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LE Paper 8 · Topic 3
Paper 8 tests whether you can tell the market's players apart: who deals, who advises, who manages, who holds the assets, who keeps the register, who clears and who regulates. Expect short 'which participant does this' questions, scenarios asking which licence type a firm needs, and a few figures: the Professional Investor Rules thresholds, the research analyst trading and quiet periods, the HK$500,000 compensation cap. Learn each participant's role, the SFO licence that goes with it, and how HKEX's subsidiaries link trading to clearing and settlement.
17 min read10 sections
Checked October 2026 against: SFO (Cap. 571) s.4, s.21, s.38, s.59, s.61, s.65, s.77, s.116, s.118, s.119, s.120, s.125, Sch. 1 and Sch. 5 (elegislation.gov.hk); Cap. 571D, 571Q, 571T, 571V, 571AC; SFC Code of Conduct (January 2026 edition) paras 3, 9, 15, 16; SFC Principles of Responsible Ownership (March 2016), family office guidance (January 2020), Type 13 circular, approved entities page (sfc.hk); HKEX admission criteria, clearing overviews, Common Nominee Services, About HKEX, CPAL news release of 13 October 2025 and Corporate Governance Statement (hkex.com.hk, hkexgroup.com); IRD FIHV page (ird.gov.hk); AFRC (afrc.org.hk). Rating scales: S&P Global Ratings and Moody's. Independent prep, not endorsed by HKSI Institute or the SFC.
A broker executes clients' orders as agent and earns commission. Under Schedule 5 of the Securities and Futures Ordinance (SFO, Cap. 571), dealing in securities is Type 1 regulated activity, so a stockbroker must be a licensed corporation (or, for a bank, a registered institution) for Type 1. Brokers usually also hold clients' securities in CCASS, provide margin loans and comment on stocks. Schedule 5 Part 2 builds in two exclusions that matter: advice wholly incidental to Type 1 dealing is not Type 4, and margin finance a Type 1 firm gives its own clients to buy securities through it is not Type 8.
| Activity | Type | Who needs it |
|---|---|---|
| Dealing in securities | 1 | Stockbrokers, private banks dealing for clients |
| Advising on securities | 4 | Independent advisers and research houses (not incidental advice by a Type 1 firm) |
| Advising on corporate finance | 6 | Sponsors and corporate finance advisers |
| Providing automated trading services | 7 | Electronic trading venues |
| Securities margin financing | 8 | Stand-alone margin lenders (not a Type 1 broker lending to its own clients) |
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| Asset management | 9 | Fund managers, discretionary portfolio managers, multi-family offices |
| Providing credit rating services | 10 | Credit rating agencies |
| Providing depositary services for relevant CISs | 13 | Trustees and custodians of SFC-authorised funds (from 2 October 2024) |
A licensed corporation needs at least 2 responsible officers (ROs) for each regulated activity, at least one of them an executive director, and every individual executive director must be an RO (s.125). At least one RO must be available at all times to supervise the business (s.118(1)(a)(ii)). Individuals are licensed as representatives accredited to the corporation (s.120).
To trade on SEHK the firm must also be an Exchange Participant: a company limited by shares incorporated in Hong Kong, licensed for Type 1, holding at least one Stock Exchange Trading Right, with its Type 1 ROs registered with SEHK and at least one executive director among them. It clears its own trades as an HKSCC Clearing Participant or through a General Clearing Participant (HKEX admission criteria). HKFE Exchange Participants are licensed for Type 2 and trade futures and options other than stock options.
Duties to clients come from the SFC Code of Conduct (January 2026 edition): execute promptly in line with instructions (para 3.1), on the best available terms (3.2), allocate fills promptly and fairly (3.3), give client orders priority over house and staff orders, including in any partial fill of an aggregated order (9.1, 9.2), know the client and ensure suitability (5.1, 5.2). A contract note must reach the client by the end of the second business day after the trade (Cap. 571Q s.5(1)); Saturdays, Sundays and public holidays are not business days.
Trap: Exchange Participantship belongs to the firm, not to individuals, and a licence alone does not let a firm trade on SEHK. It also needs a Trading Right.
Takeaway: Type 1 licence plus Trading Right makes an Exchange Participant; 2 ROs per activity; contract note by end of second business day.
A proprietary trader deals as principal with the firm's own capital and takes the market risk; a broker deals as agent for clients. Firms that do both must put client orders first (Code of Conduct para 9.1). A market maker is a trader with an obligation: it posts two-way (bid and ask) quotes to give a product liquidity. HKEX's market-making arrangements expect each exchange traded product, such as an ETF, to have at least one market maker, an Exchange Participant permitted by SEHK, subject to maximum spread and minimum participation rules for the product group.
| Participant | Acts for | Takes price risk? | Earns |
|---|---|---|---|
| Agency broker | Clients | No | Commission |
| Proprietary trader | Its own firm | Yes | Trading profit |
| Market maker | Its own firm, under quoting obligations | Yes | Bid-ask spread |
Trap: the ETF's market maker is not its manager, trustee or registrar. It supplies quotes; it does not run or hold the fund.
Takeaway: Brokers are agents, traders are principals, market makers are principals who must quote both sides.