📈 Participating in the Hong Kong Exchanges

1. Within the HKEX group, The SEHK Options Clearing House Limited (SEOCH) is the clearing house for which ONE of the following?

1. Shares and other securities traded on SEHK
2. Futures and options contracts traded on HKFE
3. OTC interest rate and currency derivatives
4. Stock options contracts traded on SEHK

SEOCH clears stock options contracts traded on The Stock Exchange of Hong Kong Limited (SEHK). Shares and other securities traded on SEHK are cleared and settled by Hong Kong Securities Clearing Company Limited (HKSCC) through CCASS, futures and options contracts traded on HKFE are cleared by HKFE Clearing Corporation Limited (HKCC), and OTC interest rate and currency derivatives are cleared by OTC Clearing Hong Kong Limited (OTC Clear).

2. Which ONE of the following best describes the role of Hong Kong Exchanges and Clearing Limited (HKEX) in the HKEX group?

1. The statutory fund that compensates clients of defaulting exchange participants
2. The clearing house that settles share trades between exchange participants
3. The regulator that licenses firms to carry on Type 1 regulated activity
4. The holding company of the exchanges and the clearing houses in the group

HKEX is the holding company of the group: it controls the stock exchange (SEHK), the futures exchange (HKFE) and the clearing houses (HKSCC, HKCC and SEOCH). Share settlement is carried out by HKSCC, not by HKEX itself. Licensing for Type 1 regulated activity is a function of the SFC, and compensation comes from the Investor Compensation Fund, not from HKEX.

3. Under section 19 of the SFO, which ONE of the following is the penalty on conviction on indictment for a person who, without reasonable excuse, operates a stock market in contravention of that section?

1. A fine of HK$1,000,000 and imprisonment for 2 years
2. A fine of HK$100,000 and imprisonment for 6 months
3. A fine of HK$5,000,000 and imprisonment for 7 years
4. A fine of HK$10,000,000 and imprisonment for 10 years

Section 19(5)(a) of the SFO provides, on conviction on indictment, for "a fine of $1,000,000 and to imprisonment for 2 years" (Cap. 571 as at 1 January 2027). HK$100,000 with 6 months is lower than this, and the two heavier penalties of HK$5,000,000 with 7 years and HK$10,000,000 with 10 years are not the penalty in section 19(5). Summary conviction carries a level 6 fine and 6 months.

4. Under section 21 of the SFO, which ONE of the following interests must a recognized exchange company ensure prevails where it conflicts with the company's own interest?

1. The interests of its shareholders
2. The interests of its participants
3. The interests of the general public
4. The interests of its listed issuers

Section 21(2)(b) of the SFO requires a recognized exchange company to "ensure that the interest of the public prevails where it conflicts with the interest of the recognized exchange company". The interests of its shareholders, exchange participants and listed issuers therefore cannot override the public interest.

5. A recognized exchange company becomes aware that one of its exchange participants is unable to comply with the financial resources rules. Under section 21 of the SFO, what must the company do?

1. Report it to the Commission in its next return
2. Notify the Commission within 3 business days
3. Immediately notify the Commission of the matter
4. Report it to the Financial Secretary at month-end

Section 21(5) of the SFO says a recognized exchange company "shall immediately notify the Commission" if it becomes aware that an exchange participant is unable to comply with its rules or the financial resources rules. A delay of 3 business days or notice in a periodic return is therefore too late, and the Financial Secretary is not the person to be notified.

6. Which ONE of the following best describes the purpose of the daily quota under Stock Connect?

1. To cap the number of investors allowed to participate
2. To cap the net value of cross-boundary purchases each day
3. To cap the holding of each investor in a single stock
4. To cap the number of eligible securities in each direction

The daily quota under Stock Connect caps the net value of cross-boundary buy trades in each direction each day, which limits the flow of funds across the boundary. It does not limit the number of investors, each investor's holding in a single stock or the number of eligible securities, which are dealt with by eligibility rules and other limits. The quota amounts are revised from time to time and are not needed to answer.

7. For the purposes of the SFO, which ONE of the following describes an "exchange participant"?

1. A person licensed by the Commission to carry on Type 1 regulated activity
2. A person who may trade through the exchange company and is entered on its register
3. A person who has opened a securities account with a CCASS clearing participant
4. A person approved by the Commission as a responsible officer of a corporation

Schedule 1 to the SFO defines an exchange participant as a person who may trade through the exchange company under its rules and whose name is entered in a "list, roll or register kept by that recognized exchange company". A Type 1 licence is a condition of participantship under Rule 302 but is not the definition. Holding a securities account or being a responsible officer does not make a person an exchange participant.

8. Which ONE of the following is NOT a requirement for a company to be an Exchange Participant under Rule 302 of the Rules of the Exchange?

1. Be the holder of a Stock Exchange Trading Right
2. Be an authorised institution under Cap. 155
3. Be a Hong Kong company limited by shares
4. Be licensed for Type 1 regulated activity

Rule 302 requires an Exchange Participant to hold a Stock Exchange Trading Right, to be a licensed corporation (or deemed licensed) for Type 1 regulated activity and to be a company limited by shares incorporated in Hong Kong. It does not require the company to be an authorised institution under the Banking Ordinance (Cap. 155), so that is the answer; the other three are all listed in Rule 302.

9. The Board of The Stock Exchange of Hong Kong Limited rejects a company's application to be an Exchange Participant. Under Rule 301C of the Rules of the Exchange, what may the applicant do?

1. Appeal within 14 business days to the Admission Appeals Committee; its decision is final
2. Appeal to the Securities and Futures Appeals Tribunal within 21 business days
3. Reapply at once, because the Board's rejection is not binding on the applicant
4. Appeal to the Commission within 14 calendar days; the Commission's decision is final

Rule 301C allows the applicant to appeal in writing within 14 business days after notification of the Board's decision to the Exchange Participant Admission Appeals Committee, whose decision will be final (Rules of the Exchange as at 1 January 2027). The Commission and the Securities and Futures Appeals Tribunal are not the appeal bodies named in the Rule, and the rejection is not simply ignored by reapplying at once.

10. Harbourview Securities Limited, an Exchange Participant, has its Type 1 licence suspended by the Commission under Part IX of the SFO for three months. It still meets every other requirement of participantship. Which ONE of the following is CORRECT under Rule 302 of the Rules of the Exchange?

1. It must reapply for admission once the licence suspension ends
2. It ceases to be an Exchange Participant on the date of suspension
3. It must transfer its Trading Right to another firm within 14 days
4. It may continue to be an Exchange Participant during the suspension

Rule 302(2) provides that where the licence is suspended under Part IX of the SFO, the participant "shall not be prevented from continuing to be an Exchange Participant" if it is otherwise eligible, which the facts confirm. It does not cease to be a participant on suspension, the Rule contains no 14-day transfer requirement, and it has no need to reapply for admission because its participantship continues.

11. Under Rule 311 of the Rules of the Exchange, which ONE of the following applies to a holder of a Stock Exchange Trading Right?

1. It may pledge the right to any lender it chooses
2. It may charge the right if the Commission is given notice
3. It may pledge the right to an authorised institution
4. It may pledge or charge the right only as the Rules allow

Rule 311 prohibits a holder from selling, transferring, pledging, mortgaging or charging the right, or creating any other encumbrance, "otherwise than in accordance with these Rules", and the Exchange is not bound to recognise any dealing made in breach. Pledging to any lender, pledging only to an authorised institution or charging on notice to the Commission is not permitted by the Rule itself.

12. Which of the following statements about Stock Exchange Trading Rights are CORRECT? I. A person may hold more than one Stock Exchange Trading Right. II. A holder may split a Stock Exchange Trading Right into separate rights for different products without the Exchange's authorisation. III. A holder may relinquish a Stock Exchange Trading Right only with the prior written approval of the Board. IV. Once given notice of it, the Exchange must recognise a pledge of a Stock Exchange Trading Right made in breach of the Rules.

1. I and III only
2. II and III only
3. II and IV only
4. I, II and IV only

Statement I is correct under Rule 310, and III is correct under Rule 311B, which permits relinquishment only with the prior written approval of the Board. Statement II is wrong because Rule 311A(d) says a Trading Right cannot be fragmented into separate rights for different products unless the Exchange authorises it. Statement IV is wrong because Rule 311 bars any pledge otherwise than in accordance with the Rules, and the Exchange is not bound to recognise a dealing in breach even when it has notice of it.

13. Under Rule 313 of the Rules of the Exchange, an Exchange Participant must at all times have at least one of the following registered with the Exchange as a Responsible Officer:

1. A non-executive director
2. An executive director
3. A company secretary
4. A compliance officer

Rule 313 states that an Exchange Participant "shall have at least one executive director registered with the Exchange as a Responsible Officer" at all times. A non-executive director, a company secretary or a compliance officer does not meet that requirement by itself.

14. Which ONE of the following statements about an Exchange Participant is INCORRECT?

1. It may be expelled for a material misrepresentation in its application
2. It needs the prior written approval of the Board before it may resign
3. After giving notice to resign, it ceases to be bound by the Rules at once
4. On expulsion, it remains indebted to the Exchange for money it owes

The incorrect statement is that the participant is no longer bound at once after giving notice to resign: under Rule 311B the Rules continue to bind it as if the notice had not been given until the Board approves. The other statements are correct, because Rule 306 allows expulsion for a material misrepresentation and leaves the participant indebted to the Exchange, and Rule 311B requires the Board's prior written approval to resign.

15. Excluding the Pre-opening Session and the Extended Morning Session, what are the hours of the Morning Session under Rule 501 of the Rules of the Exchange?

1. 9:30 a.m. to 12:00 noon
2. 9:30 a.m. to 11:30 a.m.
3. 9:30 a.m. to 12:30 p.m.
4. 10:00 a.m. to 12:00 noon

Rule 501(1)(a) fixes the Morning Session from 9:30 a.m. to 12:00 noon (Rules of the Exchange as at 1 January 2027; the times may be varied under the Rule). The Pre-opening Session and the Extended Morning Session are separate sessions and the Afternoon Session runs from 1:00 p.m. to 4:00 p.m., so the Morning Session neither opens at 10:00 a.m. nor ends at 11:30 a.m. or 12:30 p.m.

16. During the Continuous Trading Session, how are orders for auto-match stocks matched under Rule 517 of the Rules of the Exchange?

1. Largest order first, then earliest entry time
2. Earliest order entry time first, whatever the price
3. Best price first, then earliest order entry time
4. Order type first, then order entry time

Rule 517(2) applies a "strict price and time priority methodology" in the Continuous Trading Session: orders at the best price are matched first, and orders in the same queue rank by entry time. Time-only priority and size priority are not in the Rule, and order type matters only in the auction sessions under Rule 517(1).

17. Which of the following statements about order matching in the Pre-opening Session and the Closing Auction Session under Rule 517 of the Rules of the Exchange are CORRECT? I. At-auction orders carry a higher matching priority than at-auction limit orders. II. The priority of matching at-auction orders is determined by order size. III. The priority of matching at-auction limit orders is determined by the specified price. IV. At-auction limit orders with the same specified price are matched by order entry time.

1. I, III and IV only
2. II and IV only
3. I, II and III only
4. I and III only

Under Rule 517(1), at-auction orders rank above at-auction limit orders (I), at-auction limit orders are ranked by specified price (III) and, at the same price, by order entry time (IV). Statement II is wrong because at-auction orders are ranked by order entry time, not by size.

18. Under Rule 528 of the Rules of the Exchange, by when must an Exchange Participant report to the Exchange a discrepancy found in its end-of-session review of its sales and purchases journals?

1. Within 15 minutes after the end of that trading session
2. Within 15 minutes after the next Morning Session starts
3. Before the close of the next Afternoon Session
4. Within 3 business days of finding the discrepancy

Rule 528 requires the review of the sales and purchases journals at the end of each trading session and the reporting of any discrepancy not later than 15 minutes after the Morning Session of the next trading day commences (Rules of the Exchange as at 1 January 2027). A window after the same session ends, a deadline at the next Afternoon Session and a period of 3 business days are not what the Rule says.

19. Client K asks Harbourview Securities Limited whether it must charge a minimum rate of commission on trades in shares listed on the Exchange. Which ONE of the following replies is CORRECT?

1. Yes, the Exchange sets a minimum commission scale for its participants
2. No, but commission may not exceed a maximum scale set by the Exchange
3. Yes, the Commission sets a minimum rate for licensed corporations
4. No, commission is freely negotiable, so no minimum scale applies to it

Commission on securities transactions is freely negotiable between a licensed corporation and its client, and the former minimum commission scale has been abolished, so a reply based on it is out of date. Neither the Exchange nor the Commission sets a minimum rate, and no maximum commission scale is imposed by the Exchange.

20. Under section 170(1) of the SFO, subject to the exceptions, which ONE of the following must a person have at the time of selling securities at or through a recognized stock market?

1. A separate licence from the Commission to carry out short selling
2. The prior written approval of the Exchange for that particular sale
3. A presently exercisable, unconditional right to vest the securities
4. Cash collateral equal to the market value of the securities sold

Section 170(1) prohibits a sale at or through a recognized stock market unless the seller has (or believes on reasonable grounds that he has) a presently exercisable and unconditional right to vest the securities in the purchaser. The section requires no prior approval of the Exchange for each sale, no separate licence from the Commission for short selling and no cash collateral.

21. Under section 171 of the SFO, for how long must an agent or exchange participant that receives a short selling assurance retain the document, as a minimum?

1. 1 month
2. 3 months
3. 6 months
4. 1 year

(Cap. 571 as at 1 January 2027) Section 171(8)(a) of the SFO requires the document to be retained "for not less than one year from the date on which it is received". Periods of 1 month, 3 months or 6 months are shorter than the statutory minimum and so are wrong

22. Mr Chan, a licensed representative accredited to Harbourview Securities Limited, an exchange participant, knows that a client's sell order is a short selling order. Through carelessness, he does not indicate this when inputting the order into the trading system. Which ONE of the following is the MOST LIKELY position under section 172 of the SFO?

1. He commits an offence punishable by a level 6 fine and 2 years' imprisonment
2. He commits an offence only if the client suffers a loss from the omission
3. He does not commit an offence, as the omission was only due to carelessness
4. He commits an offence punishable by a level 5 fine and 1 year's imprisonment

Section 172(1)(b) requires the order to be flagged as a short selling order on input, and section 172(2) makes a breach an offence (level 5 fine and 1 year), but under section 172(3) a person is not regarded as committing it if he contravenes the section "by reason only of his inadvertence, carelessness or negligence". The level 6 fine and 2 years belong to section 170(4), and loss to the client is not an element of the offence.

23. Which of the following statements about clearing and settlement of securities traded on the Exchange are CORRECT? I. Trades in shares concluded on the Exchange are cleared and settled by HKSCC through CCASS. II. Under continuous net settlement, a participant's buy and sell obligations in the same stock are netted. III. HKFE Clearing Corporation Limited acts as the clearing house for shares. IV. Under delivery versus payment, the delivery of securities is linked to the payment for them.

1. I and II only
2. III and IV only
3. I, II and IV only
4. II, III and IV only

Statement I is correct because HKSCC clears and settles on-exchange share trades through CCASS, II is correct because continuous net settlement nets a participant's obligations in the same stock, and IV is correct because delivery versus payment links delivery with payment. Statement III is wrong: HKCC clears futures contracts, whereas share trades are cleared by HKSCC.

24. Client K sells 1,000 shares through Harbourview Securities Limited on Monday 4 January 2027. Assume there is no public holiday or market disruption that week. When do the shares settle in CCASS on the standard cycle?

1. Wednesday 6 January 2027
2. Tuesday 5 January 2027
3. Thursday 7 January 2027
4. Friday 8 January 2027

Settlement of on-exchange share trades in CCASS is on a T+2 basis (settlement cycle as at 1 January 2027), so a trade on Monday 4 January 2027 settles on Wednesday 6 January 2027. Tuesday would be T+1, which is not the cycle in force, and Thursday and Friday would be T+3 and T+4.

25. In the context of Stock Connect, which ONE of the following describes Southbound trading?

1. Mainland investors trading eligible securities listed in the Mainland
2. Hong Kong investors trading eligible securities listed in the Mainland
3. Hong Kong investors trading eligible securities listed on the Exchange
4. Mainland investors trading eligible securities listed on the Exchange

Southbound trading is Mainland investors trading eligible securities listed on the Exchange through Stock Connect. Hong Kong and overseas investors trading eligible Mainland-listed securities is Northbound trading, and the other two options do not involve crossing the boundary, so they are not Stock Connect trading.

26. Which of the following statements about the SFO provisions on short selling are CORRECT? I. Section 170 does not apply to a sale effected under a transaction in an options contract traded on a recognized stock market. II. A person selling as a principal must not convey a short selling order unless he gives his agent a documentary assurance. III. An exchange participant's representative who knows an order is a short selling order must indicate this when inputting it. IV. A contravention of section 170(1) gives rise to civil liability only and is not an offence.

1. I and III only
2. II and IV only
3. I, II and III only
4. I, II and IV only

Statement I is correct under section 170(3)(d), II under section 171(1) and III under section 172(1)(b). Statement IV is wrong because section 170(4) makes a contravention of section 170(1) an offence liable to a fine at level 6 and imprisonment for 2 years.

27. In order to conduct Exchange Traded Options Business for clients, an Exchange Participant must be registered by the Stock Exchange as an Options Exchange Participant under which pair of categories?

1. Options Trader or Options Merchant Trader
2. Options Trading or Options Broker
3. Options Broker or Options Clearing
4. Options Trading or Options Clearing

Rule 201 of the Options Trading Rules requires registration as an Options Trading Exchange Participant or an Options Broker Exchange Participant. Trader and Merchant Trader are categories of HKFE participants, not of options participants. Clearing is a matter of participantship of SEOCH, not a category of Options Exchange Participant under rule 201.

28. Which ONE of the following statements about an Options Broker Exchange Participant is CORRECT?

1. It may use the Options System directly but cannot clear its own trades
2. It may use the Options System once the Board registers it as a Market Maker
3. It cannot use the Options System and deals through a trading participant
4. It may use the Options System for trades in its own Options Broker Account

Under rule 201A of the Options Trading Rules, an Options Broker Exchange Participant is not permitted to have access to the Options System. It conducts options business for clients by entering into Options Broker Client Contracts with an Options Trading Exchange Participant, acting as principal. Market Makers are certain Options Trading Exchange Participants under rule 202, so the Market Maker option is wrong, and rule 201A has no exception for its own account.

29. Ms Lam instructs Harbourview Securities Limited, an Options Trading Exchange Participant, to buy stock options under her Options Client Agreement. Harbourview executes the order on the Options Trading System. Which ONE of the following describes the Client Contract that arises?

1. A contract between Ms Lam and the market seller of the Options Contract
2. A contract between Ms Lam and Harbourview as principals, on identical terms
3. A contract between Harbourview and Ms Lam, with Harbourview as SEOCH's agent
4. A contract between Ms Lam and SEOCH, with Harbourview as her agent

Rule 411 of the Options Trading Rules provides that a Client Contract arises between the client and the Options Trading Exchange Participant as principals. It is on identical terms to the Options Contract, except that Harbourview, which bought under the Options Contract, sells to Ms Lam under the Client Contract. It is not a contract with the market seller or with SEOCH, and Harbourview does not act as agent of SEOCH.

30. Westbay Futures Limited, an Exchange Participant that is not an Options Exchange Participant, asks Harbourview Securities Limited, an Options Exchange Participant, to effect Exchange Traded Options Business for it. What must Harbourview receive before it accepts Westbay as a client?

1. A written undertaking that the business is for Westbay's own account as principal
2. A written approval from the SFC for each options contract that Westbay trades
3. A written guarantee from SEOCH covering Westbay's margin obligations
4. A written undertaking that Westbay will trade through an Options Broker

Rule 409 of the Options Trading Rules prohibits an Options Exchange Participant from accepting a non-options Exchange Participant as a client unless it receives a written undertaking. The undertaking is that all the business will be transacted for that participant's own account as principal and not for its clients. The rule does not require SFC approval of each contract, a SEOCH guarantee, or an undertaking to deal only through an Options Broker.

31. Which ONE of the following is NOT a condition that an Options Trading Exchange Participant must satisfy before it accepts instructions from an Options Broker Exchange Participant for the latter's clients?

1. It has entered into an Options Broking Agreement with the Options Broker Exchange Participant
2. It has lodged a copy of that agreement, certified by a Responsible Officer, with the Exchange
3. It has obtained the SFC's prior written approval of the Options Broking Agreement
4. It has opened a separate DCASS account with SEOCH for the broker's transactions

Rule 401A of the Options Trading Rules lists the conditions: being a Direct Clearing Participant of SEOCH or a GCP, entering into the Options Broking Agreement, lodging a copy certified by a Responsible Officer with the Exchange, giving the broker a written statement of its details, and opening a separate DCASS account with SEOCH. Nothing in rule 401A requires the SFC's prior written approval of the agreement, so that is the statement that is not a condition.

32. On an expiry day, what happens to open long positions in expiring options contracts that meet the applicable exercise criterion?

1. They are exercised by requests DCASS generates automatically, unless denied in time
2. They lapse unless the client delivers a written exercise notice to SEOCH that day
3. They are exercised once the participant enters each exercise request manually
4. They are exercised automatically on the next trading day after the expiry day

Under rule 415A of the Options Trading Rules, DCASS automatically generates exercise requests on the expiry day for open long positions that meet the exercise criterion. Requests denied by the Options Trading Exchange Participant (or its designated GCPs) before the System Input Cutoff Time are not treated as exercised. The positions therefore do not lapse for want of a client notice, are not exercised manually, and are not left until the next trading day.

33. The Exchange may approve an Options Broker Exchange Participant subject to the Long-Only Restriction. What does this restriction mean?

1. It may not buy options contracts except to close out a short position, other than in its own account
2. It may not sell options contracts except to close out a long position, other than in its own account
3. It may not hold a long position beyond expiry of the contract, other than in its own account
4. It may not exercise a long position for a client until expiry, other than in its own account

Rule 207 of the Options Trading Rules allows the Exchange to impose the Long-Only Restriction on an Options Broker Exchange Participant. Except for its own Options Broker Exchange Participant Account, it may not sell Options Contracts other than to close out an existing long options position. The restriction concerns selling, not buying, and it says nothing about expiry or exercise.

34. Which of the following are requirements that an HKFE Exchange Participant must satisfy at all times? I. Hold at least one Futures Exchange Trading Right. II. Be a limited company incorporated in Hong Kong. III. Hold a valid business registration certificate. IV. Comply with the Financial Resources Rules.

1. I and II only
2. I, II and III only
3. II, III and IV only
4. I, II, III and IV

Rule 502 of the HKFE Rules requires each Exchange Participant at all times to hold at least one Futures Exchange Trading Right (paragraph (a)), be a limited company incorporated in Hong Kong (paragraph (d)), hold a valid business registration certificate (paragraph (j)) and comply with the Financial Resources Rules (paragraph (k)). All four statements are therefore requirements, so no shorter combination is complete.

35. Which ONE of the following describes a company that may be registered with HKFE as a Merchant Trader?

1. A company whose principal business is dealing in securities listed on the SEHK
2. A company whose principal business is clearing trades for Exchange Participants
3. A company whose principal business is advising on futures contracts for clients
4. A company whose principal business is dealing in commodities underlying Exchange Contracts

Rule 502(h) of the HKFE Rules requires a Merchant Trader to be a company whose principal business comprises dealing in one or more commodities underlying an Exchange Contract, or a subsidiary of such a company or entity. All its F.O. Business must be connected with or ancillary to that principal business. Dealing in listed securities, clearing and advising on futures are not the Merchant Trader criterion.