Type 1 Securities Sales Representative Examination cheat sheet

In Hong Kong, the Securities and Futures Ordinance (SFO) is the primary statute; the SFC is the statutory regulator and the HKMA supervises registered institutions (banks) for securities activities.

Ten regulated activities (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 automated trading services, Type 8 securities margin financing, Type 9 asset management, Type 10 credit rating) each require a licence or registration.

A licensed corporation needs a licence for every regulated activity it performs; a person acts as a representative only if licensed for that activity and accredited to a licensed corporation.

Fit-and-proper criteria: financial soundness, competence (industry experience plus a recognised qualification such as HKSI Licensing Examination papers), no material adverse regulatory or criminal record, and no disqualification order.

Licensing Examination structure for Type 1: Paper 1 (Fundamentals of Securities and Futures Regulation) plus Paper 6 or the relevant regulated-activity paper; Paper 18 covers asset management.

Substantial shareholders (10% or more of voting power) and directors require SFC approval; a change of 10% or more shareholding must be notified.

The Manager-In-Charge regime requires licensed corporations to designate individuals responsible for eight core functions (e.g., overall management, risk management, compliance, AML/CFT) and notify the SFC.

SFC disciplinary powers include public/private reprimand, revocation or suspension of licence, fine up to HK$10 million or three times profit gained or loss avoided (whichever is greater), and prohibition orders.

IPO process in Hong Kong: listing application to HKEX, vetting by the Listing Division and Listing Committee, prospectus registration with the Registrar of Companies, then public offer and listing.

Main Board financial tests (one must be met): profit test (HK$35m aggregate over 3 years with HK$4.5m in the most recent year), market cap/revenue test (HK$500m market cap and HK$500m revenue for the most recent year), or market cap/revenue/cash flow test (HK$2bn market cap, HK$500m revenue, HK$100m cash flow over 3 years).

GEM profit test: HK$25m aggregate over two years with HK$10m in the most recent year; GEM market cap/revenue test: HK$250m market cap and HK$100m revenue.

Public float: at least 25% of issued shares must be in public hands; a lower 15% may apply for issuers with market cap over HK$10bn at listing.

Sponsor must be appointed at least two months before the listing application; a sponsor's due diligence must be completed before the prospectus is issued.

Book-building and placing mechanics: cornerstone investors are subject to a six-month lock-up; clawback and reallocation mechanisms apply when the public offer is heavily oversubscribed.

Rights issue: pre-emptive offer to existing shareholders, usually priced at a discount; open offer is similar but open to all shareholders and may not be underwritten.

Placing, rights issue, open offer and consideration issue are the main equity fund-raising routes; a connected transaction or very substantial acquisition triggers independent shareholder approval and circular requirements.

Bond price and yield move inversely; for a given change in yield, price sensitivity is measured by duration, and convexity captures the curvature of that relationship.

Macaulay duration is the weighted average time to cash flows; modified duration = Macaulay duration / (1 + y/n), where y is yield and n is coupon frequency per year.

Price change approximation: %ΔP ≈ −modified duration × Δy + ½ × convexity × (Δy)².

Yield measures: current yield = annual coupon / clean price; yield to maturity assumes reinvestment of coupons at the YTM; yield to call applies where the issuer can redeem early.

Clean price excludes accrued interest; dirty price = clean price + accrued interest; accrued interest = coupon × days since last coupon / days in coupon period.

Credit ratings (AAA to D) reflect default probability and loss given default; investment grade is BBB−/Baa3 and above; below that is high yield or speculative grade.

Bond structures include fixed rate, floating rate (referencing HIBOR or SOFR), zero-coupon, callable, puttable, convertible and perpetual; each alters cash-flow timing and risk.

In Hong Kong, retail offerings of debt securities require SFC authorisation under the SFO unless an exemption applies; professional investor exemptions are set out in the Securities and Futures (Professional Investor) Rules.

Futures contract: standardised, exchange-traded, cleared through a central counterparty, marked to market daily with margin; forward is OTC, customised and carries counterparty risk.

Options: call gives the right to buy, put the right to sell; buyer pays premium and has limited loss; writer receives premium and bears potentially unlimited loss (naked call).

Put-call parity: C − P = S − K × e^(−rT) for European options on a non-dividend-paying stock.

Greeks: delta (change in option price per unit change in underlying), gamma (change in delta), theta (time decay), vega (sensitivity to volatility), rho (sensitivity to interest rates).

Warrants in Hong Kong are issued by third parties (usually investment banks) and listed on HKEX; a derivative warrant gives the right to buy (call) or sell (put) the underlying at a strike price before expiry.

Structured products combine a derivative with a deposit or bond; common types include equity-linked notes, currency-linked deposits, and credit-linked notes; principal may be at risk.

SFC authorisation rules: offerings of investments to the Hong Kong public require authorisation unless an exemption applies; the SFC's Guidelines on Online Distribution and Advisory Platforms and the Over-the-Counter Derivative regime under the SFO apply.

A derivative warrant's implied volatility, effective gearing and time decay are key pricing factors; effective gearing = delta × (underlying price / warrant price).

Collective investment scheme (CIS) has four elements: pooling of contributions, arrangement in respect of property, profits/income shared or paid to participants, and participants do not have day-to-day control.

SFC-authorised funds must comply with the SFC Handbook for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structured Investment Products; authorisation is not a recommendation.

UCITS is the EU cross-border retail fund regime; ETFs listed in Hong Kong must be authorised by the SFC unless an exemption applies.

ETF mechanics: creation and redemption by participating dealers in creation units, tracking an index or benchmark, with a market maker providing liquidity.

Physical ETF holds the underlying securities; synthetic ETF uses swaps or derivatives to replicate index returns and carries counterparty risk.

Leveraged and inverse (L&I) products reset daily, so returns over longer periods can diverge materially from the stated multiple of the index return.

Fund pricing: NAV per unit = (total assets − total liabilities) / number of units outstanding; forward pricing uses the next NAV calculated after the order is received.

SFC-authorised funds must disclose management fees, ongoing charges, and any performance fees; a Key Facts Statement (KFS) summarises key features and risks.

Order types: market order executes at best available price; limit order executes only at the specified price or better; stop order becomes a market order when the stop price is triggered.

HKEX trading hours: continuous trading 09:30–12:00 and 13:00–16:00; the opening auction runs 09:00–09:30 and the closing auction 16:00–16:08 (with random closing).

Best execution requires a licensed corporation to take reasonable steps to obtain the best available terms for clients, considering price, cost, speed, likelihood of execution and settlement.

Client order priority: a firm must not deal ahead of or trade against a client order (front-running) and must handle client orders fairly and promptly.

Short selling in Hong Kong is permitted only for designated securities and must be covered (no naked short selling); tick rule requires the sale price to be no lower than the best current bid.

Market misconduct provisions include false trading, price rigging, disclosure of false or misleading information, and stock market manipulation under Part XIII/XIV of the SFO.

Position limits apply to futures and options; HKEX sets reporting and limit thresholds for exchange-traded derivatives.

Trade confirmation and contract notes must be issued promptly (generally within the same day or the next business day) and record price, quantity, commission, and settlement date.

Client onboarding requires identity verification, address verification, source of funds/wealth, investment objectives, risk tolerance, investment horizon and financial situation.

Suitability obligation: a licensed corporation must ensure a recommendation or solicitation is reasonably suitable for the client in light of their circumstances and risk profile.

Risk profiling tools (questionnaires) classify clients as conservative, balanced, growth or aggressive; products are rated on a 1–5 risk scale and must match the client's profile.

Professional investor classification: an individual with a portfolio of at least HK$8 million, or a corporation with a portfolio of at least HK$40 million (or total assets of HK$40 million), may elect professional investor status.

Client agreement is required before providing services; it must set out fees, charges, risks, and the firm's policies on conflicts of interest and order handling.

Complex products require a suitability assessment and warning; non-complex products may not require the same level of assessment.

Periodic review: KYC information should be updated at least annually or when there is a material change in the client's circumstances.

Record keeping: client identity documents, suitability assessments and transaction records must be retained for at least seven years.

Key AML/CFT legislation in Hong Kong: Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615), Drug Trafficking (Recovery of Proceeds) Ordinance, Organised and Serious Crimes Ordinance, and United Nations (Anti-Terrorism Measures) Ordinance.

Risk-based approach: firms must assess customer risk, product/service risk, delivery channel risk and geographic risk, and apply enhanced due diligence (EDD) for higher-risk relationships.

Customer due diligence (CDD) requirements: identify and verify the customer, identify the beneficial owner, understand the purpose and intended nature of the relationship, and conduct ongoing monitoring.

Simplified due diligence (SDD) may be applied to low-risk customers but never to PEPs, correspondent banking relationships or higher-risk situations.

Politically exposed persons (PEPs): require senior management approval, source of wealth and source of funds verification, and enhanced ongoing monitoring.

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

Record retention: CDD records for at least five years after the end of the business relationship; transaction records for at least five years after the transaction.

Sanctions screening must be conducted against UNSC, HKMA, SFC and other applicable lists at onboarding and on an ongoing basis; a hit must be escalated and, if confirmed, the relationship frozen and reported.

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

Conflicts of interest must be avoided, and where unavoidable, disclosed and managed; a firm must not put its own interests ahead of the client's.

Client assets must be segregated from the firm's own assets and held in a designated client account; client money must be reconciled and safeguarded.

Inducements: firms must not offer or accept inducements that could conflict with the client's best interests, and must disclose any commission or benefit received.

Marketing materials must be accurate, not misleading, and must include risk warnings; past performance must not be presented as indicative of future results.

Personal account dealing by staff is restricted: staff must obtain pre-clearance, avoid front-running client orders, and hold for a minimum period unless an exception applies.

Whistleblowing: firms should have a confidential channel for staff to report misconduct without fear of retaliation.

Senior management responsibility: the SFC can hold senior managers accountable for failures in their areas of responsibility under the Manager-In-Charge regime.

Insider dealing under the SFO occurs when a person connected with a corporation deals in its securities while in possession of inside information, or discloses inside information, or procures another to deal.

Inside information is specific information about a corporation, not generally known, that would be likely to materially affect the price of its securities if generally known.

The Market Misconduct Tribunal (MMT) hears civil cases of insider dealing and other market misconduct; it can impose disqualification orders, cold shoulder orders, cease-and-desist orders, and fines.

Criminal proceedings for insider dealing can be brought in the Court of First Instance; penalties include imprisonment up to 10 years and fines up to HK$10 million.

SFC enforcement tools include investigation, disciplinary action against licensed persons, and referral to the MMT or the police.

Safe harbours for insider dealing include the statutory defences of no intent to profit, and certain specified circumstances such as market-making and takeover-related dealings.

Disclosure of inside information: a listed corporation must disclose inside information to the public as soon as reasonably practicable under Part XIVA of the SFO.

Market misconduct includes false trading, price rigging, disclosure of false or misleading information inducing transactions, stock market manipulation, and disclosure of inside information.