HKSI LE Paper 15 cheat sheet

HKEX is the holding company that owns and operates SEHK (cash/equities), HKFE (futures and options), the SEHK Options Clearing House and HKCC (clearing houses), plus London Metal Exchange.

SEHK operates the trading system; HKFE operates the derivatives platform. Both are recognised exchanges under the SFO, while clearing houses are recognised clearing houses.

Market segments: Main Board (profit/turnover/market-cap tests), GEM (growth companies, lower thresholds), and the Stock Connect northbound/southbound links with Shanghai and Shenzhen.

Trading hours: pre-opening auction session, continuous trading (morning and afternoon), and closing auction session for eligible securities; derivatives have their own session and after-hours futures trading.

Short selling is permitted only for designated securities on the SEHK list, must be covered (no naked short selling), and is subject to tick rule and uptick restrictions.

Volatility control mechanism applies to specified instruments in continuous trading, triggering a cooling-off period when price deviates from the last traded price by a prescribed percentage.

Investor participants access the market through SEHK exchange participants (brokers) or HKFE exchange participants; each category has separate admission and capital requirements.

SFC is the statutory front-line regulator under the Securities and Futures Ordinance (SFO); it licenses intermediaries, approves listing applications, investigates misconduct and enforces the SFO.

SEHK Listing Division administers the Listing Rules; the Listing Committee decides listing applications and disciplinary matters, while the SFC may object to a listing or require suspension.

HKMA supervises banks and, through the Securities and Futures Department, registers banks to conduct regulated activities; registered institutions are governed by HKMA conduct rules aligned with SFC codes.

Insurance Authority regulates insurance intermediaries (including long-term investment-linked products); the Mandatory Provident Fund Schemes Authority regulates MPF intermediaries.

SFC and HKMA operate a dual filing regime for listing applications, and the SFC's Takeovers and Mergers Panel and Executive administer the Codes on Takeovers and Mergers and Share Buy-backs.

Regulated activities (Types 1-13) require licences or registration; Type 1 dealing, Type 2 advising, Type 4 securities advice, Type 9 asset management are core examples.

Cross-border cooperation is governed by IOSCO MMoU and bilateral MOUs; SFC can share information and assist overseas regulators in investigations.

Main Board financial tests: profit test (recent profit thresholds), market-cap/revenue/cash-flow test, and market-cap/revenue test; GEM has lower thresholds and a two-year trading record requirement.

Sponsors must be appointed at least two months before the listing application; the sponsor's due diligence and the listing document are subject to SFC dual filing.

Connected transactions require independent shareholders' approval unless an exemption applies; continuing connected transactions have annual caps and reporting/independent shareholder approval thresholds.

Notifiable transactions are classified by percentage ratios (assets, profits, revenue, consideration, equity capital) into discloseable, major and very substantial acquisition/disposal categories.

Share buy-backs on SEHK must comply with the Codes on Share Buy-backs, the general mandate (max 10% of issued shares) and price restrictions; bought-back shares are cancelled.

Rights issues, open offers, placings and preferential offerings are governed by the Listing Rules and the Corporate Finance Adviser regime; the general mandate limits new issue without specific mandate to 20% of issued shares.

Corporate actions affecting price: dividends, bonus issues, rights issues, share splits/consolidations and capital reorganisations each trigger adjustment of derivatives contracts and reference prices.

Equity securities: ordinary shares carry voting rights and residual claim; preference shares rank ahead for dividends and winding-up but usually lack voting rights.

Debt securities: bonds have issuer credit risk, interest rate risk and liquidity risk; credit ratings from agencies are not guarantees; retail bonds must comply with prospectus and SFC authorisation rules.

SFC-authorised collective investment schemes (including SFC-authorised funds) must meet the SFC Code on Unit Trusts and Mutual Funds; authorisation is not a recommendation or guarantee of performance.

Fund structures: unit trusts, mutual funds, SICAVs and exchange-traded funds; ETFs tracking indices may be authorised or listed, and leveraged/inverse products carry specific risk disclosure requirements.

Real estate investment trusts listed on SEHK must distribute at least 90% of net income and hold primarily income-producing real estate; gearing is capped.

Securities offering exemptions include professional investor offers (PI exemption), offers to not more than 50 persons, and minimum denomination of HK$500,000 (or equivalent).

Collective investment schemes sold to the public require SFC authorisation; unauthorised funds may only be marketed under exemptions, and cold-calling restrictions apply.

Futures: standardised exchange-traded contracts with daily mark-to-market, margin calls and central clearing; forwards are OTC and carry counterparty credit risk.

Options: buyer pays premium and has a right, seller has an obligation; call/put, American/European exercise, intrinsic value plus time value determine premium.

Hang Seng Index futures and options, H-shares Index futures, stock futures and stock options are HKFE products; contract multipliers and margin requirements are set by HKCC/SEOCH.

Swaps: interest rate swaps exchange fixed for floating payments; currency swaps exchange principal and interest in different currencies; credit default swaps transfer credit risk.

Structured products (equity-linked notes, derivative warrants, callable bull/bear contracts) combine a derivative with a debt or deposit instrument; CBBCs have mandatory call features and residual value risk.

Derivative warrants are issued by third parties and listed on SEHK; they have an expiry date, exercise price and conversion ratio, and are subject to liquidity provider obligations.

Client suitability and risk disclosure: complex products require suitability assessment, and derivative sales must comply with the SFC's conduct rules on know-your-client and product due diligence.

Type 9 regulated activity covers asset management of securities and futures contracts; discretionary management requires a licence and compliance with the Fund Manager Code of Conduct.

Portfolio theory: diversification reduces unsystematic risk; systematic (market) risk remains; beta measures sensitivity to the market, standard deviation measures total risk.

Performance measurement: time-weighted return removes cash-flow effects; money-weighted return reflects investor timing; Sharpe ratio = (portfolio return - risk-free rate) / standard deviation.

Asset allocation: strategic allocation sets long-term weights, tactical allocation adjusts for short-term views; rebalancing restores target weights.

Advisory services (Type 4 for securities, Type 5 for futures) require suitability assessment, risk profiling and documentation of the rationale for recommendations.

Fund managers must manage conflicts of interest, disclose fees and soft-dollar arrangements, and comply with the SFC Code of Conduct on best execution and client asset protection.

Client assets must be segregated and held in client accounts; the Investor Compensation Fund covers defaults by licensed intermediaries up to a statutory limit per investor.

SFC Code of Conduct general principles: honesty and fairness, diligence, competence, information about clients, information for clients, conflicts of interest, compliance and market integrity.

Know-your-client (KYC) requires collecting identity, financial situation, investment experience, investment objectives and risk tolerance before recommending or executing products.

Suitability: recommendations must reasonably suit the client's circumstances; complex products require a suitability assessment and, where applicable, a cooling-off period.

Client agreements, risk disclosure statements and order documentation must be provided; discretionary accounts require written authorisation and periodic reporting.

Conflicts of interest must be avoided, disclosed or managed; inducements and soft dollars must not impair independence; personal account dealing is restricted.

Market misconduct under the SFO includes insider dealing, false trading, price rigging, disclosure of false or misleading information and market manipulation; the Market Misconduct Tribunal hears civil cases.

Complaints handling and record keeping: records must be retained for at least seven years for client identity and transaction records, and complaints must be investigated and reported.

Hong Kong AML/CTF framework: AMLO, Drug Trafficking (Recovery of Proceeds) Ordinance, Organized and Serious Crimes Ordinance, United Nations (Anti-Terrorism Measures) Ordinance and the SFC AML/CFT Guideline.

Risk-based approach: firms must conduct institutional risk assessment, customer risk assessment and ongoing monitoring proportionate to risk.

Customer due diligence (CDD): identify and verify the customer, beneficial owner and any person acting on behalf; for legal persons, identify ownership and control structure.

Enhanced due diligence (EDD) applies to politically exposed persons (PEPs), high-risk jurisdictions, correspondent relationships and complex ownership structures; senior management approval is required.

Simplified due diligence may apply only to low-risk situations after risk assessment; it does not remove the obligation to identify and verify the customer.

Suspicious transaction reports (STRs) are filed with the Joint Financial Intelligence Unit (JFIU); tipping-off the customer is a criminal offence.

Record keeping: CDD and transaction records must be kept for at least five years after the end of the business relationship or the transaction; staff training and independent compliance review are required.