HKSI Paper 4 cheat sheet

The SFC is the statutory regulator of Hong Kong's securities and futures markets; the HKMA regulates banking business and oversees banks' securities activities under delegated arrangements with the SFC.

The Securities and Futures Ordinance (Cap. 571) creates the licensing regime, the SFC's investigation and disciplinary powers, and the offences of market misconduct (insider dealing, false trading, price rigging, disclosure of false or misleading information).

Ten regulated activity types (Type 1 dealing in securities, Type 2 dealing in futures contracts, Type 3 leveraged foreign exchange, Type 4 advising on securities, Type 5 advising on futures, Type 6 advising on corporate finance, Type 7 providing automated trading services, Type 8 securities margin financing, Type 9 asset management, Type 13 depositary of SFC-authorised collective investment schemes) each require a licence or registration.

Licensing tests: corporate applicants need adequate financial resources, competence, a fit and proper management team, and at least two Responsible Officers; individual licensees must meet the fit and proper test and competency requirements (academic/industry qualification, industry experience, management experience, continuous professional training).

An SFC licensee must notify the SFC of specified events (e.g. changes in directors, substantial shareholders, Responsible Officers, commencement or cessation of a regulated activity business) within prescribed timeframes; failure is a disciplinary matter.

The Main Board of the Stock Exchange of Hong Kong is operated by HKEX; listing rules are administered by the Listing Division with the Listing Committee deciding applications, while the SFC may object to a listing application or require suspension.

Market misconduct proceedings can be brought before the Market Misconduct Tribunal (civil, on the SFC's application) and/or prosecuted criminally in court; the MMT can impose disqualification orders, cold shoulder orders, cease-and-desist orders and fines.

The SFC's Guidelines on Online Distribution and Advisory Platforms and the suitability requirements apply to robo-advice; automated services must have human oversight and adequate controls.

Investor compensation: the Investor Compensation Fund covers losses from default of a licensed intermediary in respect of exchange-traded products in Hong Kong, subject to a per-investor cap (currently HK$500,000 per investor across all claims).

Listing eligibility (Main Board) includes a minimum trading record period of three financial years, management continuity for the most recent three years, ownership continuity for the most recent year, and one of three financial tests: profit test (aggregate profit of at least HK$75 million in the most recent two years, with at least HK$35 million in the most recent year), market cap/revenue/cash flow test, or market cap/revenue test.

New applicants must have a sufficient management presence in Hong Kong, at least two executive directors ordinarily resident in Hong Kong, and a minimum public float of 25% of issued shares (with a lower 15% for issuers with an expected market capitalisation above HK$10 billion at listing).

A placing to connected persons or a placing that increases the number of placees beyond 10 requires independent placees; a placing of securities for cash by a listed issuer generally requires a specific mandate unless done under a general mandate.

The general mandate allows an issue of new shares up to 20% of the issuer's issued share capital as at the date of the shareholders' resolution; a refresh of the mandate requires a further shareholders' resolution and a placing under the mandate must be priced at a discount of no more than 20% to the benchmarked price (unless a specific mandate is obtained).

Rights issues: the issuer must offer the securities to existing shareholders pro rata; a rights issue requires a prospectus unless an exemption applies; the subscription price and the underwriting arrangements must be disclosed; controlling shareholders may be required to provide an irrevocable undertaking.

Connected transactions: a transaction between a listed issuer and a connected person (director, chief executive, substantial shareholder, or their associates) requires independent shareholders' approval and a circular if the percentage ratios exceed the de minimis thresholds (generally 5% for continuing connected transactions, with annual review and cap requirements).

Notifiable transactions are classified by percentage ratios (assets, profits, revenue, consideration, equity capital); a very substantial acquisition (ratio of 100% or more) requires shareholders' approval and a circular, and a major transaction (25% or more but less than 100%) requires shareholders' approval.

A prospectus must be registered with the Registrar of Companies and authorised by the SFC; it must contain the information necessary for an investor to make an informed assessment, including risk factors, business, financial information, directors' interests and use of proceeds.

A share repurchase by a listed issuer requires a general mandate from shareholders and must comply with the buy-back rules (price limits, timing restrictions, disclosure); repurchased shares must be cancelled.

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

The UT Code requires a scheme to have a trustee/custodian independent of the manager, an investment manager with adequate resources and experience, and a minimum initial size and ongoing net asset value (generally HK$100 million initial and HK$50 million ongoing for a general scheme).

A fund's offering document must disclose investment objective and policy, risks, fees and charges, valuation and pricing, and redemption mechanics; a Key Facts Statement (KFS) summarises key features for retail investors.

Fund pricing: the net asset value per unit = (total assets − total liabilities) / number of units outstanding; forward pricing uses the NAV calculated at the next valuation point after receipt of a valid application.

The SFC's Fund Manager Code of Conduct requires a fund manager to act in the best interests of the fund, manage conflicts of interest, ensure fair allocation of investment opportunities, and maintain proper custody and valuation arrangements.

Type 9 (asset management) licence holders managing a portfolio of securities or futures contracts for another person require a licence; discretionary management of a client's portfolio is a Type 9 activity, while merely giving advice is Type 4 or Type 5.

The SFC's Guidelines on Disclosure of Information on Funds and the Over-the-Counter Derivatives regime impose reporting and disclosure obligations on fund managers, including periodic reporting of the fund's portfolio and risk profile.

MPF schemes are regulated by the Mandatory Provident Fund Schemes Authority (MPFA) under the MPF Schemes Ordinance; approved trustees, custodians and investment managers are subject to MPFA approval and ongoing supervision, and the SFC's UT Code does not apply to MPF schemes.

Hedge funds and private funds are generally not SFC-authorised and may only be offered to professional investors (as defined in the SFO and the Securities and Futures (Professional Investor) Rules), subject to the professional investor exemption.

A derivative is a financial instrument whose value depends on an underlying asset, index, rate or event; common types include futures, forwards, options and swaps.

Futures contracts are exchange-traded, standardised and cleared through a central clearing house; forwards are OTC, customised and carry counterparty credit risk.

Options: a call gives the buyer the right (not obligation) to buy the underlying at the strike price; a put gives the right to sell; the buyer pays a premium and the seller (writer) bears the obligation and receives the premium.

Payoff formulas: long call payoff at expiry = max(S − K, 0) − premium; long put payoff = max(K − S, 0) − premium; short call payoff = premium − max(S − K, 0); short put payoff = premium − max(K − S, 0).

Put-call parity (European options, no dividends): C + K/(1+r)^T = P + S; a violation allows arbitrage.

The Black-Scholes model prices European options using the underlying price, strike, time to expiry, risk-free rate, volatility and dividends; the model assumes lognormal returns, no arbitrage, continuous trading and constant volatility.

Delta measures the change in option price for a one-unit change in the underlying; gamma measures the change in delta; theta measures time decay; vega measures sensitivity to volatility; rho measures sensitivity to interest rates.

Structured products: a typical equity-linked note combines a bond with an embedded derivative (e.g. a short put) to produce a coupon; the investor bears downside risk if the underlying falls below the strike.

The SFC's Code on Unlisted Structured Investment Products and the Over-the-Counter Derivatives regime require disclosure of the product's nature, risks, and the issuer's credit risk; retail structured products must be authorised or fall within an exemption.

A derivative warrant gives the holder the right to buy (call warrant) or sell (put warrant) the underlying at a specified price; issuers must be licensed and comply with the HKEX listing rules for structured products.

The suitability obligation requires a licensed intermediary to ensure that a recommendation or solicitation is suitable for the client in light of the client's financial situation, investment experience and investment objectives; the intermediary must assess the client's risk tolerance and knowledge.

Know-your-client (KYC) and customer due diligence (CDD) requirements under the AMLO and the SFC's anti-money laundering guidelines require identification and verification of the client's identity, beneficial ownership, and the source of funds and wealth.

The SFC's Code of Conduct for Persons Licensed by or Registered with the SFC sets out general principles: honesty and fairness, diligence, capability, information about clients, information for clients, conflicts of interest, compliance, client assets, and marketing.

Client assets must be held in segregated accounts with a licensed custodian or in a client account with a bank; the intermediary must maintain proper records and reconcile client assets regularly.

Conflicts of interest must be avoided or managed; the intermediary must disclose the nature and extent of any conflict and must not put its own interests ahead of the client's.

Marketing materials must be accurate, fair and not misleading; they must not contain false or misleading statements, and must disclose the risks of the product and the intermediary's role.

Record-keeping: the SFC requires licensees to keep records of client orders, transactions, and communications for at least seven years; records must be readily accessible and retrievable.

Complaints handling: licensees must have a written complaints policy, acknowledge complaints promptly and provide a substantive response within a reasonable time; unresolved complaints may be referred to the Financial Dispute Resolution Centre (FDRC) or the SFC.

Professional investor classification: a professional investor is an institutional investor or an individual with a portfolio of at least HK$8 million (or its equivalent) and who has provided the required written consent; the intermediary must assess the investor's knowledge and experience.