Hong Kong Financial Regulatory Framework and Market Infrastructure
Paper 7 tests how money actually moves through Hong Kong: who regulates each activity, which venue or clearing house stands behind a trade, and what a licensed person may and may not do. This first domain is the structural layer - the regulators, the statute book and the post-trade plumbing - that every later domain assumes you already know.
The regulators and their statutes
- SFC: the statutory regulator under the Securities and Futures Ordinance (Cap. 571). It licenses intermediaries and representatives, authorises collective investment schemes, administers the prospectus regime in Part XII, runs the inside-information disclosure regime, and oversees the Takeovers Code through the Takeovers Executive.
- HKMA: maintains monetary and banking stability and manages the Exchange Fund. For securities business carried on by banks it is the frontline supervisor of registered institutions; the SFC remains the statutory regulator.
- HKEX: a listed commercial company operating SEHK (cash), HKFE (derivatives), HKSCC (CCASS), HKCC and SEOCH. It is also frontline regulator of listed issuers and exchange participants.
Getting licensed
Twelve regulated activities are listed in Schedule 5 of the SFO. Those that recur in Paper 7 are Type 1 (dealing in securities), Type 2 (dealing in futures), Type 4 (advising on securities), Type 6 (advising on corporate finance) and Type 9 (asset management). A corporate licensee needs at least two approved responsible officers, one of whom must be an executive director.
Trading and settlement mechanics
SEHK runs continuous trading plus a Closing Auction Session; HKFE runs on HKATS. Cash trades settle in CCASS on a T+2 book-entry basis, with HKSCC as central counterparty. Costs stack up: negotiable brokerage, stamp duty, the SFC transaction levy, the AFRC levy and the exchange trading fee.
Worked example. Buy HK$500,000 of a Main Board stock. Stamp duty at 0.1% total (0.05% each side) = HK$500; trading fee 0.00565% = HK$28.25; SFC levy 0.0027% = HK$13.50; AFRC levy 0.00015% = HK$0.75. Statutory and exchange cost ≈ HK$543 before brokerage, so a round trip needs about 0.11% of price gain simply to break even on those items.
Traps
- Assuming the SFC approves listings - listing approval belongs to HKEX.
- Confusing registered institutions (banks) with licensed corporations.
- Treating SFC authorisation of a product as a recommendation on its merits.
- Mixing up the levy rates, or applying stamp duty to derivatives trades.