PrepLicense: HK SFC · Study notes · Paper 3
SFC LE Paper 3: Regulation of Derivatives
Paper 3 covers the regulatory framework for derivatives business: the licensing regime, the roles of the exchange and clearing house, and licensees' reporting and compliance duties.
1. Legislation and regulatory framework
The Securities and Futures Ordinance (Cap. 571) is the core statute for derivatives business, supplemented by subsidiary legislation and the SFC's codes and guidelines. Understanding the hierarchy between ordinance, regulation and code is the foundation of this paper.
2. The Securities and Futures Commission
The SFC licenses, supervises, investigates and disciplines. Know its statutory functions, the supervisory tools it applies to licensees, and how responsibilities are divided with other regulators.
3. Hong Kong Exchanges and Clearing
HKEX is both market operator and front-line regulator. The derivatives market's trading rules, clearing arrangements and central counterparty mechanism are frequently examined.
4. Other regulators
The HKMA, Insurance Authority and MPFA each have their own remit, and overlap with the SFC in places (for example bank staff at registered institutions). Be clear which regulator covers which population.
5. Defining regulated activities
You must be able to judge whether an activity is a regulated activity, which type it falls under, and whether an exemption applies. This judgement is where practitioners most often err — and a favourite question format.
6. Licensing of corporations and representatives
Corporate licensing turns on financial resources, responsible officer coverage and internal controls; representative licensing turns on fitness and properness and competence. Keep the application requirements and ongoing obligations of the two separate.
7. Ongoing obligations and activity reports
Licensees must file financial resources returns and activity reports on time, and must notify the SFC proactively in prescribed situations such as personnel changes or material incidents. Late or missing filings are breaches in themselves.
8. Market misconduct
The elements of the six categories of market misconduct — insider dealing, market manipulation, false trading and the rest — and the dual civil/criminal track through the Market Misconduct Tribunal are core examinable ground.
Sources and how to use these notes
These notes are organised around the syllabus areas published by HKSI Institute and are conceptual summaries — use them to build a framework and to revise quickly before the exam. For specific provisions, numeric thresholds and question weightings, rely on the latest official HKSI study material and the SFC source texts.
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