HKSI Paper 2 English Preview Set One

Statement I is correct because at-auction orders, having no specified price, are indeed prioritized over at-auction limit orders during the Pre-opening Session. This prioritization is based on the principle that orders willing to accept any price determined by the final IEP should be executed before those with price constraints. According to the Exchange rules, at-auction orders enjoy a higher order matching priority than at-auction limit orders and will be matched in time priority at the final IEP. Statement II is also correct. At-auction limit orders that remain unmatched after the Pre-opening Session are carried forward to the CTS and treated as limit orders, provided their specified price remains within the allowable deviation (9 times or more from the nominal price). This continuation ensures that orders with a specified price, which were not executed during the initial phase, still have an opportunity to be matched during continuous trading. Statement III is incorrect because enhanced limit orders can match up to the 10th price queue away from the best price, not the 5th. Statement IV is incorrect because limit orders can only be matched at the specified price, not at a better price. Therefore, the correct combination is I & II only.

The question addresses the responsibilities of senior management within a licensed corporation in Hong Kong, focusing on internal controls and regulatory compliance as per the Securities and Futures Ordinance (SFO) and related guidelines.

Statement I is correct because senior management is indeed responsible for establishing and maintaining an effective internal control system. This is a core requirement under the SFO to ensure proper risk management and operational efficiency.

Statement II is incorrect. While senior management must ensure compliance with regulatory requirements, the specific task of conducting daily compliance checks is typically delegated to a compliance officer or team. Senior management oversees the compliance function but doesn’t perform the daily tasks themselves.

Statement III is correct. Regular communication of control information, including policies, procedures, operations, and financial position, is crucial for effective oversight and decision-making by senior management. This ensures they are informed about the firm’s risk profile and control environment.

Statement IV is incorrect. While senior management is responsible for the overall effectiveness of internal controls, the actual implementation and execution of these controls often involve various departments and personnel throughout the organization. Senior management sets the tone and provides oversight, but they do not personally execute every control measure.

Therefore, the correct combination is I & III only.

The SEHK retains significant authority to oversee and regulate market makers to ensure market integrity and stability. The SEHK’s right to amend a Primary Market Maker’s appointment letter with written notice, imposing additional requirements, obligations, restrictions, and conditions, is a crucial aspect of this regulatory oversight. This is explicitly stated in the provided text.

Market makers are indeed entitled to fee discounts for option classes where they act as market makers, provided the trades are allocated to their house account. This incentivizes market-making activities and enhances market liquidity.

Market makers are obligated to maintain records of their hedging activities and make them available for inspection by the SEHK. This transparency is essential for monitoring potential risks and ensuring that market makers are adequately managing their exposures.

The SEHK has the authority to suspend or revoke a market maker’s permit under various circumstances, including unusual market conditions or failure to meet quote response requirements. This power allows the SEHK to take swift action to address any misconduct or operational deficiencies.

Therefore, all four statements (I, II, III, and IV) accurately reflect the rights and obligations of market makers and the regulatory powers of the SEHK.

Statement I is correct. An Options Exchange Participant is indeed permitted to offset amounts due from a client regarding margin, settlement amount, and surplus SEOCH collateral. This is a standard practice to manage the financial obligations between the participant and their client. Statement II is also correct. According to the rules governing Options Exchange Participants, if a client defaults on their Traded Options business, the participant is obligated to notify the SEHK. The SEHK may then request further information about the default as deemed necessary. This ensures transparency and allows the SEHK to monitor and manage potential risks. Statement III is correct. Stock transactions resulting from the exercise and assignment of Traded Options are settled under the Continuous Net Settlement System within CCASS. This system streamlines the settlement process and reduces counterparty risk. Statement IV is correct. Given that SEOCH options are premium paid up-front, intermediaries are required to pass these cash premiums to the SEOCH, which then transmits the payments to the sellers. This ensures that sellers receive their premiums promptly and efficiently. All four statements accurately reflect the operational and regulatory framework for Traded Options in Hong Kong.

The Securities and Futures (Investor Compensation – Levy) Rules outline the framework for collecting levies to fund the Investor Compensation Fund (ICF). Statement I is correct because the ICF is indeed funded by levies imposed on transactions. These levies are designed to provide a financial safety net for investors in cases of intermediary default. Statement II is also correct. The Securities and Futures (Investor Compensation – Compensation Limits) Rules specify the maximum compensation an investor can receive from the ICF, which is currently set at HKD 500,000 per investor per default. This limit is crucial for managing the fund’s resources and ensuring equitable distribution. Statement III is incorrect because the Securities and Futures (Investor Compensation – Claims) Rules detail the procedures for submitting and processing claims against the ICF, not the process for appealing licensing decisions. Licensing appeals are handled through separate regulatory channels. Statement IV is correct as the Securities and Futures (Levy) Order specifies the rates of levies to be imposed on securities transactions. These rates are subject to periodic review and adjustment based on the fund’s financial health and market conditions. Therefore, the correct combination is I, II & IV only.

According to the Securities and Futures Ordinance (SFO) and the Financial Resources Rules (FRR) in Hong Kong, licensed corporations dealing in securities, advising on securities, or providing securities margin financing are mandated to furnish various notifications and returns to the Securities and Futures Commission (SFC). These reporting requirements are crucial for maintaining market transparency and ensuring the financial stability of licensed entities. Monthly returns, as stipulated by the FRR, must be submitted within three weeks after the month’s end. These returns include a detailed liquid capital computation, an RLC computation, a summary of available bank loans and credit facilities, an analysis of margin clients, an analysis of collateral received from margin clients, and an analysis of client assets. These monthly submissions provide the SFC with a regular snapshot of the corporation’s financial health and risk exposure.

The FRR’s liquid capital requirements are designed to ensure that licensed corporations maintain sufficient liquid assets to cover their immediate liabilities and operational needs. A sharp decline in the market can significantly reduce the value of a corporation’s assets, potentially leading to a breach of these liquid capital requirements. Therefore, accurate and timely reporting is essential for the SFC to monitor and address any potential breaches promptly. Failure to comply with these reporting requirements can result in regulatory actions, including fines, suspensions, or revocation of licenses. The comprehensive nature of the required monthly returns allows the SFC to proactively identify and mitigate risks, thereby protecting investors and maintaining the integrity of the Hong Kong securities market.

The correct answer is I & II only. According to the Main Board Listing Rules (MBLR), specifically MBLR 8.02 and 8.03, an issuer must be duly incorporated and must not be a private company as defined under Section 11 of the new Companies Ordinance to be eligible for listing on the Main Board of the Hong Kong Stock Exchange. These are fundamental requirements ensuring the issuer’s legal standing and public nature.

Statement III is incorrect because while MBLR 8.12 requires a sufficient management presence in Hong Kong, it specifies that normally at least two executive directors must be ordinarily resident in Hong Kong, not all of them. The rule allows for exceptions at the discretion of the SEHK.

Statement IV is incorrect because MBLR 8.08(2) stipulates a minimum of 300 shareholders to ensure a sufficient spread of shareholders, not 200. This requirement aims to ensure that there is adequate public interest and liquidity in the issuer’s shares after listing. Therefore, only statements I and II accurately reflect the Main Board listing criteria.

According to Section 183 of the Securities and Futures Ordinance (SFO), a person under investigation by the SFC is required to provide documents and explanations, attend before the investigator to answer questions, give all reasonable assistance, and substantiate their answers by making a statutory declaration. If unable to provide an answer due to lack of knowledge, they must make a statutory declaration verifying this inability. Therefore, statement I is correct. Section 183 also specifies that failure to comply with the investigator’s requests without reasonable excuse, or providing false or misleading information, constitutes an offense, extending to officers or employees of a corporation who intentionally cause the corporation to commit such offenses. Thus, statement II is also correct. Section 191 of the SFO allows an employee of the SFC, an authorized person, or an investigator to apply to a magistrate’s court for a warrant to enter specified premises, require the production of records, prohibit alteration or removal of records, take steps to preserve records, and retain such records for a period, which can be extended for legal proceedings. Therefore, statement III is correct. Finally, any person who destroys, falsifies, conceals, or disposes of documents required to be produced under Part VIII of the SFO is indeed guilty of an offense, making statement IV correct. Given the above analysis, all statements are correct.

Licensed corporations in Hong Kong are obligated to report certain over-the-counter (OTC) derivative transactions to the Hong Kong Monetary Authority (HKMA) via the Hong Kong Trade Repository (HKTR). The reporting obligation arises when a licensed corporation becomes a counterparty to a specified product type, conducts a transaction in a specified product type ‘in Hong Kong’ on behalf of an affiliate, loses its exempt status, or when a corporation holding positions in a specified product type becomes a licensed corporation. The specified product classes currently include interest rate swaps (IRS) and currency-based non-deliverable forwards (NDF). However, only specific types within these classes require reporting. These include transactions referencing specified currencies and floating interest rate indices. The phrase ‘in Hong Kong’ is crucial as it broadens the scope of reporting to include transactions conducted on behalf of affiliates, even if the affiliate is located outside Hong Kong. This ensures comprehensive oversight of OTC derivative activities that have a nexus to Hong Kong’s financial system. The reporting requirement extends to all previously entered into and outstanding transactions in the specified product type, as well as any subsequent events that cause a change to the terms and conditions or parties to a transaction. This ongoing reporting ensures that the HKMA has an accurate and up-to-date view of the market. Failure to comply with these reporting obligations can result in regulatory action. The HKTR membership is essential for licensed corporations subject to these rules.

Section 162 of the Securities and Futures Ordinance (SFO) grants the appointed auditor significant powers to conduct a thorough examination when the SFC has reasonable cause to believe that a licensed corporation has failed to comply with the Financial Resources Rules (FRR), prescribed requirements, or has received an adverse auditor’s report. These powers include the ability to examine officers, employees, agents, and auditors of the target entities under oath. This extends to any business carried on by the licensed corporation or its associated entities if relevant to the audit. Non-compliance with the requirements imposed under Section 162 without reasonable excuse constitutes an offense. Section 163 of the SFO further addresses actions intended to prevent, delay, or obstruct the audit process. This includes deleting, destroying, mutilating, falsifying, concealing, altering, or making unavailable any records relating to an audit, disposing of property relevant to the audit, or attempting to leave Hong Kong. These provisions collectively aim to ensure the integrity and effectiveness of regulatory oversight, safeguarding investor interests and maintaining market confidence. The SFO empowers the SFC and appointed auditors to rigorously investigate potential breaches and hold accountable those who attempt to undermine the audit process. These measures are crucial for upholding the financial stability and transparency of the securities market in Hong Kong.

The Securities and Futures Commission (SFC) in Hong Kong adopts a risk-based supervision approach to regulate market intermediaries. This means that the SFC allocates its regulatory resources and efforts based on the perceived level of risk associated with different intermediaries and their activities. Intermediaries engaging in higher-risk activities or demonstrating weaker internal controls are subject to more intensive supervision, including more frequent inspections and enhanced monitoring. This approach allows the SFC to focus its attention on areas where the potential for market misconduct, investor harm, or systemic risk is greatest, thereby maximizing the effectiveness of its regulatory oversight. The SFC’s risk-based approach is dynamic and responsive to changes in market conditions and the evolving risk profiles of intermediaries. It involves ongoing assessment and reassessment of risks, as well as adjustments to supervisory strategies and resource allocation as needed. By prioritizing its efforts based on risk, the SFC aims to promote market integrity, protect investors, and maintain the stability of Hong Kong’s financial system. This approach is consistent with international best practices in financial regulation and reflects the SFC’s commitment to proactive and effective supervision of market intermediaries.

The correct answer is I & II only.

Statement I is correct because boiler room activities inherently involve high-pressure sales tactics. These tactics are designed to aggressively persuade investors to purchase securities, often with misleading or exaggerated claims. The pressure applied is a key characteristic of boiler room operations, as it aims to circumvent rational decision-making by potential investors.

Statement II is correct because boiler room operations frequently involve the sale of speculative or even worthless securities. These securities are often from obscure or little-known companies, and their value is highly uncertain. The focus is on generating quick profits for the operators rather than providing genuine investment opportunities for the investors.

Statement III is incorrect because while boiler room activities are unethical and often illegal, they do not necessarily require the involvement of senior management within established financial institutions. They are more commonly associated with smaller, less regulated entities or individuals operating outside the mainstream financial system.

Statement IV is incorrect because boiler room activities are characterized by a lack of transparency and misleading information. The goal is to deceive investors into making purchases based on false or incomplete information, rather than providing them with clear and accurate details about the securities being offered. This lack of transparency is a hallmark of boiler room operations, distinguishing them from legitimate investment activities.

The Code of Conduct mandates that when a licensed or registered person solicits the sale of or recommends any financial product to a client, the product must be reasonably suitable for the client, considering their financial situation, investment experience, and investment objectives. This is explicitly stated in the required clause for client agreements. Therefore, statement I is correct. The client agreement must include the full names and addresses of both the client and the licensed or registered person, verified by reliable proof, as specified by the Code of Conduct. Thus, statement II is also correct. The Code of Conduct requires that the client agreement includes a full description of the services to be provided and the charges to be paid by the client, with details of any special services such as margin financing or short-selling facilities and derivatives trading. This makes statement III correct. The client agreement must include appropriate risk disclosure statements as specified in Schedule 1 of the Code of Conduct, ensuring clients are aware of the risks associated with the services. Therefore, statement IV is also correct. All statements are correct and are essential components of a client agreement as per the Code of Conduct.

According to the Securities and Futures Ordinance (SFO) and the Financial Resources Rules (FRR) in Hong Kong, a licensed corporation advising on securities must adhere to specific financial reporting requirements. These regulations are designed to ensure the financial stability and integrity of licensed corporations, thereby protecting investors and maintaining market confidence. The FRR mandates that licensed corporations submit financial returns semi-annually, concluding at the end of June and December, with a deadline of three weeks after the reporting period. These returns include a liquid capital computation, an RLC computation, a profit and loss account, and an analysis of its clientele. Furthermore, the FRR requires immediate notification to the SFC under certain circumstances, such as when liquid capital falls below 120% of its RLC or 50% of the last reported liquid capital, if paid-up share capital falls below requirements, if previously submitted information becomes false or misleading, if aggregate loan drawdowns exceed credit limits, or if there are changes in accounting principles that materially affect liquid capital or paid-up share capital. Failure to comply with liquid capital or paid-up share capital requirements necessitates immediate notification to the SFC and cessation of regulated activities, unless otherwise permitted by the SFC. These measures ensure that licensed corporations maintain adequate financial resources and promptly address any deficiencies, safeguarding the interests of their clients and the stability of the financial market.

Statements I and II are correct. Statement I accurately reflects the licensing requirements stipulated by the SFO, mandating that individuals engaging in regulated activities (RAs) on behalf of a licensed corporation must themselves be licensed as representatives. This ensures accountability and regulatory oversight at the individual level. Statement II correctly identifies that the SFC can approve a licensed representative’s accreditation to multiple licensed corporations within the same group, acknowledging operational efficiencies and group structures. Statement III is incorrect because while registered institutions must comply with the Banking Ordinance, the requirement is for at least two executive officers to be responsible for *directly* supervising its RAs, not merely ‘involved’. Statement IV is incorrect as only corporations may become intermediaries, either as licensed corporations or registered institutions (if they are AFIs). Individuals cannot directly become intermediaries.

The ‘tick rule,’ as it applies to short selling on the SEHK, primarily aims to prevent manipulative practices that could drive down the price of a stock artificially. This rule generally dictates that a short sale cannot be executed at a price lower than the best current asking price. The rationale behind this is to ensure that short selling activities do not unduly pressure the market and undermine investor confidence. By preventing short sales at prices below the current ask, the rule helps to maintain a level playing field and prevents aggressive short sellers from exacerbating downward price movements.

However, it’s important to note that the SEHK has the authority to modify or provide exceptions to the tick rule based on market conditions or regulatory considerations. This flexibility allows the exchange to adapt its rules to address specific situations or to promote market efficiency. While the general principle of the tick rule remains in place, the SEHK’s ability to make adjustments ensures that the rule remains relevant and effective in the face of changing market dynamics. Understanding the nuances of the tick rule and the SEHK’s power to modify it is crucial for market participants engaging in short selling activities in Hong Kong.

The Securities and Futures Commission (SFC) undertakes several key responsibilities to maintain market integrity and protect investors in Hong Kong. Statement I is correct because the SFC is indeed authorized to approve and oversee Alternative Trading Systems (ATS) providers, ensuring they operate fairly and transparently. Statement II is also correct; the SFC regulates approved share registers to maintain accurate records of share ownership, which is crucial for corporate governance and investor protection. Statement III is accurate as the SFC actively supervises and monitors the activities of the Investor Compensation Company (ICC) and manages the Investor Compensation Fund, providing a safety net for investors in cases of intermediary default. Statement IV is also correct, highlighting the SFC’s role in fostering market development and participation by engaging with both local and international stakeholders and conducting market research to inform policy formulation. These functions are vital for the stability and growth of Hong Kong’s financial markets, aligning with the objectives outlined in the Securities and Futures Ordinance (SFO).

Section 162 of the Securities and Futures Ordinance (SFO) grants the appointed auditor significant powers to conduct a thorough examination when the SFC has reasonable cause to believe that a licensed corporation has failed to comply with the Financial Resources Rules (FRR), prescribed requirements, or has received an adverse auditor’s report. These powers include the ability to examine officers, employees, agents, and auditors of the target entities under oath. This extends to any business carried on by the licensed corporation or its associated entities if it is relevant to the audit. Failure to comply with the requirements imposed under Section 162 without reasonable excuse constitutes an offense. Section 163 of the SFO further addresses actions intended to prevent, delay, or obstruct the audit process. It prohibits the deletion, destruction, mutilation, falsification, concealment, alteration, or any action that makes records unavailable. It also prohibits disposing of property relevant to the audit or attempting to leave Hong Kong with the intent to obstruct the audit. These provisions ensure the integrity of the audit process and protect investors by enabling the SFC to take action against non-compliant licensed corporations.

Statement I is correct because the law of agency establishes a fiduciary relationship where the agent acts on behalf of the principal, binding the principal through actions within the scope of the agency. This is particularly relevant in financial services, as seen with stockbrokers and account executives. Statement II is also correct; a principal is indeed liable for the actions of their agent, especially when the agent is acting within their apparent authority. This principle protects clients from misconduct by agents acting on behalf of a firm. Statement III is correct because a fiduciary relationship necessitates duties of good faith, trust, confidence, honesty, and care. This high standard of conduct is crucial in relationships like those between stockbrokers and clients, ensuring the client’s interests are prioritized. Statement IV is correct as under common law, employers are obligated to provide employees with remuneration, indemnity for expenses incurred during their duties, and a safe working environment. This ensures fair treatment and protection for employees within the workplace. Therefore, all the statements are correct and accurately reflect principles within agency law, fiduciary duties, and employment law in Hong Kong’s securities and licensing context.

Securities margin financing (SMF), as defined in Schedule 5 of the Securities and Futures Ordinance (SFO), involves providing financial accommodation to facilitate the acquisition and continued holding of securities listed on any stock market, whether in Hong Kong or elsewhere. This holds true regardless of whether the securities are pledged as security for the accommodation. Statement I accurately reflects this core definition.

However, Type 8 RA (Regulated Activity) does not encompass certain provisions of accommodation. These exclusions include underwriting, sub-underwriting, and acquisition under a prospectus; provision by a Type 1 RA licensee to enable SMF for their clients; financing by a CIS for investment in its issued CIS; provision by an authorized financial institution (AFI) to facilitate securities acquisitions or holdings by its clients; provision by an individual to a company where they hold more than 10% of issued shares; and introductions by intermediaries to related corporations for SMF provision. Statement II is incorrect because it states that Type 8 RA includes underwriting activities, which is an explicit exclusion.

Furthermore, entities licensed for Type 8 RA and those licensed for Type 1 RA providing SMF must adhere to the Financial Resources Rules (FRR). These rules mandate a minimum paid-up share capital of HK$10 million and a minimum liquid capital of HK$3 million, which must always exceed the required liquid capital calculated per the FRR. Additionally, haircut percentages specified in the FRR must be applied to the asset values of stocks held as collateral against margin loans. Statement III accurately reflects the minimum paid-up share capital requirement. Statement IV is incorrect because the minimum liquid capital requirement is HK$3 million, not HK$5 million.

Statements I and II are correct. Statement I accurately describes the function of the Derivatives Clearing and Settlement System (DCASS) as the platform for clearing and settlement of traded options on the SEHK and products traded on HKFE, including index futures and options, and single stock futures and options. This is a core function outlined in the operational trading procedures. Statement II correctly identifies the SEOCH’s role in monitoring risks, determining margin requirements, overseeing the Reserve Fund, and conducting surveillance, including reviewing position ratios and limits. The SEOCH acts as the central counterparty for all trades, guaranteeing performance regarding money settlement and stock delivery, as per the SEOCH Rules. Statement III is incorrect because while SEOCH participants do enter exercise instructions via DCASS, the resultant stock transactions are passed to CCASS for settlement, not directly settled within DCASS. Statement IV is incorrect because novation involves the Hong Kong Securities Clearing Company Limited guaranteeing settlement by acting as the settlement counterparty to CCASS clearing participants and assuming the settlement risk, not the SEOCH directly guaranteeing settlement to individual investors. Therefore, only statements I and II are accurate regarding the operational trading procedures for options trading and the roles of DCASS and SEOCH.

The Securities and Futures Ordinance (SFO) in Hong Kong places significant responsibilities on responsible officers (ROs) and executive officers (EOs) of licensed corporations and registered institutions, respectively. These officers are considered the ‘controlling minds’ and are held accountable for the conduct of their firms.

Statement I is correct because Section 194 of the SFO explicitly grants the SFC the power to take disciplinary actions against a regulated person (which includes licensed corporations and their ROs) if they are found guilty of misconduct or are deemed not fit and proper. These actions can include suspending or revoking the license.

Statement II is correct because Sections 194 and 196 of the SFO establish management liability. ROs and EOs can be held liable if they have consented to, connived at, or been neglectful of misconduct by the licensed corporation or registered institution. This includes breaches of regulatory requirements.

Statement III is incorrect because while ROs and EOs are responsible for ensuring compliance with anti-money laundering (AML) regulations, the SFO itself doesn’t specify imprisonment as an immediate consequence for AML failures. Penalties for AML breaches are outlined in separate legislation, such as the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO), which can include imprisonment, but this is not directly stated within the SFO regarding RO/EO duties.

Statement IV is incorrect because the SFO does not specify a fixed monetary penalty for breaches of operational control. Fines and other penalties are determined by the SFC based on the severity and nature of the breach, considering factors like the impact on investors and the firm’s compliance history. While the SFC can impose substantial fines, the SFO doesn’t predefine a specific amount.

Therefore, the correct combination is I & II only.

The Investor Compensation Fund (ICF) in Hong Kong is designed to protect investors who suffer pecuniary losses due to the default of a licensed intermediary. The ICF’s scope is limited to exchange-traded products in Hong Kong, meaning that losses incurred from investments in non-exchange-traded products are not covered. The Investor Compensation Company Limited (ICC), a wholly-owned subsidiary of the SFC, manages and administers the ICF, including the determination of claims. The ICF is funded by a levy on transactions on the SEHK and HKFE, which is waived when the net asset value of the ICF exceeds HK$1.4 billion and reinstated if it falls below HK$1 billion. The levy is currently waived. Any investor, regardless of nationality, can claim against the ICF if they meet the criteria of suffering losses due to the default of an intermediary in relation to exchange-traded products in Hong Kong. Therefore, statements I and II are correct. Statement III is incorrect because the levy is currently waived. Statement IV is incorrect because the ICF covers exchange-traded products, not all investment products.

The clearing obligation for OTC derivative transactions in Hong Kong, as governed by the Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA), focuses on mitigating systemic risk posed by larger participants. Statement I is correct because the clearing obligation primarily targets ‘dealer-to-dealer’ transactions, specifically those between prescribed persons (like AFIs, AMBs, and licensed corporations) and either another prescribed person or a designated financial services provider. This ensures that significant market participants are subject to mandatory clearing. Statement II is also correct; the clearing threshold, set at US$20 billion, applies to prescribed persons to determine if they are significant enough to be subject to the clearing obligation. Financial services providers are, by definition, considered significant players and are therefore always subject to the clearing obligation regardless of their positions. Statement III is incorrect because even if a prescribed person’s position falls below the clearing threshold, they remain subject to the clearing obligation unless they provide an exit notice after 12 consecutive months below a specified amount. This ensures that firms cannot easily avoid the clearing obligation due to temporary reductions in their positions. Statement IV is correct because substituted compliance allows transactions cleared under comparable regulations in designated jurisdictions to be exempt from mandatory clearing in Hong Kong, preventing duplicative regulatory burdens and promoting cross-border harmonization. Therefore, the correct combination is I, II & IV only.

The SEHK holds significant power to maintain market integrity and protect investors. A trading halt or suspension is a serious action, reserved for situations where the normal functioning of the market is compromised. The failure of an issuer to comply with Listing Rules in a material respect indicates a potential governance or operational issue that could affect the stock’s value and investor confidence. Similarly, a lack of sufficient shares in public hands can lead to market manipulation and price volatility, undermining fair trading. The SEHK also considers the fundamental viability of the listed company; if the issuer lacks sufficient operations or assets, its continued listing may mislead investors. Finally, if the SEHK deems the issuer unsuitable for listing, perhaps due to regulatory breaches or other serious concerns, suspension or a halt may be necessary. These measures ensure that only companies meeting certain standards remain listed, protecting the interests of the investing public and maintaining the reputation of the Hong Kong securities market. The HKSCC, through CCASS, facilitates the clearing and settlement of transactions, but the decision to halt or suspend trading rests solely with the SEHK, based on the criteria outlined in the Listing Rules and its broader mandate to oversee market integrity.

The SEHK’s disciplinary powers, as outlined in Chapter 7 of the Rules of the Exchange, primarily address breaches of business conduct. An Exchange Participant is accountable for the actions of its personnel, including responsible officers, directors, and employees. The disciplinary actions available to the SEHK range from issuing warning letters and imposing fines to suspending exchange participantship. It’s crucial to understand that the SEHK’s disciplinary role is distinct from that of the SFC. The SFC, as the front-line regulator, handles disciplinary matters related to breaches of the SFO, statutory rules, and codes of conduct. The SEHK’s responsibility is focused on trading, clearing, settlement offences, and breaches of the Listing Rules. Scenarios that may trigger disciplinary action by the SEHK include breaches of the Rules of the Exchange or statutory provisions in the SFO, failure to report non-compliance with financial requirements, failure to fulfill legal obligations related to securities, criminal charges involving fraud or dishonesty, being under investigation by the SFC with an auditor appointed, and engaging in misconduct as defined in s. 193 of the SFO. The SEHK’s disciplinary actions aim to maintain market integrity and ensure compliance with regulatory standards, complementing the broader regulatory oversight provided by the SFC.

Statement I is correct because, according to the SFC’s Code of Conduct, senior management of a licensed or registered person should possess comprehensive knowledge of the business, including its internal control and risk management systems, and have access to all relevant information pertaining to its operations. This ensures they can effectively oversee and manage the firm’s activities and risks. Statement II is also correct. The Code of Conduct mandates that licensed corporations provide additional disclosure to their clients regarding the risks associated with client money being received or held outside Hong Kong. This disclosure is crucial for clients to make informed decisions about their investments. Statement III is incorrect because the ICG (Internal Control Guidelines) lists eight key areas of internal controls, including management and supervision, segregation of duties and functions, personnel and training, information management, compliance, audit, operational controls, and risk management. Statement IV is incorrect. The Code of Conduct requires licensed or registered persons to report material breaches or suspected breaches of laws, rules, regulations, and codes to the SFC. Additionally, they must report insolvency situations and disciplinary actions taken against them by regulators or professional bodies. Therefore, the correct combination is I & II only.

The scenario highlights a critical aspect of the responsibilities of Managers-In-Charge (MICs) within a licensed corporation, specifically concerning their access to information and advice. According to regulatory expectations, MICs must have timely access to all relevant business information and the necessary advice related to their responsibilities. This requirement ensures that MICs can effectively perform their duties, make informed decisions, and uphold the standards of conduct expected by the SFC.

Option (a) directly addresses this expectation by stating that the MIC should ensure they have access to all relevant information and necessary advice. This aligns with the core principle of empowering MICs to fulfill their responsibilities. Options (b), (c), and (d) present alternative approaches that are either insufficient or misaligned with the regulatory emphasis on proactive access to information and advice. While seeking approval for every action (option b) might seem cautious, it is impractical and hinders timely decision-making. Relying solely on information provided by subordinates (option c) is inadequate, as it may not provide a complete or unbiased view. Ignoring the need for advice (option d) is detrimental, as it prevents the MIC from benefiting from expert insights and potentially overlooking critical considerations. The Securities and Futures Commission (SFC) emphasizes the importance of MICs having the necessary resources and support to effectively manage their functions and maintain the integrity of the licensed corporation. This is in line with paragraph 4.1 of the Code of Conduct, which requires MICs to be fit and proper, and implicitly necessitates access to information and advice to meet this standard.

The Investor Compensation Fund (ICF) in Hong Kong is designed to protect retail investors in cases of intermediary default. The ICF’s coverage extends to exchange-traded securities and futures contracts, providing a safety net up to a specified limit. It’s crucial to understand the scope of this protection, including what is covered and who is eligible to make a claim. The ICF does not cover losses on A shares bought through the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect due to intermediary default. A default by an intermediary includes insolvency, bankruptcy, winding-up, breach of trust, defalcation, fraud, or misfeasance. The ICF is specifically aimed at retail investors, excluding institutional investors who are considered better equipped to assess their counterparties. The maximum compensation for exchange-traded securities or futures contracts is HK$150,000 per claimant, with a maximum of HK$300,000 for both. Each holder of a joint account is considered a separate claimant, while an investor with multiple accounts is still capped at HK$150,000. Understanding these limitations and eligibility criteria is essential for both investors and intermediaries operating in the Hong Kong financial market, ensuring compliance with regulatory requirements and appropriate risk management practices as outlined by the Securities and Futures Commission (SFC). The fund is established under Part X of the Securities and Futures Ordinance (SFO).

The Securities and Futures (Financial Resources) Rules (FRR) in Hong Kong are crucial for maintaining the stability and integrity of the financial market. The FRR mandates that licensed corporations maintain adequate financial resources to cover their operational risks and meet their obligations.

Statement I is correct because the FRR aims to ensure that licensed corporations have sufficient liquid assets to cover their immediate liabilities, thereby protecting client assets and maintaining market confidence. Statement II is also correct; a key objective of the FRR is to enable the SFC to promptly assess the financial health of licensed corporations, allowing for timely intervention if a firm’s financial stability is at risk. Statement III is correct as the FRR requires licensed corporations to maintain a minimum level of paid-up capital, which acts as a financial buffer against potential losses. Statement IV is also correct because the FRR requires licensed corporations to report their financial positions regularly to the SFC, enabling continuous monitoring of their financial health and compliance with regulatory requirements. Therefore, all the statements accurately reflect the objectives and requirements of the FRR.