Can I open a stock account without going to an intermediary's office?
Yes, licensed or registered intermediaries may open an account for a client without a personal visit. Intermediaries should take all reasonable steps to establish the true and full identity of each of its clients. Where an account is not opened face-to-face and the relevant documents are not executed in the presence of an employee of the licensed or registered intermediary, the signing of the client agreement and sighting of related identity documents must be certified by another licensed or registered intermediary, a JP (Justice of the Peace), or a professional person such as a branch manager of a bank, certified public accountant, lawyer or notary public.
Alternatively, you can return the client agreement together with a copy of your identity document for verification, plus a cheque of not less that HK$10,000 bearing your own name and drawn on your account with a licensed bank in Hong Kong. Your signature on the cheque should be the same as that on the client agreement. The new account will not be activated until the intermediary has cashed your cheque.
Must I provide my financial information to my brokerage when opening a stock account?
All licensed intermediaries are required to "know their clients" by taking all reasonable steps to establish the true identity of a client and check his financial circumstances at account opening. For instance, a client should provide the intermediary with a copy of his identity card which uniquely identifies himself. It helps to facilitate subsequent investigations into improper dealing.
Besides, intermediaries may ask new clients to fill out a questionnaire regarding their investment objectives, investment experience, financial situation and other related information. Such measures help the intermediaries assess the creditworthiness of the clients. They also let intermediaries understand their clients so that they can ensure the suitability of the investments for the clients when making recommendations. Therefore, remember to update your intermediary when there is any change in your investment objectives, otherwise it may not be able to give you advice that best suits you.
Do I need my employer's (a brokerage) consent if I open a trading account with another brokerage?
Yes, you do. According to the Code of Conduct for Persons Licensed by or Registered with the SFC, when a licensee knows a prospective client is an employee of another licensed or registered intermediary, he should obtain written consent from the other intermediary before opening the account. This enables the other licensed or registered intermediary to be informed of its employee's dealings and detect any possible conflict of interest between the employee and his clients. It also helps to spot possible trading malpractices by the employee.
The above requirement basically applies to all employees of an SFC licensed or registered intermediary, regardless of the nature of your job with the firm. As each firm has its own structure, the senior management or responsible staff should clearly know whether an individual employee has possible conflicts of interest with its clients if the employee trades himself. As such, a licensed or registered intermediary should decide by itself if an employee is allowed to open an investment account with other intermediaries.
If I want to maintain a cash account and a margin account at the same time, what do I have to consider particular?
Unlike cash accounts, in margin trading, you only put up a fraction of the total cost. You borrow money from a brokerage for your share transactions using your shares as collateral. Be aware that, when you leverage up through margin accounts, both your market gains and losses will be magnified.
Margin accounts are riskier. Therefore, do not open a margin account if you have no intention of using such a facility. Otherwise, when you trade on margin, make sure that there is sufficient collateral to support the trading activity on the account. The amount of required collateral (usually by way of shares and cash) varies according to market conditions.
Note that it is a feature of securities margin financing in Hong Kong that margin clients' shares are usually "pooled"and re-pledged by the brokerage to a bank to secure its own line of credit. Thus, when you open a margin account, you will normally be asked to give written authorisation to this effect. Depending on the terms of the authorisation, the pooling arrangement may capture all the shares in the margin accounts, regardless of whether you have made use of the margin credit on your account.
If the brokerage is wound up or liquidated, you can also be at risk. The bank may liquidate the shares to discharge the brokerage's indebtedness. Therefore, margin clients may not get back all their shares. This is known as the risk of pooling. So, only leave a reasonable amount of shares on your margin account - no more than what is necessary to cover the margin requirement, and put the rest of your shares on the cash account.
Finally, when you place an order, make sure you state clearly the account through which the order should be executed as cash and margin accounts have different settlement obligations.
Can the brokerage pledge the shares held on my cash account? Can it sell the stocks on my cash account to cover the outstanding balance on my margin account?
Pursuant to the Securities and Futures Ordinance, a brokerage is not permitted to pledge the securities held by a cash client for its own bank loan.
However, if an investor wants to conduct securities borrowing and lending activities, he can give a written authorisation to the brokerage, allowing it to pledge his securities to a third party. This authorisation should be renewed annually unless the investor is a professional investor. Alternatively, the authorisation can be "deemed" renewed by the brokerage if it has sent a reminder in writing at least 14 days before the impending expiry of the authorisation, the client does not object and the firm issues a written confirmation within 1 week after the date of expiry.
Note that the SFC has required licensed brokerages to state clearly in the client agreement the risks involved in giving authorization for the purpose of pledging securities to or depositing them with a third party. Thus, be sure you study the agreement carefully and do not sign away your rights.
Regarding a brokerage's right of set-off, this will depend on the provisions in the cash account agreement, which may explicitly confer such a right allowing the brokerage to sell shares on the cash account if proceeds from forced liquidation on the margin account are insufficient to cover the margin loans.
Can the same intermediary deal in both stock options and index options?
Although both stock options and index options are option products, they are however traded on different exchanges.
Stock option is a product traded on the Stock Exchange of Hong Kong Limited (SEHK). The underlying securities of stock options are designated by the SEHK. Usually, they are blue chips listed on the Main Board. An intermediary must be a Stock Options Exchange Participant of the SEHK before it can trade stock options. On the other hand, index option is a traded product of the Hong Kong Futures Exchange Limited (HKFE). The most popular index option tracks the HSI option. An intermediary must be a Futures Exchange Participant before it can trade index options.
The Securities and Futures Ordinance (SFO) has prescribed Type 1 regulated activity as dealing in securities, which include stocks, bonds, stock options and funds; and Type 2 regulated activity as dealing in futures contracts, including futures and index options. As such, an intermediary has to be licensed or registered for both Type 1 and Type 2 regulated activities before it can deal in both stock and index options.
You can check the "Public Register of Licensed Persons and Registered Institutions" on the SFC website to find out what regulated activities a licensee is eligible to conduct
Can I request for a copy of my brokerage's audited financial accounts?
Under the Code of Conduct for Persons Licensed by or Registered with the SFC, a licensed or registered intermediary should, upon request, disclose the financial condition of its business to a client by providing a copy of the latest audited balance sheet and profit and loss account required to be filed with the SFC and disclose any material changes which adversely affect the licensed or registered intermediary's financial condition after the date of the accounts.
However, it is an intermediary's business decision whether to entertain requests from non-clients for financial accounts.
How can I track my stocks in CCASS?
As an investor trading through a brokerage, you may ask your broker how he keeps your shares for you. At present, the vast majority of brokerages keep their clients' shares in CCASS (the Central Clearing and Settlement System is operated by the Hong Kong Securities Clearing Co. Ltd. or "HKSCC"). However, even though your brokerage has deposited your shares into CCASS, HKSCC will still regard your brokerage, rather than you, as the owner of the shares and your brokerage still has full control over the shares.
There are, however, two other methods for you to keep track of your shareholdings and movements in CCASS.
Method I: Making use of a Stock Segregated Account with Statement Service
By opening a Stock Segregated Account in HKSCC through your brokerage, you will receive a Daily Movement Statement from HKSCC whenever there is a stock movement in the Stock Segregated Account. At the end of each month, you will also receive a Monthly Balance Statement from HKSCC, even when that account has a zero balance. These statements serve as an independent record of the movements of your shares and you can check the information on the statements against the information supplied by your brokerage. You should note that statements issued by HKSCC and your brokerage may not have the same cut-off dates, which may result in differences in shareholding information.
The Stock Segregated Account allows your brokerage to segregate your shares from those of the firm itself and its other clients. When an order has been filled, you will not have to move the shares yourself as your brokerage will transfer shares into or out of the Stock Segregated Account. In addition, you will receive corporate communications, such as annual report and notices, directly from the share registrars.
However, the Stock Segregated Account is still under the full control of the brokerage. HKSCC will not recognise you as the account holder or the registered holder of the shares. (See figure 1: sample of a statement of a Stock Segregated Account)
Method II: Opening a CCASS Investor Participant Account
Unlike a Stock Segregated Account, this is an account which you can open in your own name in HKSCC. What is special about this account is that CCASS will process a withdrawal or deposit, only upon the receipt of confirmation of the settlement instruction you, the account holder, give to your brokerage. This enables you to have full control of stock movements in the account.
After opening an Investor Participant Account, you still have to trade through your broker. Furthermore, you need to confirm with HKSCC the settlement instructions issued by your brokerage before any transaction is processed. Some brokerages only withdraw your shares for settlement purposes after your trade has been filled. However, some other brokerages may, for risk management purpose, request you to transfer your shares to their accounts before you place your sale order. Holders of Investor Participant Accounts can now send and confirm their orders via the Internet and by phone.
Apart from having full control of stock movements in your account, you will also receive an account activity statement from HKSCC directly with the latest data on your holdings in CCASS. You can also enjoy HKSCC's comprehensive nominee services, including the collection of dividends and taking up of rights issues, as well as receiving communications of listed companies.
Please refer to HKEx' website for further information on the Stock Segregated Accounts and Investor Participant Accounts.
How can I withdraw my shares from the broker's custody?
When you want to withdraw your shares, the broker will instruct the custodian to prepare transfer deeds and share certificates. When these documents are ready, they will be forwarded to you for share registration. You should check with your broker the required processing time and fees before proceeding with a withdrawal.
Most brokerages entrust clients' shares to CCASS Depository. A brokerage who gives CCASS withdrawal instruction before 2 pm on a working day, can usually collect the share certificates no later than 5 pm on the same day. Those who do so after 2 pm can collect the share certificates the next day. CCASS currently charges HK$3.5 per board lot for share withdrawal.
I placed a "limit buy" order with my broker. It was filled on two trading days and I had to pay additional brokerage commission. Why?
Brokerage commission is normally charged at a percentage of the transaction value, subject to a minimum per transaction. If an investor places a limit buy order without specifying an "all or nothing" restriction, chances are that the order may be partially filled when there are not sufficient stocks available at the price specified. This order, if not a "day order", may be carried forward to the next trading day and executed for the unfilled portion. As a result, the order may be treated as separate transactions. If the minimum commission applies to both transactions, the total commission charged might be higher than what would have been charged if the order had been filled completely in a single transaction.
Are banks' securities and futures operations regulated by the SFC or HKMA?
Under the Securities and Futures Ordinance, dealing in securities (including stocks, bonds, stock options and funds) and dealing in futures contracts (including futures and index options) are regulated activities. Banks are required to be registered with the SFC as "registered institutions" in order to carry on these two types of regulated activities. However, banks are exempt from registration with the SFC if they carry out the regulated activities of leveraged foreign exchange trading and securities margin financing.
Being registered institutions, banks have to comply with the ordinances, codes and guidelines relating to performing regulated activities. The Hong Kong Monetary Authority (HKMA), however, remains the frontline regulator of banks' securities and futures operations. Bank staff who engage in regulated activities need not be licensed or registered with the SFC. Instead, the HKMA maintains a register of these bank staff, known as "relevant individuals".
Do I get compensated if my brokerage fails?
The Investor Compensation Fund (ICF) was established under the Securities and Futures Ordinance on 1 April 2003 to pay compensation to retail investors of any nationalities who suffer pecuniary losses as a result of default of licensed intermediaries, including securities and futures dealers, registered institutions under the Banking Ordinance and margin financiers in Hong Kong. "Default" means an intermediary, its employee or its associated person is in bankruptcy, winding up or in solvency or has committed breach of trust, defalcation, fraud or misfeasance.
Under the ICF, the maximum compensation limit is HK$150,000 per investor for trading securities and futures contracts respectively. Yet, the compensation limit is applied on a per-investor basis regardless of how many accounts you have at the defaulting intermediary.
Presently, the ICF only covers exchange-traded products in Hong Kong. For instance, the ICF does not cover leveraged foreign exchange trading even though it is one of the regulated activities. Also, the ICF only applies for defaults occurring on or after 1 April 2003.
Simply speaking, the amount of compensation is calculated according to the closing prices of securities or futures contracts on the date of default by the intermediary, which is normally the date of suspension of trading by the intermediary.
The Investor Compensation Company Limited (ICC) is responsible for receiving, assessing and determining claims against the ICF, making payments to claimants and pursuing recoveries against defaulting intermediaries. If it is determined that an intermediary has committed a default, the ICC may issue a notice to invite claims within the time specified on the notice. To know more about the investor compensation arrangements, you may visit the ICC's website.