HKSI Licensing Examination Paper 8 (Securities) — All Questions

Orders entered into the Stock Exchange of Hong Kong's automatic order-matching system are generally executed on the basis of:

• a.The largest order first, regardless of price
• b.The broker offering the highest commission first
• c.Price and then time priority✓
• d.Random allocation among all orders

The Exchange's automatic order-matching and execution system matches orders on a price-then-time priority basis: better-priced orders execute first, and among equally priced orders the earliest entered is filled first.

Which of the following is a government-imposed cost on a typical Hong Kong share transaction?

• a.The broker's commission
• b.Stamp duty on the transfer of shares✓
• c.The custodian's safekeeping fee
• d.The fund manager's performance fee

Stamp duty is a government levy charged on transfers of Hong Kong stock. Brokerage commission, custody fees and management fees are charged by market participants; the SEHK and SFC also levy small trading and transaction fees.

A brokerage's requirement that the staff who execute trades are kept separate from those who settle and record them is an example of:

• a.A marketing strategy intended to reassure clients that their orders are handled by separate teams
• b.A tax-avoidance technique
• c.Segregation of duties, an internal control to reduce error and fraud✓
• d.A breach of the Code of Conduct

Segregation of duties separates incompatible functions (dealing, settlement, record-keeping) so no single person controls a whole transaction, reducing the risk of error and fraud. It is a core internal-control principle in a firm's operations.

Most HK-listed shares today are held and transferred:

• a.By the SFC on investors' behalf, which holds all listed shares centrally in a single government register
• b.Only as physical paper certificates delivered by hand
• c.In book-entry (electronic) form within CCASS rather than by moving paper certificates✓
• d.Exclusively through overseas custodians

Modern settlement is largely dematerialised: securities are immobilised in CCASS and transferred by electronic book entry, which is faster and safer than physically delivering paper certificates.

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.

A cash dividend is:

• a.a tax paid by the company to the government
• b.a distribution of a company's profits to its shareholders✓
• c.a reduction in the number of shares in issue
• d.a loan from shareholders to the company

A cash dividend is a payment of part of a company's distributable profits to shareholders as a return on their investment. It is declared by the company and normally paid out of accumulated profits or reserves.

An investor who buys a share on or after its ex-dividend date:

• a.must pay the dividend to the seller
• b.receives double the declared dividend as compensation for having bought after the cut-off date
• c.is always entitled to the recently declared dividend
• d.is not entitled to the recently declared dividend, which goes to the seller✓

On and after the ex-dividend date, the share trades without the right to the declared dividend, so the buyer does not receive it; the entitlement remains with the seller who held the share cum-dividend. This is why the price typically drops on the ex-date.

On the ex-dividend date, all else being equal, a share's price would be expected to:

• a.rise by twice the dividend
• b.fall by approximately the amount of the dividend✓
• c.double
• d.be completely unaffected

Because a buyer on the ex-date no longer receives the declared dividend, the theoretical price adjusts downward by roughly the dividend amount. The dividend value effectively leaves the share price on the ex-dividend date.

The record date of a dividend is the date on which:

• a.the share is automatically delisted
• b.trading in the share is suspended for a month
• c.the shareholder is required to reinvest the whole of the dividend into newly issued shares of the company
• d.the company checks its register to determine who is entitled to the dividend✓

On the record date the company examines its register of members to identify the shareholders entitled to the declared dividend. It follows the ex-dividend date under the standard settlement cycle.

A company whose shares trade at HK$12 makes a one-for-two bonus issue (one new share for every two held). All else equal, the theoretical ex-bonus price is:

• a.HK$8✓
• b.HK$12
• c.HK$6
• d.HK$18

A holder of two shares worth 2 x HK$12 = HK$24 receives one free share, giving three shares in total. The value is unchanged, so the theoretical price is HK$24 / 3 = HK$8. A bonus issue raises no new cash; it merely subdivides existing value.

A bonus (scrip) issue:

• a.capitalises reserves into new shares given free to shareholders, raising no new cash✓
• b.raises new cash for the company
• c.is a repayment of the company's debt
• d.reduces the number of shares in issue

A bonus issue converts distributable reserves into share capital and allots the resulting new shares free to existing shareholders. It increases the share count and lowers the price proportionally but brings in no new money.

Shares currently trade at HK$10 cum-rights. The company announces a one-for-four rights issue at a subscription price of HK$8. The theoretical ex-rights price (TERP) is:

• a.HK$10.00
• b.HK$9.60✓
• c.HK$9.00
• d.HK$8.00

TERP = (existing shares x price + new shares x subscription) / total shares = (4 x HK$10 + 1 x HK$8) / 5 = HK$48 / 5 = HK$9.60. The TERP is the weighted-average price of old and new shares after the rights issue.

A rights issue:

• a.offers existing shareholders new shares pro rata, usually at a discount, to raise fresh capital✓
• b.gives newly created shares away free to the general investing public rather than to existing holders
• c.reduces the company's share capital
• d.is a form of dividend paid in cash

A rights issue raises new capital by inviting existing shareholders to buy additional shares in proportion to their holdings, typically at a discount to the market price. Unlike a bonus issue, it brings new cash into the company.

A company splits its HK$60 shares two-for-one (each share becomes two). The theoretical post-split price is:

• a.HK$30✓
• b.HK$60
• c.HK$15
• d.HK$120

In a two-for-one split each share is divided into two, doubling the share count while total value is unchanged, so the price halves: HK$60 / 2 = HK$30. A split improves marketability without altering total value.

A stock split:

• a.materially changes total shareholder value
• b.raises new capital for the company
• c.increases the share count and lowers the price proportionally, leaving total value unchanged✓
• d.increases the company's total market value because the larger number of shares is worth more in aggregate

A stock split subdivides existing shares into more shares at a proportionally lower price. It changes neither the company's total market capitalisation nor a holder's total value; it only affects the number and price of shares.

A scrip dividend allows a shareholder to:

• a.elect to receive new shares instead of a cash dividend✓
• b.receive a guaranteed capital gain
• c.sell their shares back to the company at par
• d.avoid all taxes on the investment

A scrip dividend gives shareholders the option to take new shares in lieu of cash. It lets the company conserve cash while offering investors a way to increase their holding without a market purchase.

A share consolidation (reverse split) of five-into-one will, all else equal:

• a.raise new capital for the company
• b.double the number of shares in issue
• c.reduce the share count and raise the price per share proportionally✓
• d.pay a cash dividend to shareholders

A consolidation combines several shares into one, reducing the number of shares and raising the price per share in proportion (a five-into-one consolidation multiplies the price by five). Total value is unchanged; it is the opposite of a split.

Shares trade at HK$18. The company announces a one-for-five rights issue at a subscription price of HK$12. The theoretical ex-rights price (TERP) is:

• a.HK$15
• b.HK$12
• c.HK$18
• d.HK$17✓

TERP = (5 x HK$18 + 1 x HK$12) / 6 = (HK$90 + HK$12) / 6 = HK$102 / 6 = HK$17. The TERP blends the five existing shares at HK$18 with the one new share at HK$12.

A share trading 'cum-dividend' means the buyer:

• a.must pay extra stamp duty
• b.is entitled to the forthcoming declared dividend✓
• c.forgoes the declared dividend
• d.cannot resell the share until it is paid

'Cum-dividend' (with dividend) means the buyer acquires the right to the next declared dividend. Once the share goes ex-dividend, that entitlement is stripped out and the price adjusts down accordingly.

Ad valorem stamp duty on a Hong Kong share transaction is charged:

• a.on the buyer only
• b.on the seller only
• c.on both the buyer and the seller✓
• d.by the broker as part of its commission

Stamp duty on Hong Kong stock is an ad valorem government levy payable by each side of the transaction, so both the buyer and the seller are charged. It is separate from brokerage commission and exchange fees.

Exchange trades in Hong Kong shares are cleared and settled in CCASS on a cycle of:

• a.T+10
• b.same day (T+0) with paper certificates
• c.T+30
• d.T+2✓

The standard settlement cycle for SEHK-traded shares is T+2, meaning transactions settle two business days after the trade date, largely by electronic book entry within CCASS.

A 'board lot' is:

• a.a type of stock-market index
• b.the standard trading unit in which a stock is normally quoted and traded✓
• c.the maximum number of shares one investor may own
• d.a government tax on large trades

A board lot is the standard quantity of shares in which a stock is ordinarily bought and sold on the Exchange. Different stocks have different board-lot sizes set by the issuer.

Shares held or traded in a quantity smaller than one board lot are known as:

• a.a block trade
• b.a short position
• c.a rights issue
• d.an odd lot✓

An odd lot is a holding smaller than one board lot, which typically trades in a separate odd-lot market and may attract a less favourable price. It commonly arises after bonus issues or consolidations.

A limit order instructs the broker to trade:

• a.only at the closing auction
• b.at any price available immediately
• c.at a specified price or better✓
• d.only after the next dividend is paid

A limit order sets a maximum price to pay (for a buy) or a minimum price to accept (for a sell); it executes only at that limit or a better price. It controls price but does not guarantee execution.

Compared with a limit order, a market (at-best) order:

• a.seeks immediate execution at the best available price, without a price guarantee✓
• b.guarantees a specific execution price
• c.can only be placed by institutional investors
• d.can never actually be executed under any market conditions, however urgent the client's instruction

A market or at-best order prioritises speed of execution over price certainty: it fills against the best available prices in the market, so the trade completes quickly but the exact price is not guaranteed.

On SEHK, the minimum tick (the smallest permitted spread between quoted prices):

• a.varies according to the price band of the security✓
• b.is set daily by each individual broker
• c.is a flat HK$1 for all stocks
• d.does not exist

The minimum spread (tick size) is set by a tiered schedule that depends on the price of the security: lower-priced shares have smaller ticks and higher-priced shares larger ticks. It standardises the increments at which prices can change.

When shares are held in CCASS through a broker's account, the investor typically holds them:

• a.beneficially, with the shares registered via HKSCC Nominees✓
• b.as physical paper share certificates that are locked away for safekeeping in the investor's own bank vault
• c.directly on the issuer's register in their own name
• d.on deposit with the SFC

Shares immobilised in CCASS are usually registered in the name of HKSCC Nominees, while the investor holds a beneficial interest through their broker or custodian. This book-entry arrangement replaces the physical movement of certificates.

A prolonged suspension of trading in a listed company's shares would most likely arise because:

• a.an ordinary dividend was paid
• b.the market closed for the midday break
• c.the share price rose by 1%
• d.there is undisclosed price-sensitive information or a major corporate event pending✓

A long suspension is used to preserve a fair and orderly market when there is material information not yet disclosed, a major transaction, or an issue over the company's ability to meet listing requirements. Routine events do not warrant suspension.

Holders of significant short positions in specified shares must report them:

• a.only to the issuer of the shares
• b.never, as short positions are private
• c.to the SFC on a weekly basis once the position exceeds the reporting threshold✓
• d.to the public daily on television

The short-position reporting regime requires holders of reportable short positions in specified shares to report to the SFC weekly, giving the regulator visibility of large short exposures. This is separate from the tick and covered-short rules.

The main function of CCASS is to:

• a.set Hong Kong interest rates
• b.publish independent equity research
• c.regulate the day-to-day conduct and disclosure obligations of every company listed on the Exchange
• d.clear and settle securities transactions by electronic book entry✓

The Central Clearing and Settlement System (CCASS), operated by HKSCC, is the market infrastructure that clears and settles exchange trades through electronic book entry, largely eliminating the need to move paper certificates.

A company may generally pay a cash dividend only out of:

• a.borrowed money it must repay to shareholders
• b.distributable profits or reserves✓
• c.its share capital paid directly to holders
• d.the stamp duty it has collected

Dividends are normally payable only out of a company's distributable profits or reserves, protecting creditors by preventing an unlawful return of capital. Paying dividends out of capital is generally not permitted.