuit-breaker-style safeguard: if a potential trade would push the price beyond a preset band from a recent reference price, a brief cooling-off period is triggered to curb extreme intraday volatility. Trading is not permanently halted.

While a VCM cooling-off period is in force, trading in the affected security:

• a.may continue but only within the permitted price band✓
• b.stops completely until the next day
• c.may occur at absolutely any price without any limit, exactly as in normal continuous trading
• d.moves automatically to another exchange

During the cooling-off period trading continues but is confined to the permitted price band around the reference price, allowing the market to absorb information without an abrupt price spike. It is not a full halt.

For eligible index-constituent stocks, the VCM is triggered when a potential trade would deviate from the reference price by more than approximately:

• a.1%
• b.50%
• c.0.5%
• d.10%✓

For VCM-eligible stocks, a potential trade deviating more than about 10% from the reference price (the last traded price five minutes earlier) triggers the cooling-off period. The band for major index futures is tighter (about 5%).

A short trading halt in a listed stock is most commonly used to:

• a.reward the company's long-term shareholders by paying them additional special dividends during the halt
• b.increase the stamp duty collected on the stock
• c.allow the market to absorb a pending price-sensitive announcement on an even basis✓
• d.reset the level of the Hang Seng Index

A short halt gives all investors fair, simultaneous access to price-sensitive information (such as results or a major transaction) before trading resumes, protecting market integrity. It is not a reward or a tax mechanism.

Short selling on SEHK is:

• a.allowed only for government bonds
• b.completely prohibited in all circumstances
• c.permitted only in designated securities and must be covered, with naked short selling prohibited✓
• d.permitted in any stock without borrowing the shares

Regulated short selling is allowed only in designated (eligible) securities and must be 'covered' by a stock borrow or equivalent right; 'naked' short selling (selling without any means to deliver) is prohibited.

Under the short-selling 'tick rule' on SEHK, a short-sale order price must not be:

• a.above the day's high
• b.at least 10% below the previous close
• c.below the best current ask price✓
• d.a round number

The tick rule requires a short sale to be entered at or above the best current ask price, preventing short sellers from aggressively driving the price down. It is a key restriction on covered short selling.

'Covered' short selling means the seller:

• a.sells only to institutional investors
• b.expects the price to rise before settlement
• c.has a presently exercisable and unconditional right to vest the securities (e.g. via a stock borrow) before selling✓
• d.has bought insurance against trading losses

A covered short sale is backed by a stock borrow or other presently exercisable right to deliver the shares at settlement. This ensures the seller can meet delivery, in contrast to prohibited naked short selling.

Under Part XV of the Securities and Futures Ordinance, a person becomes a 'substantial shareholder' with a disclosure duty once their interest reaches:

• a.1% of the voting shares
• b.51% of the voting shares
• c.5% of the voting shares✓
• d.30% of the voting shares

The disclosure-of-interests regime treats a holder of 5% or more of a listed company's voting shares as a substantial shareholder who must notify their interest. The 5% level is the key initial threshold.

A substantial shareholder whose interest crosses a notifiable threshold must generally notify the SFC and the Exchange within:

• a.3 business days✓
• b.30 minutes
• c.1 year
• d.6 months

Notifications under the disclosure-of-interests rules must be made within three business days of the relevant event, ensuring the market is kept promptly informed of significant changes in holdings.

Once a person is a substantial shareholder, a further notification is triggered when their percentage interest:

• a.never needs updating again
• b.changes by any tiny fraction of a percent on any day
• c.falls, but not when it rises
• d.changes such that it crosses a whole-number percentage level (for example from 6.9% to 7.1%)✓

After the initial disclosure, a fresh notification is required when the interest, expressed as a rounded-down whole percentage, moves across a whole-number level. Minor sub-percentage moves within the same level are not separately notifiable.

A director of a listed company must disclose their interests in the company's shares:

• a.only after they leave the board
• b.only if the interest exceeds 5%
• c.regardless of the size of the interest✓
• d.only if the interest exceeds HK$1 million in value

Under the disclosure-of-interests regime, directors (and chief executives) must disclose all their interests in the company's shares and debentures, however small, together with any changes. The 5% test applies to substantial shareholders, not directors.

The disclosure-of-interests regime chiefly aims to:

• a.set share prices administratively
• b.keep the market informed of significant and changing holdings in listed companies✓
• c.guarantee dividends to minority shareholders
• d.raise government tax revenue

The regime promotes market transparency by ensuring investors know who holds significant stakes and how those stakes change, which supports fair and informed trading. It is a disclosure tool, not a tax or pricing mechanism.