HKSI Paper 4 key terms

Authorisation granted by the Securities and Futures Commission allowing a firm or individual to carry on a regulated activity in Hong Kong. Different licence types permit different activities, such as dealing in securities, advising on securities, or asset management.

One of the categories of financial business defined in the Securities and Futures Ordinance, such as dealing in securities, advising on futures contracts, or providing automated trading services. Carrying on a regulated activity in Hong Kong generally requires a licence.

Licence category covering asset management, meaning discretionary management of a portfolio of securities or futures contracts for another person. It is the licence most relevant to fund managers operating in Hong Kong.

A senior licensed individual approved by the SFC to supervise a licensed corporation's regulated activities. A firm must have at least two responsible officers, at least one of whom is available at all times.

The assessment the SFC applies to licence applicants and approved persons, covering financial soundness, competence, integrity, and reputation. Failure on any element can result in refusal, suspension, or revocation of a licence.

The two equity markets operated by Hong Kong Exchanges and Clearing. The Main Board serves larger, established issuers, while GEM is a growth market with lighter eligibility thresholds and higher disclosure obligations.

The rulebook issued by Hong Kong Exchanges and Clearing that governs admission to listing, continuing obligations, and disclosure by listed issuers. Breaches can lead to censure, fines, or delisting.

A mutual market access scheme linking Hong Kong with Shanghai and Shenzhen exchanges, letting eligible investors trade eligible shares in each other's markets through local brokers and clearing houses, subject to quotas and eligibility rules.

An approved overseas institution permitted to invest in mainland Chinese securities under a quota-based regime. The scheme has been largely superseded by the Stock Connect channels for many portfolio investors.

A scheme allowing approved offshore institutions to raise renminbi outside the mainland and invest in onshore Chinese securities within an approved quota. It was an early route for offshore renminbi to enter mainland markets.

Specific information about a listed issuer that is not generally known and would, if known, materially affect its share price. Insiders must not deal, and the issuer must disclose promptly once the information is known.

Prohibited conduct under the Securities and Futures Ordinance including insider dealing, false trading, price rigging, disclosure of false or misleading information, and stock market manipulation. The Market Misconduct Tribunal hears civil cases.

A licensed firm appointed by a listing applicant to guide it through the listing process and conduct due diligence on the applicant. Sponsors owe duties to the exchange and investors, not only to the issuer.

The first sale of shares by a company to public investors, accompanied by listing on an exchange. Proceeds typically fund expansion, repay debt, or provide exits for existing shareholders.

The process of gathering indications of interest from institutional investors to set an offer price and allocate shares in a new issue. It helps the issuer gauge demand before pricing.

An investor who commits before listing to subscribe for a fixed amount of shares at the final offer price, in exchange for guaranteed allocation and usually a lock-up period. Their participation signals confidence to other investors.

An over-allotment option letting the underwriter sell up to a set percentage more shares than originally offered, usually to stabilise the price after listing. It is typically exercisable for about 30 days.

An offer of new shares to existing shareholders in proportion to their holdings, usually at a discount. Shareholders who decline see their stake diluted unless they sell their rights.

A sale of new or existing shares to a selected group of investors rather than to the public or existing holders. It is faster than a rights issue but may dilute existing shareholders.

A shareholder's entitlement to subscribe for new shares before they are offered to outsiders, protecting against dilution. Listed companies in Hong Kong generally need specific authority or a waiver to disapply it.

The investigation a sponsor, underwriter, or adviser conducts into a company's business, finances, legal status, and management before a transaction. Its depth and documentation are central to professional standards.

A collective investment scheme authorised for retail sale in Hong Kong by the SFC under the SFC Handbook. Authorisation involves requirements on structure, disclosure, and the suitability of the manager.

A collective investment scheme in which investors buy units in a trust; the trustee holds assets and the manager runs the portfolio. Common structures include mutual funds and umbrella funds with sub-funds.

The value of a fund's assets minus its liabilities, divided by the number of units to give a per-unit price. It is typically calculated at least daily for retail funds.

The processes by which investors buy into or exit a fund at the prevailing net asset value, sometimes adjusted by fees. Dealing frequency and cut-off times are set out in the fund's offering document.

A recurring charge deducted from fund assets, usually expressed as an annual percentage of net asset value, to pay the investment manager. It is separate from initial charges and performance fees.

An incentive charge paid to the manager when returns exceed a benchmark or high-water mark. Poorly designed structures can encourage excessive risk-taking, so disclosure and calculation method matter to investors.

A fund whose units trade on an exchange throughout the day, usually tracking an index. Creation and redemption by authorised participants keep the market price close to net asset value.

A financial contract whose value depends on an underlying asset, rate, index, or event. Common forms include futures, options, swaps, and forwards, used for hedging or speculation.

A standardised agreement to buy or sell an underlying at a set price on a future date, traded on an exchange and settled through a clearing house. Daily margining manages counterparty risk.

The price a buyer pays for an option, reflecting intrinsic value and time value. The seller receives the premium and bears the obligation if the buyer exercises.

The market's expectation of future price swings in an underlying, derived from option prices. Higher implied volatility generally makes options more expensive because outcomes are less certain.

A demand for additional collateral when a leveraged or derivative position moves against the holder. Failing to meet it can trigger forced liquidation and crystallise losses.

An entity that interposes itself between trade counterparties, guaranteeing performance and managing default through margining and a default fund. It reduces systemic risk in derivatives and securities markets.

An investment combining a derivative with a deposit or note to produce tailored payoffs, often with capital protection or enhanced yield. Complexity, issuer credit risk, and early termination features are key risks.

The requirement to ensure a recommendation or solicitation is reasonably suitable for the client given their financial situation, investment experience, and objectives. It applies even where the client initiates the discussion.

The process of collecting and verifying information about a client's identity, finances, objectives, and risk tolerance before providing services. It underpins suitability, anti-money-laundering checks, and ongoing relationship management.

Assessing a client's willingness and ability to bear loss, often through a questionnaire and discussion. The resulting profile guides asset allocation and product recommendations and should be reviewed periodically.

A client category, such as an institution or high-net-worth individual meeting defined thresholds, to whom reduced protections and disclosure requirements may apply. Firms must still assess suitability and document consent.