Big Picture A

Week 1-3: Unit Learning Outcomes (ULO): At the end of the unit, you are expected to:

a. Discuss the overview of the Philippine Financial market; and

b. Introduce the Philippine Securities market.

Big Picture A in Focus: ULOa. Discuss the overview of the Philippine Financial Market.

Metalanguage
The following are terms to be remembered as we go through in studying this unit. Please refer
to these definitions as supplement in case you will encounter difficulty of understanding with regards to
this topic.

• Capital market- It is a segment of the financial market with dealings in maturities

beyond 1 year.
• Debt- it is a financial obligation that has to be repaid with interest.
• Equity- It is a form of ownership in an enterprise and does not have to be repaid.
• Money market- It is a segment of the financial market with dealings in short term
maturities of financial contracts.
• Primary market- refers to the issuance of new securities representing an actual
transfer of funds from the investor to the issuing entity called initial public offering
(IPO).
• Secondary market- it refers to the trading of securities providing a liquidity
mechanism in the market for investors (the actual trading between the buyer and
the seller)

Essential Knowledge
The following are the discussion on the financial intermediation process, the different types of
market in Philippine Financial markets and the snapshot of the capital markets in the Philippines.
Please note that you don’t have to limit yourself to these resources. Thus, you are expected to utilize
other books, research articles and other resources that are available in the university’s library e.g.
ebrary, search.proquest.com etc., and even online tutorial websites.

1. Financial Intermediation process

The difference in savings and consumption patterns in the economy gives rise to an
intermediation process to balance the financial system. The intermediation process brings
together the users and suppliers of funds. The banking system is the most common form of
 financial intermediation in the financial system. Thus, aside from matching lenders with
borrowers, the financial intermediaries provide continuous facility of capital flow from the
surplus savers to deficit savers in the system. Risk management, liquidity, and information
dissemination are also part of the services provided by the financial intermediaries.

Figure BPA-A1.1 Financial Intermediation process

2. The Philippine Financial Markets

2.1. Money Market

• It is a segment of the financial market with dealings in short term
maturities of financial contracts.
• The maturity of these instruments are less than 1 years
• Example:
- T- bills issued by the Bureau of treasury (BTr) with the
maturity of less than 360 days.
- Short commercial paper issued by private companies such as
San Miguel Corporation, Universal Robina Corporation etc.
Figure BPA-A2.1 Available money market instruments (in the Philippine peso )

2.2 . Capital Market

• It is a segment of the financial market with dealings in maturities beyond 1 year.
• The capital market can be further subdivided into the following:

2.2.a. Primary vs. Secondary

Primary market- refers to the issuance of new securities
representing an actual transfer of funds from
the investor to the issuing entity called initial
public offering (IPO).
Secondary market- it refers to the trading of securities providing a
liquidity mechanism in the market for investors
(the actual trading between the buyer and the
seller)

2.2.b. debt vs. equity

Debt- it is a financial obligation that has to be repaid with interest
.

Equity- It is a form of ownership in an

enterprise and does not have to be repaid.

2.3. Foreign Exchange Market

• It refers to the market dealing in foreign currency like the Philippine
peso, US dollar, and other major currencies.
 • In the country most of the trading of foreign currencies is done using
the Philippine Dealing system (PDS).
PDS- is an organized secondary market where the buying and
selling clients of the Bankers Association of the Philippines(BAP) meet
and where transactions are “mapped” or recorded but the transaction
done by the money changers are “not mapped”.

2.4. Derivatives market

• Includes all financial contracts deriving its value from any other
underlying assets like security prices, interest rates, foreign exchange
rates.
• The basic classes of derivatives are futures, swaps, forward rate
contracts.
• Provide a risk management tool in the financial system.

3. Snapshot of the Philippine Capital markets 3.1.a. DEBTS ü Issuers in the Philippine debt
market
• The Philippine government remains the largest issuer of debt
in the country.
• The government assumed or guaranteed part of the debt
issued by a number of government owned or controlled
corporations (GOCC).
• Issuers of private debts are limited to top domestic companies
• ABS (Asset Back Securities) compromised the bulk of private
issuances, with the rest issued binds, corporate notes and
commercial paper lines.
ü Investors in the Philippine Debt market

• The banking sector is a major investor in domestic debt

instruments. Aside from the regulatory requirement for banks
to hold government as collateral, some instruments are eligible
to meet reserve requirement.
• Other major players are the SSS, GSIS, HDMF, trust funds,
insurance companies, private pension funds, mutual funds and
retail investors.
3.1.b. EQUITIES ü Issuers of the Philippine
equities market
• Financial Issues- this sector includes banks and financial
institutions.
• Industrial issues- this sector includes electrical, power and water ,
food , beverage and tobacco, construction, infrastructure and
allied services.
• Holding firm issues- this sector includes holding companies.
 • Property issues- this sector includes land developers, and real
estate companies.
• Service issues- this sector includes media, telecommunications,
information technology, transportation services , hotel and
leisure, education, and diversified services.
• Mining and oil issues- mining includes companies engaged in
mineral exploration and extraction.
• Preferred- it includes cumulative convertible preferred services.
• Warrants, Philippine Deposit receipts, etc
• Small and Medium
Enterprises ü Investors in the
Philippine Equities
• During 1980’s,Individual participants are the major majority
investors in the Philippine stock market.
• From 1990’s onwards, trust departments, insurance firms, and
other institutional investors (local and foreign) have been active
participants in the stock market.
• Most recently, retail investors are investing in the equities market
via mutual funds, affording them low initial investment outlay,
asset diversification, and professional management.

3.1.c. Foreign Exchange market ü Foreign

Exchange instruments
• Spot transaction- the most common foreign exchange transactions
are done in the spot market. Transactions at the Philippine
Dealing System are based on prevailing foreign exchange rate and
vary from time to time. ü Investors in the forex market
• Commercial banks in the Philippines are allowed to engaged in
foreign exchange transactions.
• Most banks trade for their clients (exporters and importers), and
also for their own banking requirements.
• Mutual funds engage in dollar denominated bonds.
• Trust departments, and institutional and retail investors also
participate in the foreign exchange market.
• Foreign investors who participate in the fixed income and equities
market likewise access the foreign exchange market.
3.1.d. Derivatives market ü
Derivative instruments
• Forward contracts- these are contracts, which obligate the
holder to buy or sell an asset at a predetermine delivery price at a
predetermined future date. The most commonly used forward
contracts are foreign exchange forward with tenor of 30,60, and
90 days.
 • Swap contracts- these contracts specify a simultaneous
exchange in cash flows by both parties based on movements
linked to the prices, values, or returns, of an underlying
instruments (e.g. stock, currency, etc.) It is an agreement between
two parties obligating themselves to fulfill their contractual
agreement at specified dates in the future. The most commonly
used swap contracts are the currency swaps and interest rate
swaps with tenor of 30 days.
• Option contracts- an option is a right but not an obligation to buy
or sell an underlying asset at a certain date and price. There are
two basic types of options, the put and call options. Call
option gives the holder the right to buy (but not the obligation)
the underlying asset by a certain date for a certain price. Put
option gives the holder the right to sell (but not the obligation)
the underlying asset by a certain date for a certain price. Put and
call option are sometimes used by investors in the PSE while
foreign exchange options with tenor of 90 days are also popular

ü Issuers/ investors of derivatives instruments

• In 1995, the BSP started regulating derivative transactions in
the country. It regularly issues circulars and guidelines in
trading derivatives instruments.
• BSP sets standard and gives accreditation to financial
institutions for derivative transactions.
• The first derivatives licenses were given to Citibank, Bank of
America, and Hongkong Shanghai Banking Corp. in 1996. The
first local bank granted a derivatives license was Equitable PCI
bank in 1997 (which has been acquired by Banco de Oro).

4. Status and observations on the Philippine capital market ü

Equity

• Trading concentrated on few issues

• Limited of securities traded
• Low demand of securities
• Lack of financial information/regulation
• Limited institutional participation
• Weak corporate governance

ü debt
• huge government debts
• transparency in rate determination
• limited rating appeal
• importance of bank
Self-Help: You can also refer to the sources below to help you further understand the lesson