HKSI Paper 3 (Regulation of Derivatives) English Free Trial

Market misconduct is defined as:
(a) insider dealing;
(b) false trading;
(c) price rigging;
(d) disclosure of information about prohibited transactions;
(e) disclosure of false or misleading information inducing transactions; or
(f) stock market manipulation.

An intermediary that enters into margined transactions such as an intermediary which deals in futures contracts, must also, in respect of each client on whose behalf it enters into such transactions, keep records showing:
(a) the market value and margin value of each type of securities collateral deposited with it;
(b) the aggregate market value and the aggregate margin value of such securities collateral; and
(c) details of margin calls made.

An applicant for HKFE participantship must ordinarily be a limited company incorporated in Hong Kong and must:
(a) submit a properly completed application in writing to HKFE on the prescribed form, including an undertaking to be bound by HKFE Rules, with a certified copy of a board minutes authorising a director to sign the undertaking on behalf of the company;
(b) have fulfilled the Securities and Futures (Financial Resources) Rules (“FRR”) and other financial requirements of HKFE;
(c) pay HKFE all required fees in full;
(d) demonstrate that there are no reasons why it should not be licensed by or registered with the SFC to carry on Type 2 regulated activity;
(e) acquire an HKFE trading right; and
(f) have complied with any other conditions specified in the notice of approval.

The procedures for operating discretionary accounts should include:
(a) executing a discretionary account agreement which includes the investment objectives and strategies of the client and the terms under which discretion will be exercised;
(b) regular reviews of the account’s performance by designated staff independent of those handling the account;
(c) providing the client with regular statements and timely ad hoc reports on account balance and transaction details; and
(d) clearly separating the investment decision-making process from the dealing process.

The important regulators in Hong Kong are:
(a) the SFC;
(b) the HKMA; and
(c) the Companies Registry.

2.20 The requirements in relation to the receipt of money or cash rebates are:
(a) the licensed or registered person must have described its practices in relation to rebates and the client consented in writing to the licensed or registered person receiving and retaining the rebates; this may be provided for in the client agreement or other investment management agreement;
(b) brokerage rates are not in excess of customary full-service rates; and
(c) the rebates and their approximate values are disclosed to the client; such information must be provided to the client at least twice annually, or in each contract note.

Licensed representatives must report changes in the following information:
(a) their basic information, including names, identity card numbers and contact details;
(b) the status of any authorisation by a regulatory organisation in or outside Hong Kong;
(c) the status of their membership of a stock exchange or futures exchange in or outside Hong Kong; and
(d) the relevant information as specified in the Information Rules

The requirement for a licence or registration for Type 5 regulated activity applies to corporations which carry on a business of advising on futures contracts. The requirement applies to all staff members who perform regulated functions for the licensed corporation, with the exception of accountants, clerks or cashiers.

Where the assessment is made in respect of an AFI, it will relate to:
(a) any director;
(b) the chief executive;
(c) managers (as defined in s. 2(1) of the Banking Ordinance); and
(d) executive officers of the AFI.

The only products of significance for the present Topic are those that meet the definition of futures contracts, which include:
(a) contracts for differences (which meet either the futures contract or options on futures contract definitions);
(b) forward contracts (but only when they are traded on an exchange); and
(c) futures contracts and option contracts (where these are options on futures contracts and traded on an exchange).