Financial Regulation 

Financial regulations are laws that govern banks, investment firms, and insurance
companies. They protect you from financial risk and fraud. But they must be balanced
with the need to allow capitalism to operate efficiently.

 Role of regulation in the Financial System 

Regulations protect customers from financial fraud. These include unethical
mortgages, credit cards, and other financial products.
Effective government oversight prevents excessive risk-taking by companies.
Regulations would have kept the Lehman Brothers' failure from catching the
government off-guard.
Without regulation, a free market creates asset bubbles.
That occurs when speculators bid up the prices of stocks, houses, and gold. When
the bubbles burst, they create crises and recessions.
Government protection can help some critical industries get started. Examples
include the electricity and cable industries. Companies wouldn't invest in high
infrastructure costs without governments to shield them. In other industries,
regulations can protect small or new companies. Proper rules can foster innovation,
competition, and increased consumer choice.
Regulations protect social concerns. Without them, businesses will ignore damage to
the environment. They will also ignore unprofitable areas such as rural counties.
[ CITATION Ama20 \l 1033 ]

How does financial regulation work?

Ensuring firms have the funding to trade safely, have the appropriate risk controls in
place and are appropriately governed is known as “prudential regulation”.
Ensuring firms treat customers fairly from the sales process to how complaints are
managed, is known as “consumer protection”.
An important part of prudential regulation is authorisation. We call this our
“gatekeeper role” and means we only allow firms to operate in the financial system
once they have fulfilled a number of criteria, including governance and risk control.
Consumer protection rules are also in place. These spell out how firms must treat
their customers when selling them financial products. So for example, a regulated
 firm must ensure that it “acts honestly, fairly and professionally in the best interests
of its customers and the integrity of the market” [ CITATION Cen20 \l 1033 ]

 Philippine Financial Regulators 

Financial activities have been referred to activities that deal on funding certain
transaction or expenditures. In the financial market, the financial activities are
focused on the trading of securities and financial instruments. Setting rules to set
standards, control and order on the financial activities, regardless of the source, is
called as financial activity regulation.
In the Philippine setting, the financial regulation is observed by the following but not
limited to the following:
Bangko Sentral ng Pilipinas
The BSP is created under the New Central Bank Act or the Republic Act 7653 and an
attached agency of the Department of Finance. Its primary purpose is to act as a
macroeconomic regulator by managing the currency, money supply, and interest
rates of the country, as well as oversee the commercial banking system.
BSP manages liquidity and issuance of currency in the Philippines. It also has the
power to extend discounts, loans, and advances to banking institutions for liquidity
purposes. BSP determines the exchange rate policy of the Philippines and supervises
commercial banks as well as other non-bank establishments performing quasi-
banking functions. It also has a function as banker, financial advisor and official
depository of the Government [ CITATION Isk18 \l 1033 ].

Insurance Commission

To regulate and supervise the insurance, pre-need, and HMO industries in

accordance with the provisions of the Insurance Code, as amended, Pre-Need Code
of the Philippines, and Executive Order No. 192 (s. 2015). [CITATION Ins20 \l 1033 ]

The functions of insurance are to conduct insurance agent’s examinations, evaluate

and prepare researches and reports with regards to insurance, pre-need and HMO
matters and review and approval of plans before sale to prospective clients among
others.
Philippine Securities and Exchange Commission

The Commission shall have the powers and functions provided by the Securities
Regulation Code, Presidential Decree No. 902-A, as amended, the Corporation Code, the
Investment Houses Law, the Financing Company Act, and other existing laws.
Under Section 5 of the Securities Regulation Code, Rep. Act. 8799, the Commission shall
have, among others, the following powers and functions:

 The commission approves and regulates mergers and acquisition of publicly

quoted companies.

 The commission also authorizes the establishment of unit trusts

 It also has the responsibility of maintaining surveillance over the capital market
towards enhancing its efficiency.

 The Securities and Exchange Commission issues guidelines for the establishment
of stock exchanges in different locations of the country due furtherance of the
deregulation of the capital market.

 The commission releases guidelines on foreign investment in the country.

 The commission is mandated to determine the price of all securities issued in the
country involving all public enterprises or private companies with alien ownership
interest. [CITATION Sec20 \l 1033 ]

Board of Investments
As an attached agency of Department of Trade and Industry (DTI), The Philippine Board
of Investments (BOI) is responsible for the development of investments here in the
Philippines. Leading the promotions of various industries and investment opportunities,
BOI assists Filipino and foreign investors to venture and thrive in vast areas of economic
pursuits and acts as your one-stop shop in doing business in the Philippines.

 Drivers of Financial sustainability 

At the forefront of the changing economic environment, business strategies have

been refined, allowing leading businesses and multinationals to embrace practices
that focus not only on the financial elements but also the environmental and social
aspects. Nowadays, increasing numbers of businesses embed sustainability practices
to optimize their operations and generate cost savings. Sustainability saves money
through resource efficiencies – reduction of energy, water and waste consumption
reduces carbon and costs. However, what’s even more important is that strong
sustainability practices support the ability to win new business. We see increasing
 numbers of corporations moving forward with sustainability initiatives and using
them as a key tool to differentiate, keep and win customers. As a result, sustainable
businesses are strengthening their valuations making them more attractive to
investors.
Business approach to sustainability has evolved significantly in the last decade. The
objectives of embedding sustainability have expanded from compliance and
stakeholders’ pressure to commercial incentives. Many businesses use it as a key
message in their branding to differentiate, enhance reputation and win more
business. Moreover, sustainability can be a source of organizational and
technological innovations that yield both bottom-line and top-line returns. Smart
companies treat sustainability as a new frontier of innovation. Sustainable business
models reinforce innovation by entailing the customer value proposition and
figuring out how to deliver a new one. There is no doubt that enterprises are
becoming a critical advocate of sustainability and future of our planet. [ CITATION
Tur17 \l 1033 ]

In financial markets, some players or firms failed to survive even they comply with the
regulation set. The reason being is that these firms respond to the following market
drivers:
 Competitiveness
 Market Behavior
 Consistency
 Stability

Risk in the Financial Market 

Risk is a term often heard in the world of investing, but it is not always clearly defined. It
can vary by asset class or financial market and the list of risks include default risks,
counterparty risks, and interest rate risks. Volatility is sometimes used interchangeably
with risk, but the two terms have very different meanings. Furthermore, while some risks
relate to just one company, others are relevant for specific industries, sectors, or even
entire economies.

 Systemic and Non-Systemic Risk

Risks are typically one of two types: systemic or non-systemic. A systemic risk is one that
happens within a company or group of companies that can create havoc throughout an
entire industry, sector, or economy. The financial crisis of 2007-2008 is an example, as a
handful of large institutions threatened the entire financial system. This gave rise to the
adage "too big to fail" because many of the large banks were deemed too important
and thus needed a bailout from the U.S. government.
Non-systemic risk relates to one party or company and is also called unsystemic or
diversifiable risk. For example, a company might face risks of substantial losses due to
legal proceedings. If so, the shares might be vulnerable if the company loses a lot of
money due to an adverse court ruling. This risk is likely to impact just one company and
not an entire industry. It is said that the diversification of a portfolio is the best way to
mitigate non-systemic risk.
 Volatility
Volatility is the speed of movement in the price of an asset. A higher level of volatility
indicates larger moves and wider changes in the value of an asset. Volatility is a non-
directional value—a higher volatility asset has an equal likelihood of making a larger
move up as it does down, which means they have a larger impact on the value of a
portfolio. Some investors like volatility, while others try to avoid it as much as possible.
Either way, a high volatility instrument carries greater risk in down markets because it
suffers greater losses than the low volatility asset.
 Counterparty Risk
Counterparty risk is the possibility that one party of a contract defaults on an
agreement. It is a risk, for example, in a credit default swap instrument. Credit swaps
represent the exchange of cash flows between two parties and are typically based on
changes in the underlying interest rates. Counterparty defaults on swap agreements
were one of the main causes of the 2008 financial crisis.1
Counterparty risk can also be a factor when dealing with other derivatives such as
options and futures contracts, but the clearinghouse will ensure the terms of a contract
are fulfilled if one of the parties runs into financial problems. Counterparty risk can
affect bond, trading transactions, or any instrument where one party depends on
another to fulfill financial obligations.
 Default Risk and Interest Rate Risk
Default risk is most often associated with bond and fixed income markets. It is the risk
that a borrower may default on its loan obligations and not pay the lender outstanding
amounts. Generally, a higher possibility of default results in a larger amount of interest
paid on a bond. Thus, there is a risk/reward tradeoff investors must consider when
looking at yields on bonds.
Interest rate risk refers to the potential losses in investment due to increasing interest
rates. It is most notable when investing with bonds, as the price of a bond typically falls
as interest rates rise. That's because bonds pay a fixed percentage rate and, as interest
rates rise, existing bonds must compete with newer bonds that will be issued at higher
rates. In order to do so, the price of the older bond must drop, and that is the risk of
holding bonds as rates increase.
 Risk represents the potential for losses on investment and will vary depending on
the asset or financial market.
 Counterparty risk, interest rate risk, and default risk are examples of risks in the
financial world.
 Systemic risk refers to the risk that problems in one or a few companies will affect
the entire sector or economy.
 Diversification mitigates non-systemic or unsystemic risk.
 Volatility refers to the speed of movement in price and is not specifically a source
of risk. [ CITATION Inv20 \l 1033 ]

Managing Credit Risk in Money Market 

Credit risk is one type of business risk. This is the risk that the borrower was not able to
repay its obligation. Such risk is valuated as a factor to determine the cost of lending or
financing using debt. Credit risk also affects the valuation of accounts receivable.
[ CITATION Las19 \l 1033 ]
Effective credit risk management is critical for the viability of your institution.
 Know Your Customer
Knowing your customer is essential because it is the foundation for all
succeeding steps in the credit process. To be successful, you must operate on
pertinent, accurate, and timely information. The information you gather and the
relationships you establish are critical to positioning yourself as a valued financial
consultant and provider of financial products and services. Establishing a good
relationship can bring a long stream of equity to your institution.
 Analyze Nonfinancial Risks
Risk Management is a continuous process (not a static exercise) of identifying
risks that are sometimes subject to quick and volatile changes. The identification
of risks may result in opportunities for portfolio growth or may aid in avoiding
unacceptable exposures for the institution.
 Understand the Numbers
To understand the numbers you should focus on the financial capacity of the
company as evidenced by the information provided and examine the accuracy of
the information as well as the quality and sustainability of financial performance.
Before beginning any financial analysis, it is important to understand why
companies and individuals borrow money.
 Structure the Deal
 Learn what the company does and how it operates. Then examine how it fits into
its industry and how it is affected by economic conditions. That information
shows you what the company’s business strategy should be and how easy or
difficult it will be to carry out that strategy. Finally, you can evaluate how
competent the company’s management is to accomplish the activities you have
identified as crucial to the company’s success.
Having completed the analysis of the business, you can then move to analyzing
the financial reports, historical and forecasted. Understanding profitability and
cash flow, liquidity, and leverage are key to structuring the facility
 Price the Deal
Determining the appropriate pricing is a critical. It ensures that your financial
institution will be adequately compensated for the risk of the deal.
 Present the Deal
Communicating your findings in a cogent and professional manner is a critical
step in getting your proposal approved. Credit decisions should not be made on
financial statement analysis alone. A credit review would not be complete without
an equally significant emphasis on the qualitative issues such as the ability of
management, the competitive business environment, and the economic issues
relating to the business.
 Close the Deal
Closing the Deal takes place after the analysis, structuring, and pricing have been
completed.
 Monitor the Relationship
In today’s competitive environment, you cannot afford to wait for your loans to
be repaid and expect your clients to call you for other products and services. To
have a competitive advantage in today’s market, you must continue to monitor
the risk profile of your client and, at the same time, pursue opportunities to
develop and expand the relationship.

 Credit Ratings 
Credit rating is an analysis of the credit risks associated with a financial instrument or
a financial entity. It is a rating given to a particular entity based on the credentials
and the extent to which the financial statements of the entity are sound, in terms of
borrowing and lending that has been done in the past.
Usually, it is in the form of a detailed report based on the financial history of
borrowing or lending and credit worthiness of the entity or the person obtained
from the statements of its assets and liabilities with an aim to determine their ability
to meet the debt obligations. It helps in assessment of the solvency of the particular
entity. These ratings based on detailed analysis are published by various credit rating
agencies like Standard & Poor's, Moody's Investors Service, and ICRA, to name a few.
[CITATION Ben20 \l 1033 ]
A credit rating is an opinion of a particular credit agency regarding the ability and
willingness an entity (government, business, or individual) to fulfill its financial
obligations in completeness and within the established due dates. A credit rating
also signifies the likelihood a debtor will default. It is also representative of the credit
risk carried by a debt instrument – whether a loan or a bond issuance.

A credit rating is, however, not an assurance or guarantee of a kind of financial

performance by a certain instrument of debt or a specific debtor. The opinions
provided by a credit agency do not replace those of a financial advisor or portfolio
manager.
Who Evaluates Credit Ratings?
A credit agency evaluates the credit rating of a debtor by analyzing the qualitative
and quantitative attributes of the entity in question. The information may be sourced
from internal information provided by the entity, such as audited financial
statements, annual reports, as well as external information such as analyst reports,
published news articles, overall industry analysis, and projections.
A credit agency is not involved in the transaction of the deal and, therefore, is
deemed to provide an independent and impartial opinion of the credit risk carried by
a particular entity seeking to raise money through loans or bond issuance.
Presently, there are three prominent credit agencies that control 85% of the overall
ratings market: Moody’s Investor Services, Standard and Poor’s (S&P), and Fitch
Group. Each agency uses unique, but strikingly similar, rating styles to indicate credit
ratings.
Types of Credit Ratings
Each credit agency uses its own terminology to determine credit ratings. That said,
the notations are strikingly similar among the three credit agencies. Ratings are
bracketed into two groups: investment grade and speculative grade.
Investment grade ratings mean the investment is considered solid by the rating
agency, and the issuer is likely to honor the terms of repayment. Such investments
are typically less competitively priced in comparison to speculative grade
investments.
Speculative grade investments are high risk and, therefore, offer higher interest rates
to reflect the quality of the investments.
Users of Credit Ratings
Credit ratings are used by investors, intermediaries such as investment banks, issuers
of debt, and businesses and corporations.
Both institutional and individual investors use credit ratings to assess the risk related
to investing in a specific issuance, ideally in the context of their entire portfolio.
Intermediaries such as investment bankers utilize credit ratings to evaluate credit risk
and further derive pricing of debt issues.
Debt issuers such as corporations, governments, municipalities, etc., use credit
ratings as an independent evaluation of their creditworthiness and credit risk
associated with their debt issuance. The ratings can, to some extent, provide
prospective investors with an idea of the quality of the instrument and what kind of
interest rate they should be expecting from it.
Businesses and corporations that are looking to evaluate the risk involved with a
certain counterparty transaction also use credit ratings. They can help entities that
are looking to participate in partnerships or ventures with other businesses evaluate
the viability of the proposition.
Credit Score
A credit rating is used to determine an entity’s creditworthiness, wherein an entity
could be an individual, a business, a corporation or a sovereign country. In case of a
loan, the rating is used to establish whether a loan should be rendered in the first
 place. If the process goes further, it helps in deciding the term of the loan such as
dates of repayment, interest rate, etc.
In the case of bond issuance, the credit rating indicates the worthiness of the
corporation or sovereign country’s ability to repay the bond payments in due time. It
helps the investor evaluate whether to invest in the bond or not.
A credit score, however, is strictly for indicating an individual’s personal credit health.
It indicates the individual’s ability to undertake a certain load and his or her ability to
honor the terms and conditions of the loan, including the interest rate and dates of
repayment. A credit score for individuals is used by banks, credit card companies,
and other lending institutions that serve individuals. [ CITATION CFI20 \l 1033 ]

 Credit Information System 

Credit information systems (CIS) help ensure financial stability by enabling
responsible access to finance. They also can play an instrumental role in expanding
access to credit and other services on credit to the underserved and unbanked. CIS
facilitate lending processes by providing objective information that enables lenders
to reduce their portfolio risk, reduce transaction costs, and expand their lending
portfolios. By doing so, credit reporting systems enable lenders to expand access to
credit to creditworthy borrowers, including individuals with thin credit history,
microentrepreneurs, and SMEs.

 Cost of Debt 
The cost of debt is the effective interest rate a company pays on its debts. It’s the
cost of debt, such as bonds and loans, among others. The cost of debt often refers to
before-tax cost of debt, which is the company's cost of debt before taking taxes into
account. However, the difference in the cost of debt before and after taxes lies in the
fact that interest expenses are deductible.
 The cost of debt is the rate a company pays on its debt, such as bonds and loans. 
 The key difference between the cost of debt and the after-tax cost of debt is the
fact that interest expense is tax-deductible.
 Cost of debt is one part of a company’s capital structure, with the other being the
cost of equity. 
 Calculating the cost of debt involves finding the average interest paid on all of a
company’s debts. 

Cost of debt is one part of a company's capital structure, which also includes the cost
of equity. Capital structure deals with how a firm finances its overall operations and
 growth through different sources of funds, which may include debt such as bonds or
loans, among other types.
The cost of debt measure is helpful in understanding the overall rate being paid by a
company to use these types of debt financing. The measure can also give investors
an idea of the company's risk level compared to others because riskier companies
generally have a higher cost of debt. [ CITATION Che20 \l 1033 ]

 Managing Liquidity and Solvency 

Liquidity = ability to quickly access cash and near-cash assets to satisfy current debt
service and operations.

Solvency = strong balance sheet with manageable debt ratios, leverage, and risk that
is low enough to maintain access to ongoing funds should the need arise.

Solvency, though related to liquidity, refers to a firm’s overall credit picture and its
ability to fulfill long-term obligations and secure funding in the future. It is related to
the overall capital structure of a firm, its degree of financial leverage, and the risk
associated with that structure.

It is not uncommon for a company to have a high degree of liquidity but be

insolvent or for a company with a strong balance sheet and high solvency to be
suffering a temporary lack of liquidity.

Debt, when used carefully and appropriately, can fund growth, provide financial
leverage, and compensate for business fluctuations. Excessive or inappropriate debt
is dangerous and must be avoided through thoughtful debt management.

 Valuation of Collaterals 
Collateral Valuation (also Collateral Appraisal) is the methodology used by a firm (in
particular financial services firms such as banks) to measure the value of collateral linked
to their lending activities. [ CITATION Opend \l 1033 ]
Types of Valuation
Depending on the nature of the collateral the following valuation types might be
available:
 Full Appraisal
 Drive-by
 Automated Valuation Model
  Indexed
 Desktop
 Managing or Estate Agent
 Purchase Price
 Hair Cut
 Mark to market
 Counterparties Valuation
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Bennett, Coleman & Co. Ltd. (2020). Definition of 'Credit Rating'. The Economic Times.

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why-does-it-matter

CFI Education Inc. (2020, January 27). Credit Rating - Overview, Types, and Users of Credit
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https://corporatefinanceinstitute.com/resources/knowledge/finance/credit-rating/

Chen, J. (2020, February 5). Cost of Debt. Retrieved October 28, 2020, from Investopedia:
https://www.investopedia.com/terms/c/costofdebt.asp

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https://www.insurance.gov.ph/about/mandates-objectives-and-functions/

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Lascano, M., Baron, H., & Cachero, A. T. (2019). Fundamentals of Financial Markets.
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