HKSI Paper 2: 70 Key Concepts and Study Guide
HKSI Paper 2, Regulation of Securities, is one of the HKSI Institute's Licensing Examination papers for people working in the securities industry. The exam consists of 40 multiple-choice questions to be answered in 60 minutes, and the pass mark is 70% - that is the score you personally need, which is not the same thing as the pass rate, a statistic describing how other candidates performed. One important version note: this article is based on the public syllabus for study guide version 2.9, which applies to Paper 2 sittings from 26 October 2026. If you sit on or before 25 October 2026, your exam follows version 2.8.1, so please use that guide and verify where the two versions overlap.
This guide walks you through 70 key revision concepts in the official topic order, from the regulatory framework through to market misconduct. Each concept gives you a short explanation, an original hypothetical example, a common trap, and a self-check question with its answer, so you can test whether you can apply the idea rather than just recognise it. Work through it topic by topic, and revisit your weak spots before exam day.
Exam format: HKSI examination overview . Latest published pass rate: 61.72% (Jul 2026) . A pass rate is a past result for a group of candidates, not your required score.
How to use these 70 concepts
- Read one topic at a time and, after each concept, cover the answer and try the self-check question yourself before revealing it. If you cannot explain the answer in your own words, reread the explanation.
- Keep a written log of every trap that catches you. These become your personal revision list for the final week, which is far more efficient than rereading everything.
- Use the concepts as prompts against your official study guide: for each one, locate the corresponding section in the guide and confirm the details for your sitting, especially where any numbers are involved.
The practice examples are original and hypothetical unless explicitly identified as a published case. The concept count is a revision structure; it does not represent official question frequency or topic weighting.
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Topic 1: Regulatory Framework
The SFO-based framework, the SFC and other regulators, the licensing regime, RA1, and the guidelines governing fitness, competence and training.
1. Hong Kong as an International Financial Services Centre
Hong Kong offers equities, debt, funds, derivatives, structured products and expanding virtual-asset-related services to local and global investors. Regulation therefore has to cover a wide range of products, intermediaries and cross-border channels, not just local stockbroking.
Example. Hypothetical example: one licensed corporation helps a client buy Mainland shares through a cross-border link and another client subscribe to an authorised fund - different products, one overarching framework.
Watch out. Assuming Paper 2 concerns only dealing in listed shares; the framework spans the full product range.
Self-check: Your hypothetical firm adds fund distribution alongside stockbroking. Does its regulatory position change fundamentally?
Answer: No - the framework is built for diverse products and services, so the firm stays within the same licensing and conduct structure.
2. The SFO and the Tiered Regulatory Framework
The SFO is the principal ordinance, supported by subsidiary legislation (rules and regulations with legal force) and by codes and guidelines such as the Code of Conduct and the ICG. Codes are not legislation: a breach is not automatically a criminal offence, but it reflects on fitness and properness and can trigger SFC disciplinary action.
Example. Hypothetical example: a responsible officer repeatedly ignores suitability requirements. The likely consequence is licence-based discipline, not automatic prosecution.
Watch out. Treating every code or guideline breach as a crime - consequences differ according to the instrument breached.
Self-check: A hypothetical intermediary breaches a guideline rather than a rule. What kind of consequence follows?
Answer: Conduct-based consequences - disciplinary action and fitness-and-properness implications - rather than automatic criminal liability.
3. Company Law and Contract Law
Company law gives intermediaries separate legal personality and imposes duties on directors towards their companies. Contract law requires offer, acceptance and consideration, which is what makes a client agreement enforceable. General business law applies to securities firms just as it does to any business.
Example. Hypothetical example: a client agreement is formed when the firm's offer is accepted and consideration passes, so both parties acquire enforceable rights.
Watch out. Thinking directors' duties are purely internal company matters - they intersect with regulatory fitness and properness.
Self-check: What three elements make your hypothetical client agreement enforceable?
Answer: Offer, acceptance and consideration.
4. Agency, Tort, Employment and Data Privacy
Under agency law, an intermediary acts on the client's behalf within authority and owes the client duties. Tort law imposes a duty of care, so negligence can ground claims. Employment law makes employers vicariously liable for staff, and personal data privacy law restricts how client data is collected and used.
Example. Hypothetical example: an employee reuses client contact data for personal marketing - a privacy issue that also exposes the employer.
Watch out. Assuming only securities law binds a securities firm - general law applies alongside it.
Self-check: Staff misuse client personal data in a hypothetical firm. Which area of law is engaged besides securities rules?
Answer: Personal data privacy law, with possible vicarious employer exposure under employment principles.
5. The SFC: Objectives and Powers
The SFC is Hong Kong's independent statutory regulator of the securities and futures markets, with objectives including maintaining market integrity, protecting investors and reducing systemic risk. Its powers include licensing intermediaries, setting rules in prescribed areas, investigating, taking disciplinary action and applying to courts and tribunals.
Example. Hypothetical example: on suspicion of client asset misuse, the SFC can investigate the firm and pursue disciplinary outcomes.
Watch out. Confusing advisory or consultative bodies with the SFC's own decision-making functions.
Self-check: Who licenses securities intermediaries in a hypothetical scenario?
Answer: The SFC, as the statutory licensing authority for regulated activities.
6. SFC Divisions versus Advisory Committees
The SFC's divisions carry out its executive functions, such as licensing, intermediaries supervision, enforcement, corporate finance and investment products work. Advisory committees provide views and recommendations but hold no executive or decision-making power over individual firms.
Example. Hypothetical example: a licence application is processed by the licensing function; a committee's supportive opinion is not itself a decision.
Watch out. Attributing binding power to advisory committees - they advise, they do not decide.
Self-check: A hypothetical committee recommends a policy change. Is it binding on firms?
Answer: No - the committee's role is advisory; decisions rest with the SFC's executive functions.
7. Other Financial Market Regulators
The HKMA supervises banks, including authorised institutions that carry on regulated activities as registered institutions, where the HKMA is front-line regulator for banking matters and the SFC supervises conduct. The AFRC oversees auditors of listed entities, while the Insurance Authority and MPFA regulate their own sectors.
Example. Hypothetical example: a bank licensed to deal in securities has the HKMA supervising its banking business and the SFC supervising its securities conduct.
Watch out. Assuming the HKMA has no securities relevance - registered institutions sit under both regulators.
Self-check: For a hypothetical bank's share-dealing business, who leads conduct supervision?
Answer: The SFC supervises the regulated activity's conduct, with the HKMA as the front-line banking regulator.
8. SFC versus Exchanges and Clearing Houses
The SFC is the statutory regulator of markets and intermediaries, while HKEX operates SEHK, HKFE and the clearing houses, exercising front-line regulation such as Listing Rule administration. The exchange group carries out day-to-day market regulation under the SFC's statutory oversight.
Example. Hypothetical example: a listed company breaches Listing Rules - SEHK acts front-line, while the SFC retains its own statutory powers.
Watch out. Saying the SFC has no role in exchange matters - it oversees the exchange controller as well as licensing participants.
Self-check: Who enforces Listing Rules day to day in a hypothetical breach?
Answer: SEHK as front-line regulator, operating under the SFC's oversight.
9. The Licensing Regime and Associated Entities
Carrying on a regulated activity requires authorisation: a company becomes a licensed corporation, an authorised bank becomes a registered institution, and the individuals acting become licensed representatives, with executive officers performing that role in banks. The regime also catches associated entities of licensed corporations.
Example. Hypothetical example: bank staff executing share trades act as executive officers of a registered institution, not as representatives of a licensed corporation.
Watch out. Assuming banks need a licensed corporation licence - banks register instead.
Self-check: How is a hypothetical bank authorised to deal in securities?
Answer: As a registered institution, with its individuals approved as executive officers.
10. RA1: Dealing in Securities
Dealing in securities covers acting as agent or principal, and inducing or attempting to induce another person to enter an agreement to acquire or dispose of securities, including through certain marketing materials. Providing wholly factual, non-inducing information may fall outside it, and it is distinct from advising on securities.
Example. Hypothetical example: a call urging a client to buy a share induces dealing; a bare price quote answering an enquiry may not.
Watch out. Confusing RA4 advice with RA1 dealing - the line is between inducing a transaction and providing advice.
Self-check: A hypothetical advertisement invites the public to subscribe for shares. Which regulated activity does that engage?
Answer: RA1, dealing in securities, through the inducement limb.
11. Fit and Proper, Competence and CPT
The Fit and Proper Guidelines require the SFC to consider factors such as financial soundness, reputation, qualifications and experience. The Guidelines on Competence set the qualification and experience expectations for licensing individuals, and the Guidelines on CPT require ongoing annual training at prescribed minima to keep competence current.
Example. Hypothetical example: an applicant passes all exams but has unexplained wealth - fitness and properness remains in doubt despite the qualifications.
Watch out. Thinking passing the exam alone satisfies competence - experience and continuing training also count.
Self-check: A hypothetical licensee qualified three years ago. Any ongoing duty?
Answer: Yes - annual CPT at the guideline-prescribed minimum to maintain competence.
12. Corporate Governance and Reporting Information to the SFC
Good practice under the framework includes an effective compliance function, clear reporting lines and engaged senior management. Licensed corporations must provide prescribed information to the SFC and notify changes, such as responsible officer or address changes, within the prescribed time so the public register stays accurate.
Example. Hypothetical example: when a responsible officer resigns, the firm must notify the SFC of the change.
Watch out. Treating notifications as optional paperwork - they are licensing obligations with consequences for non-compliance.
Self-check: Your hypothetical firm relocates. Is notification required?
Answer: Yes - prescribed changes must be reported to the SFC within the prescribed timeframe.
Topic 2: Requirements of Relevant Subsidiary Legislation
Financial resources, client asset protection, transaction documents, records, audit, the Investor Compensation Fund, insurance, position limits and OTC derivative obligations.
13. Financial Resources Rules: Liquid versus Fixed Capital
The FRR keeps intermediaries financially sound by requiring minimum amounts of paid-up capital and liquid capital, scaled to the activities undertaken. Liquid capital captures readily available resources; illiquid assets contribute little or nothing to the test.
Example. Hypothetical example: a firm whose assets sit mostly in property looks wealthy on paper but may fail the liquid capital requirement.
Watch out. Equating overall net worth with compliance - the composition of capital matters, not just the total.
Self-check: A hypothetical firm has large fixed assets but little cash. Is it necessarily compliant?
Answer: No - the liquid capital test turns on liquidity, not total assets.
14. Client Securities Rules: Segregation and Reuse
Client securities must be held in trust and segregated from the firm's own assets, with restrictions on disposal, pledging or reuse. Records must show whose securities are held at all times.
Example. Hypothetical example: a firm cannot pledge client shares as security for its own bank borrowing.
Watch out. Mixing client securities with house inventory, even briefly - the trust requirement forbids it.
Self-check: May a hypothetical firm use client shares to support its own trading position?
Answer: No - trust protection and reuse restrictions prohibit it.
15. Client Money Rules: Trust Accounts
Client money must be deposited into a separate account at an authorised institution, held in trust, reconciled and maintained as the rules require, with withdrawals only for client-related purposes and deposits made within the prescribed period.
Example. Hypothetical example: a client's cheque must go into the trust account, never the firm's operating account.
Watch out. Borrowing from the trust account even overnight - that is misapplication of client money.
Self-check: Your hypothetical firm faces a cashflow squeeze. Can it use client money temporarily?
Answer: No - client money is held in trust and may only be used for client purposes.
16. Contract Notes, Statements and Receipts
The rules prescribe three document families: contract notes for each transaction, issued to the client within the prescribed time with prescribed particulars; periodic statements of account; and receipts for money or securities received. Each serves a different evidential purpose.
Example. Hypothetical example: a trade executed on Monday must be evidenced by a contract note issued within the prescribed timeframe showing the prescribed details.
Watch out. Substituting an informal email summary for a compliant contract note.
Self-check: A hypothetical firm receives money from a client. Which document should it issue?
Answer: A receipt for money received, as the rules require.
17. Keeping of Records and Accounts and Audit Rules
The Keeping of Records Rules require business records to be kept in prescribed form, retrievable on request, and retained for the prescribed period. The Accounts and Audit Rules require annual accounts with an auditor's report, lodged with the SFC within the prescribed time.
Example. Hypothetical example: accounts are audited but the report is lodged late - the lodgement failure is itself a breach regardless of content.
Watch out. Assuming good accounting practice replaces timely lodgement with the SFC.
Self-check: A hypothetical firm has clean audited accounts but lodges late. Any issue?
Answer: Yes - late lodgement breaches the Accounts and Audit Rules even if the accounts themselves are sound.
18. The Investor Compensation Fund
The ICF, funded by levies, compensates eligible claimants who suffer losses from a licensed intermediary's default in respect of exchange-traded products, subject to prescribed conditions and per-claimant limits. Eligibility, product type and default conditions all must be satisfied.
Example. Hypothetical example: an investor whose broker defaults on SEHK share holdings may claim from the ICF if the eligibility conditions are met.
Watch out. Describing the ICF as blanket insurance for every loss - it is a default compensation scheme with defined limits.
Self-check: Does the ICF cover all client losses in a hypothetical broker failure?
Answer: No - only eligible claimants meeting the default, product and limit conditions are covered.
19. Mandatory Insurance Arrangements
Licensed corporations must arrange and maintain insurance to cover risks such as misappropriation, fraud and loss of client assets, providing a layer of protection for operational losses. Insurance complements the ICF and the segregation rules; it does not replace any of them.
Example. Hypothetical example: an employee steals client scrip - the insurance arrangement responds to the loss, while the ICF remains a separate mechanism.
Watch out. Assuming insurance cover excuses the firm from segregation and control duties.
Self-check: Does having insurance remove the need for strong internal controls in a hypothetical firm?
Answer: No - insurance is an additional layer, not a substitute for controls.
20. Position Limits versus Reportable Positions
The CLRPR sets position limits, which are hard maximum holdings or positions, and reportable positions, which are thresholds that trigger a disclosure obligation once exceeded. The purpose is to prevent market concentration while giving regulators visibility of large positions.
Example. Hypothetical example: a trader accumulating a derivatives position may cross a reportable threshold well before approaching the hard limit.
Watch out. Conflating the two - a limit caps holdings, while a reportable level only requires disclosure.
Self-check: A hypothetical holding sits above the reportable level but below the limit. Is that permissible?
Answer: Yes, provided the position is reported as the rules require.
21. OTC Derivative Reporting and Record Keeping
The OTC reporting rules require specified persons to report specified OTC derivative transactions to the SFC-authorised repository and to keep the required records. The data supports systemic risk monitoring of the derivatives market.
Example. Hypothetical example: a licensed corporation entering an interest rate swap with a client reports the transaction data to the repository.
Watch out. Assuming reporting applies to every trade automatically - applicability turns on the rules' definitions of specified persons and specified transactions.
Self-check: Is every OTC derivative transaction reportable by a hypothetical dealer?
Answer: No - only specified transactions by specified persons within the rules' definitions are reportable.
22. OTC Clearing Obligations and CCP Designation
The OTC clearing rules require certain standardised dealer-to-dealer OTC derivative transactions to be cleared through a designated central counterparty, reducing bilateral counterparty risk, with associated record keeping obligations. The mandate targets specified transactions, not the whole OTC market.
Example. Hypothetical example: two dealers execute a standardised interest rate swap - the clearing mandate may require CCP clearing rather than bilateral settlement.
Watch out. Assuming all OTC derivatives must be centrally cleared - only the specified standardised transactions are caught.
Self-check: A hypothetical uncleared bilateral swap between two dealers raises no issue?
Answer: It does if the transaction falls within the mandated clearing category - designated CCP clearing would then be required.
Topic 3: Management and Supervision of Securities Business
Responsible officer duties, the Code of Conduct, internal control guidelines, the SEHK dealing schedule, and AML/CFT including the risk-based approach and GAML.
23. Responsible Officers and Executive Officers
Responsible officers are licensed individuals actively supervising a licensed corporation's regulated activities, with duties to ensure compliance. Executive officers perform the equivalent role in registered institutions. Both are personally accountable, and their failures can ground SFC action against them individually.
Example. Hypothetical example: a responsible officer signs off on compliance matters without reviewing them - he remains personally answerable.
Watch out. Treating the responsible officer title as honorific - it carries active, personal supervision duties.
Self-check: In a hypothetical bank, what is the supervising individual's title?
Answer: Executive officer, the registered institution equivalent of a responsible officer.
24. Code of Conduct: General Principles
The Code of Conduct sets nine general principles: GP1 honesty and fairness, GP2 diligence, GP3 capabilities, GP4 information about clients, GP5 information for clients, GP6 conflicts of interest, GP7 compliance, GP8 client assets, and GP9 responsibility of senior management. Because it is a code, a breach is not automatically criminal but bears on fitness and properness and can lead to SFC discipline.
Example. Hypothetical example: a relationship manager recommending a product he holds personally engages the conflict principles.
Watch out. Assuming code breaches are automatically criminal - the consequences are conduct and licensing consequences.
Self-check: A hypothetical firm breaches a general principle but no rule. Any consequence?
Answer: Yes - SFC discipline and fitness-and-properness implications still follow.
25. Suitability and Client Agreements
Before recommending, an intermediary must have a reasonable basis - the client's financial situation, investment experience and objectives - and use prescribed client agreements with risk disclosures. The key distinction is between executing a client's own unsolicited order and making a firm-initiated recommendation.
Example. Hypothetical example: a client asks the firm to buy a specific blue chip (unsolicited execution), while the firm pitching a structured product triggers full suitability analysis.
Watch out. Applying suitability only to complex products - any recommendation needs a reasonable basis.
Self-check: A hypothetical client initiates his own order. Does suitability work the same way?
Answer: The unsolicited order is executed on instruction; full suitability analysis attaches to firm-initiated recommendations.
26. Conflicts of Interest and Personal Dealing
Intermediaries must identify conflicts, manage or disclose them appropriately, and give client interests and client orders priority. Staff personal account dealing must be controlled to prevent dealing ahead of clients or misusing client information.
Example. Hypothetical example: a proprietary desk takes the same position immediately before executing client orders - conflict handling and order priority are engaged.
Watch out. Assuming disclosure alone cures every conflict - some conflicts require avoidance or refusal.
Self-check: An employee buys shares just before recommending them to clients in a hypothetical firm. Acceptable?
Answer: No - it breaches conflict handling and client order priority expectations.
27. ICG: Key Internal Control Areas
The ICG expects senior management to build internal controls across key areas including organisational structure, segregation of duties, information management, and ongoing monitoring and review. Compliance operates as a line function reporting to senior management, not a back-office afterthought.
Example. Hypothetical example: the same team both executes trades and settles them - a segregation weakness the ICG targets.
Watch out. Treating the ICG as soft guidance - it informs how the SFC assesses supervision and fitness.
Self-check: Would compliance staff reporting to the front-office head satisfy the ICG in a hypothetical firm?
Answer: No - the ICG expects compliance independence with direct access to senior management.
28. Senior Management Accountability
Under the ICG, each key management responsibility must be explicitly allocated to a named senior manager, documented, and understood by staff. Responsible officers oversee the regulated activities, while other senior managers are accountable for the operational functions they own.
Example. Hypothetical example: a firm maps every key function - settlement, risk, compliance - to a named senior manager and reviews the map regularly.
Watch out. Assuming only responsible officers are accountable - other senior managers carry their own accountability.
Self-check: A hypothetical mid-office function fails. Who is accountable?
Answer: The designated accountable senior manager, within the firm's overall supervision framework.
29. Code of Conduct Schedule for SEHK Dealing
A schedule to the Code of Conduct adds requirements for dealing in SEHK-listed securities: handling orders promptly and fairly, seeking the best result for clients, and giving client orders priority over the firm's own orders, together with controls over order allocation.
Example. Hypothetical example: a dealer fills his own account at a better price while a client order waits - a priority breach.
Watch out. Assuming the general principles alone suffice - the schedule adds SEHK-specific conduct rules.
Self-check: Client and house orders rest at the same price in a hypothetical firm. Which executes first?
Answer: The client order - priority over proprietary orders is required.
30. AML/CFT Legislation in Hong Kong
Key ordinances include the Drug Trafficking (Recovery of Proceeds) Ordinance, the Organised and Serious Crimes Ordinance covering proceeds of crime, the UN (Anti-Terrorism Measures) Ordinance on terrorist financing, and the AMLO imposing CDD and record keeping duties. Suspicious transactions must be reported to the JFIU, and tipping off a client is prohibited.
Example. Hypothetical example: a client refuses to explain his source of funds - the firm assesses and files a suspicious transaction report rather than confronting him with it.
Watch out. Telling the client or his adviser that a report was filed - the tipping-off prohibition bites.
Self-check: A colleague mentions a filed report to the client's accountant in a hypothetical case. Why is that a problem?
Answer: It risks tipping off, which the legislation prohibits.
31. CDD and the Risk-Based Approach
Firms must identify and verify clients, establish beneficial ownership and control, understand the purpose of the relationship, and monitor activity on an ongoing basis. The risk-based approach calibrates intensity: enhanced measures for higher-risk clients such as politically exposed persons, and reliance on third parties only under prescribed conditions with responsibility retained.
Example. Hypothetical example: onboarding a politically exposed person requires enhanced due diligence and senior management approval.
Watch out. Applying identical checks to every client - the approach requires calibrating measures to assessed risk.
Self-check: Can a hypothetical firm outsource CDD entirely to an introducer and forget about it?
Answer: No - reliance on third parties is conditional, and the firm retains ultimate responsibility.
32. GAML and Virtual Asset AML Requirements
GAML sets AML/CFT requirements for licensed corporations and SFC-licensed virtual asset service providers, adding virtual-asset-specific measures such as blockchain analytics, wallet screening, and enhanced scrutiny of VA counterparties and transfers. Its application depends on the firm's virtual asset activities.
Example. Hypothetical example: client funds routed through mixing services raise GAML risk measures and potentially a suspicious transaction report.
Watch out. Assuming traditional AML procedures suffice for virtual assets - GAML adds asset-specific controls.
Self-check: Should a hypothetical firm apply identical CDD to fiat-only and virtual asset clients?
Answer: No - VA business attracts additional GAML measures on top of baseline requirements.
Topic 4: Dealing in Securities Traded on the SEHK
HKEX and market participants, participantship and trading rights, products, listing boards, trading mechanics, halts and suspensions, CCASS clearing and settlement, discipline and transaction costs.
33. HKEX Structure and Market Participants
HKEX is the listed holding company operating SEHK and the futures exchange, plus the clearing houses: HKSCC for securities, SEOCH for stock options, HKCC for futures and OTC Clear for OTC derivatives. Market participants include exchange participants, issuers and investors.
Example. Hypothetical example: a firm trading both shares and listed options deals on two exchanges and settles through their respective clearing houses.
Watch out. Conflating HKEX the operator with SEHK the exchange - they are different layers.
Self-check: Which clearing house clears a hypothetical SEHK share trade?
Answer: HKSCC, the securities clearing house.
34. Exchange Participantship and Trading Rights
Trading directly on SEHK requires being an exchange participant holding a trading right, subject to licensing and exchange requirements. A trading right confers the ability to trade on the exchange, while participantship is the resulting membership status - separate from clearing participation.
Example. Hypothetical example: a licensed corporation acquires a trading right so its orders can reach SEHK directly.
Watch out. Assuming a trading right includes CCASS clearing access - they are separate arrangements.
Self-check: Is a hypothetical trading right the same thing as a clearing participation?
Answer: No - trading rights and clearing participation are distinct, each with its own requirements.
35. Products Traded on the SEHK
SEHK lists Main Board and GEM equities, REITs, ETFs, bonds, derivative warrants and callable bull/bear contracts. Derivative warrants give rights priced at a premium, while CBBCs are structured products with a call feature that can terminate them early.
Example. Hypothetical example: a client compares a warrant's premium and gearing against a CBBC's call price before choosing.
Watch out. Treating warrants and CBBCs as interchangeable - their structures and early-termination features differ.
Self-check: A hypothetical product terminates automatically when the underlying hits its call price. What is it?
Answer: A callable bull/bear contract (CBBC).
36. Main Board versus GEM Listing
Main Board suits established companies meeting profit, track-record and market-capitalisation style criteria, while GEM serves younger or emerging companies under different, generally less demanding entry requirements and a higher-risk profile, with its own rulebook and transfer route to the Main Board.
Example. Hypothetical example: a start-up with a short trading history and modest revenue targets a GEM listing rather than the Main Board.
Watch out. Assuming both boards share identical criteria - each has its own rulebook and tests.
Self-check: A hypothetical new company with a limited track record seeks listing. Which board fits better?
Answer: GEM, subject to its own entry criteria being met.
37. The Trading System and Order Types
SEHK uses an automated order processing and matching system with prescribed order types, such as limit orders, enhanced limit orders and auction session orders. Matching follows price priority first, then time priority at the same price.
Example. Hypothetical example: two orders rest at the same price - the one entered earlier executes first under time priority.
Watch out. Assuming unconstrained market orders exist as on some other markets - SEHK order types carry price protection characteristics.
Self-check: Two hypothetical orders at the same price - which executes first?
Answer: The earlier-entered order, under time priority.
38. Price Increments and Order Validity Rules
SEHK quotes move in prescribed minimum price increments (tick sizes) that vary according to the security's price band, and rules on order size and spread preserve orderly price discovery. A valid order price must sit on a valid tick for that security's band.
Example. Hypothetical example: suppose a security's price band uses $0.05 increments - an order at $20.03 would be invalid because it does not align with a valid tick.
Watch out. Quoting prices between increments - the system will not accept them.
Self-check: A hypothetical order priced between two valid ticks - is it accepted?
Answer: No - the price must align with the prescribed increment for that price band.
39. Halt, Suspension, Cancellation and Withdrawal of Listing
A trading halt is a short stoppage, often pending an announcement or clarification; a suspension is a longer stoppage until the underlying issues are resolved; cancellation or withdrawal of listing ends the security's trading status. On-exchange dealing in suspended securities is restricted until resumption.
Example. Hypothetical example: a company halts mid-session pending clarification of a media report and is later suspended pending its results.
Watch out. Using halt and suspension interchangeably - they differ in duration and cause.
Self-check: A hypothetical issuer needs time before a major announcement during trading. Which applies?
Answer: A trading halt, typically, given its short and temporary nature.
40. HKSCC and CCASS Participant Categories
HKSCC operates CCASS, the central securities depository and clearing system. Participant categories include direct clearing participants, general clearing participants who clear for other brokers, custodian participants holding for clients, and investor participants holding their own holdings - each with its own admission criteria.
Example. Hypothetical example: a broker that clears trades for other non-participant brokers acts as a general clearing participant.
Watch out. Assuming all CCASS users share the same rights - the categories differ materially.
Self-check: A hypothetical broker wants to clear for another broker. Which category applies?
Answer: General clearing participant.
41. How Clearing and Settlement Work
CCASS settles trades on a rolling cycle - commonly T+2 for SEHK securities - through electronic book-entry transfers against payment, so settlement risk is managed centrally. Participants who fail to deliver face buy-in procedures and disciplinary exposure.
Example. Hypothetical example: a trade executed on Monday settles on Wednesday under the T+2 cycle.
Watch out. Assuming settlement is same-day - a fixed settlement cycle applies.
Self-check: A hypothetical participant fails to deliver on settlement day. What follows?
Answer: Buy-in action against the failing participant, plus potential disciplinary consequences.
42. Novation and Continuous Net Settlement
Through novation, HKSCC becomes the legal counterparty to CCASS trades and thereby stands behind settlement between participants. Under Continuous Net Settlement, deliveries and receipts are netted across a participant's transactions, reducing the volume of movements.
Example. Hypothetical example: a participant owes 100,000 shares to one participant and is owed 80,000 by another - CNS nets this to a single 20,000-share delivery.
Watch out. Thinking participants settle directly with each other - after novation, HKSCC is the counterparty.
Self-check: Who is the settlement counterparty for a hypothetical CCASS trade after novation?
Answer: HKSCC, as the central counterparty standing behind settlement.
43. SEHK Disciplinary Procedures
SEHK disciplines its participants for exchange rule breaches through investigation and disciplinary hearings, with sanctions such as fines, suspension or termination of participantship, and appeal routes. This is distinct from the SFC's statutory disciplinary regime.
Example. Hypothetical example: a participant repeatedly fails exchange obligations - SEHK discipline may proceed in parallel with any SFC action.
Watch out. Conflating exchange discipline with SFC discipline - different bodies, grounds and sanctions.
Self-check: Can one hypothetical breach attract both SEHK and SFC action?
Answer: Yes - the exchange and the SFC exercise separate disciplinary jurisdictions.
44. Investor Transaction Costs
An investor's transaction costs comprise brokerage, which is negotiable with the broker, plus non-negotiable components such as stamp duty on transfers and regulatory and trading levies and fees. The components and their bases matter more than memorised rates, which can change over time.
Example. Hypothetical example: a $100,000 trade's total cost equals brokerage plus stamp duty plus the applicable levies and fees, each calculated on its own base.
Watch out. Quoting specific rates as permanent figures - rates change, so know the structure and confirm current values.
Self-check: Which cost component in a hypothetical trade is negotiable?
Answer: Brokerage - statutory duties, levies and fees are fixed.
Topic 5: Other Securities Activities
Introducing agents, margin financing, short selling, stock borrowing and lending, advising, online trading, alternative venues, offers of securities, cross-border trading and virtual assets.
45. Approved Introducing Agents
An approved introducing agent introduces prospective clients to intermediaries under an approved arrangement without carrying on the regulated activity itself. Approval typically depends on staying within defined limits - such as not holding client money or assets and not giving advice.
Example. Hypothetical example: an agent introduces investors to a licensed broker but handles no funds and gives no advice.
Watch out. Introducing that drifts into advice or holding client assets - that crosses into licensing territory.
Self-check: May a hypothetical approved introducing agent accept client money?
Answer: No - holding client money would amount to carrying on regulated activity beyond its approval.
46. Securities Margin Financing
Securities margin financing is a distinct regulated activity involving lending to clients secured by securities collateral to finance purchases. It requires dedicated authorisation, with specific collateral control, margin call procedures and financial resources treatment differing from plain dealing.
Example. Hypothetical example: a client posts shares as collateral, borrows to buy more, and faces a margin call when values fall.
Watch out. Assuming any lending against shares is ordinary dealing - the dedicated margin financing regime applies.
Self-check: A hypothetical firm lends clients money secured on their shares. Which regulated activity is that?
Answer: Securities margin financing, requiring its own authorisation.
47. Covered versus Naked Short Selling
Short selling is selling securities the seller does not own. Naked short selling, without arrangements to cover delivery, is prohibited. Covered short selling of designated securities is permitted subject to conditions, including arranging cover and marking the order as a short sale.
Example. Hypothetical example: a trader borrows shares, sells them, and later returns borrowed stock - covered and permitted; selling with no borrowing arrangement would be prohibited naked selling.
Watch out. Assuming all short selling is illegal - regulated covered short selling is allowed.
Self-check: A hypothetical sale is placed with no cover arranged. How is it classified?
Answer: Naked short selling, which is prohibited.
48. Securities Borrowing and Lending
SBL transfers securities against collateral under documented agreements: lenders earn fees, borrowers obtain stock to cover deliveries or short positions. Proper documentation, collateral maintenance and record keeping are required, and SBL connects directly to lawful covered short selling.
Example. Hypothetical example: a broker borrows stock from a custodian to settle a client's short sale, posting and maintaining collateral.
Watch out. Treating stock borrowing as an informal handshake - documentation and controls are required.
Self-check: Would an oral borrowing arrangement satisfy the requirements in a hypothetical case?
Answer: No - prescribed documentation and controls apply to securities borrowing and lending.
49. Advising on Securities (RA4) versus Dealing
Advising on securities covers providing analyses, advice or invitations intended to induce securities transactions, and requires its own authorisation. It is distinct from dealing (executing or inducing transactions) and from exemptions such as wholly factual media commentary.
Example. Hypothetical example: an analyst's paid recommendation to buy a share is regulated advice; a broker merely executing the resulting order is dealing.
Watch out. Assuming expressing views always equals regulated advice - the context and inducement matter.
Self-check: A hypothetical newspaper publishes a wholly factual market report. Is that RA4?
Answer: Generally no - wholly factual commentary falls outside regulated advising.
50. Online Trading and Advising
Offering online dealing services requires robust system capacity, security and contingency arrangements, secure client authentication, written client agreements, and complete order records, with internet trading risks disclosed to clients. Conduct duties are not relaxed online - they are extended with system requirements.
Example. Hypothetical example: a firm's app degrades gracefully during volume spikes - capacity and contingency planning reflecting the requirements.
Watch out. Assuming password sharing between household members is acceptable - authentication controls prohibit it.
Self-check: In a hypothetical online platform, is it acceptable for a client to share his password?
Answer: No - secure authentication and access controls are required.
51. Alternative Liquidity Pools and Automated Trading Services
ALPs match orders outside SEHK - through internalisation or crossing networks - raising transparency and best-execution considerations. Operating a market-like automated venue generally requires an automated trading services licence, unless an exemption applies, with conditions on fair ordering, systems and information disclosure.
Example. Hypothetical example: a bank matches client orders internally before routing residue to the exchange - it must assess the ALP and ATS characterisation.
Watch out. Assuming internal matching is always unregulated - the venue's characterisation determines licensing.
Self-check: A hypothetical automated venue matches client orders continuously. Is a licence needed?
Answer: Potentially yes - an ATS licence, unless a specific exemption applies.
52. Offers of Securities: Prospectus and Authorisation
Offers to the public are generally restricted: the CWUMPO requires a prospectus for public offers of a listed corporation's securities, and the SFO restricts public offers of investments unless authorised or exempt, with professional and private placement exemptions carrying conditions. Authorised collective investment schemes and structured products, and their advertisements, need SFC authorisation.
Example. Hypothetical example: a firm emails a fund offer to a large retail audience - authorisation or a qualifying exemption is required first.
Watch out. Assuming private placements can target any number of retail clients - exemptions have strict conditions.
Self-check: May a hypothetical firm offer an unauthorised fund to the public?
Answer: No - the offer requires SFC authorisation or a specific exemption.
53. Cross-Border Trading: Stock Connect
Stock Connect links Hong Kong and Mainland markets: Northbound lets Hong Kong and offshore investors trade A-shares through the SEHK link to Shanghai and Shenzhen, while Southbound lets Mainland investors trade selected Hong Kong stocks. Orders flow through home-market brokers, with clearing via HKSCC and ChinaClear arrangements under cross-border regulatory cooperation.
Example. Hypothetical example: a Hong Kong client buys an A-share - the order goes via SEHK into the Northbound link and settles under the link's arrangements.
Watch out. Assuming the client needs a Mainland brokerage account - the link's structure provides access.
Self-check: How does a hypothetical Hong Kong investor access A-shares?
Answer: Through Northbound Stock Connect via a Hong Kong broker, without opening a Mainland account.
54. Virtual Assets: The SFC's Regulatory Approach
The SFC regulates virtual asset activities through licensing regimes, including licensed virtual asset service providers and controlled access for intermediaries' VA-related activities. Tokens with securities characteristics are regulated as securities regardless of their blockchain form, while other virtual assets are addressed through the VA-specific regimes.
Example. Hypothetical example: a token representing equity in a company is treated under securities regulation even though it is issued on a blockchain.
Watch out. Assuming all virtual assets sit outside regulation - substance and access conditions determine the regime.
Self-check: Is a hypothetical security token beyond the SFC's reach?
Answer: No - tokens with securities characteristics are regulated as securities.
Topic 6: Exchange Traded Options and OTC Derivatives
Stock options on the SEHK, participant access, position limits and reporting, clearing and margin, plus OTC derivatives licensing and ongoing obligations.
55. Stock Options: Classes and Series
SEHK-traded stock options are standardised contracts on underlying listed shares. A class comprises all options on one underlying share, while a series specifies a particular strike price and expiry; holders of exercised standard options receive share delivery under the prescribed contract terms.
Example. Hypothetical example: a call on Company X with a $50 strike and March expiry is one series within the Company X class.
Watch out. Confusing class with series - a class is the whole share; series are the strike-and-expiry combinations.
Self-check: Options on the same hypothetical share with different strikes and expiries - same class?
Answer: Yes - they are multiple series within one class.
56. Options Market Participants and Access Rights
Dealing in listed stock options requires options market participantship and appropriately qualified and registered traders; access rights determine what a participant may trade and for whom. Equities participantship alone does not carry over to the options market.
Example. Hypothetical example: a firm adding options dealing must secure options participantship and register its traders before writing its first option.
Watch out. Assuming an equities trading right automatically covers options trading.
Self-check: A hypothetical equity participant wants to trade options tomorrow. Any problem?
Answer: Yes - options participantship and registered, qualified traders are needed first.
57. Options Position Limits, Reporting and Monitoring
Position limits cap a person's aggregate position per option class, computed across the series in that class, while reportable levels trigger disclosure once exceeded. The exchange and the SFC monitor positions to prevent concentration and manipulation.
Example. Hypothetical example: a trader's long calls and short puts on the same share are combined in assessing the class position limit.
Watch out. Assessing each series separately - limits apply to the aggregate per class.
Self-check: A hypothetical trader spreads one share's options across many series. Does that escape limits?
Answer: No - positions are aggregated per class for limit purposes.
58. Options Clearing and Margin
The options clearing house acts as central counterparty via novation, collecting initial margin based on portfolio risk and calling variation margin from daily mark-to-market. Premiums settle under prescribed arrangements, and exercised contracts settle into the underlying shares.
Example. Hypothetical example: a short option position loses value during the day - variation margin is called for the following settlement.
Watch out. Assuming the premium is the only cash flow - daily margining applies throughout the position's life.
Self-check: A hypothetical option expires worthless. What happens to the margin?
Answer: The position closes and margin is released under the clearing house's process.
59. OTC Derivatives Licensing
Dealing in OTC derivatives is a distinct regulated activity in its own right. Entities dealing in OTC derivatives for clients require authorisation for that activity, while authorised banks act as registered institutions - an existing securities licence does not cover OTC derivatives dealing.
Example. Hypothetical example: a securities broker adds interest rate swap dealing for clients - it needs the OTC derivatives authorisation beyond its dealing in securities licence.
Watch out. Assuming one licence covers all derivatives - OTC derivatives dealing is separately authorised.
Self-check: A hypothetical firm launches OTC derivatives dealing under its existing securities licence. Is that sufficient?
Answer: No - the OTC derivatives dealing activity requires its own authorisation.
60. OTC Derivatives Ongoing Obligations
OTC derivatives dealers carry ongoing obligations including transaction reporting to the authorised repository, record keeping, conduct requirements, and clearing of specified standardised transactions through a designated central counterparty, alongside risk mitigation practices with counterparties.
Example. Hypothetical example: a dealer executes a standardised interest rate swap with another dealer - reporting obligations and possibly the clearing mandate both engage.
Watch out. Assuming the OTC market remains wholly bilateral - mandated clearing and reporting apply to specified transactions.
Self-check: Are all hypothetical OTC trades centrally cleared?
Answer: No - only the specified standardised transactions within the clearing mandate are cleared.
Topic 7: Market Misconduct and Improper Trading Practices
The dual civil and criminal regime, the Market Misconduct Tribunal, the six forms of market misconduct, consequences, private actions, unsolicited calls, improper practices, fining principles and enforcement.
61. The Dual Track: MMT Proceedings versus Criminal Prosecution
The SFO provides a civil route before the Market Misconduct Tribunal and a criminal route before the courts. Double-jeopardy safeguards prevent the same person facing both Part XIII and Part XIV proceedings for the same market-misconduct conduct. The routes use different standards of proof; the civil route still requires the applicable statutory elements, including any required mental state.
Example. Hypothetically, suspected insider dealing is considered for the MMT route or the criminal route. The authorities must respect the statutory safeguards when choosing proceedings against that person for the same conduct.
Watch out. Assuming only one track exists, or that the MMT route is criminal - it is civil.
Self-check: Is a hypothetical MMT finding a criminal conviction?
Answer: No - it is a civil finding carrying civil consequences.
62. The MMT: Role, Procedure and Orders
The MMT is an independent civil tribunal that hears references and can make orders under section 257 of the SFO: disqualification from being a director or taking part in the management of any listed or unlisted corporation; a cold shoulder order restricting dealings in the Hong Kong financial market; cease and desist orders; disgorgement to the Government of profit gained or loss avoided; and payment of costs and expenses. It may also refer matters for disciplinary action. It cannot imprison - that belongs to the criminal track.
Example. Hypothetical example: a trader found to have rigged a price may face a disgorgement order and a disqualification order from being a director or taking part in the management of listed or unlisted corporations.
Watch out. Listing MMT orders loosely - learn the specific order set and what each does.
Self-check: Can the MMT imprison a hypothetical respondent?
Answer: No - imprisonment is available only on the criminal track.
63. Insider Dealing
Insider dealing occurs when a person connected with a listed corporation - or someone who obtains relevant information from such a connected person - deals, or induces others to deal, in its listed securities while holding information not generally known that would materially affect price if generally known.
Example. Hypothetical example: a finance manager buys shares ahead of an undisclosed profit warning - a classic insider dealing scenario.
Watch out. Assuming only directors qualify - employees, advisers and tippees can be caught through the connected person and connected source limbs.
Self-check: A hypothetical outsider is tipped by a connected friend and then deals. Is that caught?
Answer: Potentially yes - dealing on information from a connected source is covered.
64. False Trading, Price Rigging and Stock Manipulation
False trading concerns a false or misleading appearance of trading or the market or price, with the applicable intention, recklessness, deeming rules and defences. Price rigging separately covers specified wash sales with a price effect and fictitious or artificial transactions or devices used intentionally or recklessly to produce that effect. Stock market manipulation involves two or more transactions affecting price and an intention to induce specified dealing decisions by others.
Example. Hypothetical example: friends trade shares between accounts they control without any change in real ownership - a false trading pattern.
Watch out. Lumping all manipulation into one offence - each form requires its own elements to be established.
Self-check: A hypothetical trader sells shares between his own accounts with no ownership change. Which misconduct?
Answer: False trading, through the wash-sale style transaction.
65. Disclosure-Based Market Misconduct
The remaining forms of market misconduct are disclosure-based. Disclosure of information about prohibited transactions concerns communicating that the price of securities is likely to be affected by prohibited manipulative dealing, subject to conditions about the discloser's participation in, or benefit from, that dealing - it does not simply mean disclosing any forced sale or confidential order. Disclosure of false or misleading information covers information likely to induce transactions or affect price, covering listed securities and unlisted securities of listed corporations under the relevant provisions.
Example. Hypothetical example: a person spreads a fabricated takeover rumour about a listed company, knowing it will likely move the price.
Watch out. Assuming spreading rumours is merely an ethics issue - specific SFO provisions capture it as market misconduct.
Self-check: A hypothetical person circulates a false merger rumour to induce buying. Misconduct?
Answer: Yes - the disclosure provisions cover false or misleading information likely to induce transactions.
66. Consequences of Market Misconduct
MMT consequences are civil: disgorgement of profit gained or loss avoided, cold shoulder and cease and desist orders, disqualification from being a director or taking part in the management of listed or unlisted corporations, and payment of costs and expenses. Criminal convictions can bring fines and imprisonment. In parallel, the SFC can take licence-based disciplinary action against the person's licence or registration.
Example. Hypothetical example: an offender may face an MMT disqualification and an SFC licence review running alongside each other.
Watch out. Describing every consequence as criminal - MMT orders are civil in nature.
Self-check: Can the MMT order a hypothetical wrongdoer to disgorge profit?
Answer: Yes - disgorgement is one of its civil orders.
67. Private Civil Actions
Persons who suffer pecuniary loss from market misconduct may bring private civil actions in court for compensation under the SFO, entirely separate from MMT proceedings and SFC enforcement. An MMT finding or conviction can sit alongside, but does not replace, the victim's own claim.
Example. Hypothetical example: an investor buys during a rigged price run and later suffers loss - he may sue the manipulator for compensation.
Watch out. Assuming only regulators can act - affected persons have their own statutory cause of action.
Self-check: While a hypothetical MMT case is ongoing, can victims also sue?
Answer: Yes - private civil actions are independent of the MMT process.
68. The Unsolicited Calls Prohibition
The SFO restricts making unsolicited calls to market specified regulated products to specified categories of persons unless an exemption applies, such as a genuine prior request from the recipient. The aim is to curb high-pressure cold calling of unsophisticated investors.
Example. Hypothetical example: a salesperson cold-calls a retiree pushing a structured product - likely within the prohibition absent an exemption.
Watch out. Assuming all cold calls are banned - application turns on the product sold, the recipient category and any exemption.
Self-check: A hypothetical client phones first to request product information. Does the prohibition apply?
Answer: No - the call is solicited by the client, so the prohibition does not bite.
69. Improper Trading Practices
Common improper practices include churning (excessive trading to generate commissions), unauthorised trading (executing without consent), front running (dealing ahead of client orders), marking the close (influencing end-of-day prices), matched orders, and spoofing or layering with orders meant to be cancelled. Each is judged by intent and its effect on clients or the market.
Example. Hypothetical example: a dealer executes dozens of trades in a dormant account within a month while commissions balloon - classic churning indicators.
Watch out. Treating these as mere internal policy breaches - they ground SFC discipline and may constitute other misconduct or offences.
Self-check: A hypothetical dealer buys for his own account just before filling a large client buy order. Which practice is that?
Answer: Front running.
70. SFC Fining Principles and Reasons for Enforcement
Under its disciplinary fining framework, the SFC weighs factors such as the seriousness and duration of the breach, harm caused, benefit gained, cooperation shown and disciplinary record, with comparable principles applying under the AMLO. Enforcement exists to protect investors, deter misconduct and preserve market integrity, with outcomes published to signal standards.
Example. Hypothetical example: a firm that self-reports a breach, cooperates fully and remediates quickly may see those factors reflected in the fine determined.
Watch out. Assuming fines are arbitrary - published principles guide how the amount is determined.
Self-check: Should a repeat offender and a first-time self-reporting firm expect the same hypothetical fine?
Answer: No - the fining factors, such as record and cooperation, differentiate the outcomes.
Turn your revision into a study plan
Adjust the pace to your starting knowledge and examination date. These are suggested revision stages, not an official preparation timetable.
| Stage | What to do |
|---|---|
| Stage 1 - Framework and legislation | Work through Topics 1 and 2: build a one-page glossary of each ordinance, rule set and regulator's role, and write a sentence stating what each piece of subsidiary legislation protects. Self-test on the licensing regime distinctions (licensed corporation, registered institution, responsible officer, executive officer). |
| Stage 2 - Conduct and market mechanics | Study Topics 3 and 4: summarise each Code of Conduct general principle in your own words, map the ICG's internal control areas, outline the AML/CFT ordinances and the risk-based approach, then draw the SEHK trading and CCASS settlement flow from order to novation-based settlement. |
| Stage 3 - Activities and derivatives | Cover Topics 5 and 6 by making a comparison table: for each securities activity (margin financing, short selling, borrowing and lending, advising, online trading, ATS, offers, Stock Connect, virtual assets), note its authorisation need and one key conduct rule. For options, practise class versus series and aggregate position limit questions. |
| Stage 4 - Misconduct and consolidation | Finish with Topic 7: write out the six market misconduct forms with their elements, the MMT's order set, and the dual-track consequences. Then attempt a full timed mock of 40 questions in 60 minutes, and review your trap log from earlier stages before sitting the exam. |
Questions candidates ask
Which study guide version applies to my exam sitting?
Paper 2 guide version 2.9 applies to LE sittings from 26 October 2026 onwards. If you sit on or before 25 October 2026, your exam follows version 2.8.1, so study from that version and check where the two overlap. Always confirm the correct version for your enrolment on the HKSI Institute's website.
Is a breach of the Code of Conduct a criminal offence?
Not automatically. A Code breach can affect fitness and properness and support SFC disciplinary action. A criminal offence requires the elements of a relevant statutory offence to be proved; some statutory provisions instead create civil or regulatory consequences. Identify the particular rule and enforcement route.
What is the exam format for Paper 2?
Paper 2 consists of 40 multiple-choice questions answered in 60 minutes, and the pass mark is 70%. Remember that the pass mark is the score you need to pass; the pass rate is a separate statistic about how candidates performed and plays no part in your marking.
Do I need to memorise every rate, limit and threshold?
No article can substitute for the official study guide, and numeric values change over time. Focus first on understanding what each rule does and why a scenario turns on it, then verify the specific current figures against your version of the guide before the exam.
How does Paper 2 relate to Paper 1?
Both cover the regulatory framework, so there is genuine overlap, but Paper 2 goes deeper into securities-specific requirements such as client asset rules, SEHK mechanics, the Code of Conduct and market misconduct. Treat each paper on its own terms and revise from the study guide for the paper you are sitting.
Official sources and further reading
- HKSI Paper 2 syllabus and learning outcomes (PDF)
- HKSI current study guide versions and effective dates
- HKSI examination format and study resources
- SFC Code of Conduct
- SFC: Market Misconduct Tribunal orders in false trading case
These independent revision notes explain the public syllabus through original examples. They do not reproduce the official study guide or examination questions. Use the official study guide valid for your examination date for the full examinable detail. HKSIDataBase is an independent provider and is not endorsed by the HKSI Institute.