Introduction Across HKSI exams, you’ll encounter questions that connect regulatory intent, market mechanics, and governance. The following five questions illustrate common themes: regulator intervention powers, the economics of repos, clarity on auditor responsibilities, who settles derivatives, and recognizing market risk in fixed-rate bonds. We’ll walk through each, unpack the reasoning, and draw HKSI-relevant takeaways.
Question 1: When can the SFC intervene in a licensed company’s operations? Scenario: Wiki is a licensed corporate in Hong Kong, listed, and the question asks which scenarios permit the SFC to intervene in its business operations. Options:
- (1) Damaging the interests of major shareholders
- (2) Damaging the interests of minority shareholders
- (3) The SFC believes intervention is in the interests of the investing public
- (4) Damaging the interests of certain suppliers Answer: D (2, 3, 4) Explanation (key points):
- The claim that the SFC can intervene whenever big shareholders are harmed is incorrect. The regulation focuses on minority shareholder protection when intervention is warranted.
- The possibility that intervention can be aligned with investors’ interests (3) reflects the public-interest objective often cited in regulatory actions.
- Damaging suppliers (4) can also trigger regulatory concern if it harms how the market functions or investor protection principles. Takeaways for HKSI candidates:
- Understand that regulatory intervention is strongly tied to minority protection and the broader public interest, not merely to the harm of dominant shareholders.
- Be aware that statements about regulator actions should reflect investor protection and market integrity objectives.
Question 2: Why might the seller enter into a repurchase agreement (repo)? Options:
- (A) Earn from exchange rate differences
- (B) Earn the spread between repo rate and market rate
- (C) Earn interest
- (D) Earn risk premium Answer: C Explanation (key points):
- While some may cite the repo rate vs. market rate spread (B), the core economic rationale emphasized here is earning interest from the repo transaction. The final purpose in practice is to generate interest income on the cash and collateral arrangement. Takeaways for HKSI candidates:
- Recognize that repos are primarily a funding and liquidity tool intended to earn interest, with rate dynamics that can be influenced by central bank policy.
- Distinguish between intuitive but incomplete explanations (e.g., spreads) and the primary objective (earning interest).
Question 3: If a Hong Kong company hires an external auditor (Liying & Co.) for its audit, which statements are correct? (1) Liying must be accountable to senior management (2) The internal audit team must follow the external auditor’s audit plan (3) The external auditor will take on work only if internally audited staff are competent and independent (4) The recommendations by Liying should be reported to senior management promptly Options:
- (A) (1)(3)(4)
- (B) (3)(4)
- (C) (1)(2)(3)
- (D) (1)(2)(3)(4) Answer: B Explanation (key points):
- Statement (1) is incorrect: external auditors are responsible to shareholders, regulators, and clients, not solely to senior management.
- Statement (2) has no basis here; instead, the proper arrangement is to define roles and responsibilities between internal audit and external auditors through a formal agreement.
- Statements (3) and (4) reflect appropriate conditions: external auditors rely on competence/independence, and their recommendations should be communicated to the company’s senior governance level promptly. Takeaways for HKSI candidates:
- Emphasize the independence and reporting lines of external auditors vs. internal audit functions.
- Understand that clear agreement on roles and timely reporting of recommendations are core governance expectations.
Question 4: Which institution is responsible for the settlement and delivery of stock options? Options:
- (A) Hong Kong Futures Exchange Limited
- (B) Hong Kong Clearing Limited (HKCC)
- (C) HKEX Options Settlement Limited
- (D) Central Clearing and Settlement System (CCASS) Answer: C Explanation (key points):
- HKEX Options Settlement Limited (OSL) handles the integrated settlement, delivery, custody, and agent services for options as part of the HKEX ecosystem. Takeaways for HKSI candidates:
- Be familiar with the specific entities that settle derivatives and how they fit into the broader market infrastructure (clearing, settlement, custody).
Question 5: Ms. Yu holds many fixed-rate corporate bonds; if rates rise, she faces potential losses. This risk is most likely: Options:
- (A) Credit risk
- (B) Market risk
- (C) Liquidity risk
- (D) Operational risk Answer: B Explanation (key points):
- The risk described is market risk: the possibility of loss due to adverse movements in interest rates affecting the value of fixed-rate bonds. Takeaways for HKSI candidates:
- Distinguish between market risk (price/value movements due to market factors like rates), credit risk (default risk of issuers), liquidity risk (difficulty in selling an asset without a loss), and operational risk (internal processes and controls).
Closing: Practical HKSI preparation The questions above connect regulatory concepts, instrument mechanics, and risk governance—key areas in HKSI exams. By understanding the underlying principles and how they apply to real-market scenarios, you’ll build a solid foundation for your HKSI journey. If you found this walkthrough helpful, follow HKSIYES for more topic-by-topic explanations and practice questions to boost your exam readiness.