JOHN BUCO COLEGIO

DE JIMENEZ INC.
Dicoloc, Jimenez, Misamis Occidental, 7204 Philippines

HANDOUTS for CAPITAL MARKETS

TEACHER: FROELAN G. ANGUS

Book: Capital Markets

Author: Norma Dy Lopez-Mariano, PhD
Edition: First
Published: Rex Book Store
References:https://www.bsp.gov.ph/Pages/AboutTheBank/WhoWeAre/OrganizationAndGovernan
ce /GovernanceOfTheBank.aspx
Topic 1: THE FINANCIAL SYSTEM (PART 1)
INTRODUCTION
The International Monetary Fund (IMF) and the World Bank (WB) conduct financial sector
assessments of countries that they help. It is imperative that the IMF and WB monitor the financial
standing of country borrowers. A study of the country’s financial system is crucial in the study of
capital markets because the financial market is central to the financial system. This chapter will
discuss what a financial system is and its role in the economy. It will also tackle the roles the
different participants in a financial system play. The monetary system, the monetary policy and its
effect in the economic system of a country, and the tools of monetary policy and how they affect
money supply and interest rates will also be dealt with in this chapter. Lastly, the role of the Bangko
Sentral ng Pilipinas (BSP) in the economic development of the Philippines will be elaborated.

FINANCIAL SYSTEM: DEFINITION

Financial system describes collectively the financial markets, the financial system participants, and
the financial instruments and securities that are traded in the financial markets. The functions of the
financial system are:

• to channel the funds from the savings units (lenders) to the deficit units (borrowers);
• to provide a medium of exchange;
• to provide a mechanism for risk sharing; and
• to provide a channel through which the central bank can influence the economy, in general and
the financial system, in particular.

With the advent of globalization, we have a multinational financial system. Multinational

financial system refers to the collective financial transfer mechanisms that facilitate the movement
of money and profits between and among financial system participants throughout the world. These
mechanisms include transfer of prices on goods and services traded internally and internationally;
intercompany loans and leading (speeding up) and lagging (slowing down) payments, fees, and
royalty charges wherever they are located in the world; and dividend payments. Together, they lead
to a “pattern of profits and movements of funds that would be impossible in the world of Adam
Smith”

Financial system performs four basic functions, which are also the functions of finance and financial
managers.

• Fund acquisition- a way of getting deposits and necessary funds to finance projects and
investments
• Fund allocation – determining to which uses, projects, or investments the acquired funds will be
used
• Fund distribution – the process by which necessary funds are given to the uses, projects, or
investments that need funds.
• Fund utilization – using the funds for its intended purpose
FINANCIAL SYSTEM PARTICIPANTS
There are six participants or sectors in the financial system:

1. Households or consumers

2. Financial institutions/intermediaries

3. Non-financial institutions

4. Government

5. Central bank

6. Foreign participants

BANKO SENTRAL NG PILIPINAS AND THE PHILIPPINE FINANCIAL SYSTEM

About BSP and the different organizational structures come from BSP.gov.ph. Bangko
Sentral ng Pilipinas (BSP) is the Central Bank of the Republic of the Philippines. It was established on
January 3, 1949 as the country’s central monetary authority. The Bangko Sentral ng Pilipinas (BSP)
was established on July 3, 1993, pursuant to the provisions of the 1987 Philippine Constitution and
Republic Act No. 7653, the New Central Bank Act of 1993 to replace the Central Bank of the
Philippines. BSP enjoys fiscal and administrative autonomy in the pursuit of its mandated
responsibilities.

Organizational Structure
By organization, the basic structure of the Bangko Sentral ng Pilipinas includes:

• The Monetary Board exercises the powers and functions of BSP, such as the conduct of
monetary policy and supervision of the financial system. Its chairman is the BSP Governor, with
five full-time members from the private sector and one member from the Cabinet. The
Governor is the Chief Executive Officer of BSP and is required to direct and supervise the
operations and internal administration of BSP and is required to direct and supervise the
operations and internal administration of BSP. A deputy governor heads each of the BSP’s
operating sectors.
Topic 2: The Financial System (Part 2)
The Monetary Board exercises the powers and functions of the BSP, such as the conduct of
monetary policy and supervision of the financial system. Its chairperson is the BSP Governor, with
five full-time members from the private sector and one member from the Cabinet.

The Governor is the chief executive officer of the BSP and is required to direct and supervise the
operations and internal administration of the BSP. A deputy governor (or a Senior Assistant
Governor in the case of the Currency Management Sector) heads each of the BSP's operating sector
as follows:

• Monetary and Economics Sector is mainly responsible for the operations/activities related to
monetary policy formulation, implementation, and assessment
• Financial Supervision Sector is mainly responsible for the regulation of banks and other BSP-
supervised financial institutions, as well as the oversight and supervision of financial technology
and payment systems
• Currency Management Sector is mainly responsible for the forecasting, production, distribution,
and retirement of Philippine currency, as well as security documents, commemorative medals,
and medallions
• Corporate Services Sector is mainly responsible for the effective management of corporate
strategy, communications, and risks, as well as the BSP's human, financial, technological, and
physical resources to support the BSP's core functions

BSP Vision and Mission

Vision: The BSP aims to be recognized globally as the monetary authority and primary financial
system supervisor that supports a strong economy and promotes a high quality of life for all
Filipinos.

Mission: BSP is committed to promote and maintain price stability and provide proactive leadership
in bringing about a strong financial system conducive to a balanced and sustainable growth of the
economy. Towards this end, it shall conduct sound monetary policy and effective supervision over
financial institutions under its jurisdiction.

Functions of BSP
Being the primary monetary authority, BSP performs the following functions:

1. Bank of issue – BSP has the monopoly of printing money bills and minting money coins.
2. Government’s banker, agent, and adviser – BSP handles the banking accounts of
government agencies and instrumentalities. All government agencies deposit their funds
with BSP. It provides foreign exchange to the government for the implementation of goods
and services and for payment of foreign loans. If funds are not sufficient for the needs of the
country, BSP borrows from international financial institutions like WB and IMF.
3. Custodian of the cash reserves of banks – All banks are regulated to have adequate reserves
in proportion to their deposit liabilities with BSP to ensure availability of cash to depositors
who wish to withdraw deposits.
4. Custodian of the nation’s reserves of international currency – The early years of central
banking required central banks to maintain a minimum reserve of gold, and later of
international currency, as a guarantee for its issuance of currency bills or notes and deposit
liabilities (cash reserves of commercial banks).
 5. Bank of rediscount and lender of last resort –The rediscounting function of the central bank
means the central bank lends money to banks in distress on the basis of their promissory
notes or the promissory notes of the bank borrowers.
6. Bank of central clearance and settlement – The central bank acts as a sort of clearing house.
This means that banks send representatives to the clearing house at the central bank where
claims are demanded by one bank against another.
7. Controller of credit- Controlling money supply requires controlling credit. The higher the
money supply in circulation, the higher the prices of goods and services.

Topic 3: Financial Markets (Part 1)

• Financial markets are structures through which funds flow. They are the institutions and
systems and facilitate transactions in all types of financial claims.
• A financial claim entitles a creditor to receive payment from a debtor in circumstances specified
in a contract between them, oral or written
• . • Primary markets are markets in which users of funds (e.g., corporations) raise funds through
new issues of financial instruments such as stocks bonds. They consist of underwriters, issuers,
and instruments involved in buying and selling original or new issues of securities referred to as
primary securities.
• Primary market issues are generally for public offerings or publicly traded securities like stocks
of companies already selling stocks in the stock market or stock exchanges. First-time issues for
the public are called initial public offerings or IPOs.
• Rather than a public offering, primary market sales can take the form of a private placement,
particularly for closed corporations, that is, corporations whose stocks are only sold to family or
a few close friends, relatives, and some other private individuals.
• Secondary markets are markets for currently outstanding securities referred to as secondary
securities. All transactions after the initial issue in the primary market are done in the secondary
markets. Secondary markets only transfer ownership, but do not affect the total outstanding
shares or securities in the market.
• Money markets cover markets for short-term debt instruments usually issued by companies
with high credit standing. They consist of a network of institutions and facilities for trading debt
securities only with a maturity of one year or less.
• Banks with temporary cash surpluses led commercial banks to set up the money market as an
auction house for excess reserves. It is called the interbank call market, a money market.
• The Philippine Government issues four kinds of government securities (GS): cash management
bills, Treasury bills, Treasury notes, and Treasury bonds.
• Treasury bills (T-bills) are government securities which mature in less than a year. There are
three tenors of T-bills: 91-day, 182-day, and 364-day bills.
• Capital markets are markets for long-term securities. Long-term securities are either debt
securities (notes, bonds, mortgages, or leases) or equity securities (stocks).
• Securities market is where companies issue common stocks or bonds that are
marketable/negotiable to obtain long-term funds. An instrument which is transferable by
endorsement or delivery is negotiable.
• Stock market serves as the medium or agent of exchange transactions that deal with equity
securities or stocks.
• Bond market is the market where bonds are issues and traded. Bond markets are generally
classified into Treasury notes and bonds market, municipal bonds market, and corporate bonds
market.
Topic 4: Financial Markets (Part 2)
• Derivative securities market to the market where derivative securities are traded.
• Capital markets and money markets include the exchanges where the securities or financial
instruments are traded or sold. These exchanges can be formally organized or informally
organized.
• The negotiated or non-securities market includes, but is not limited to loan market, mortgage
market, and lease market. Loan market is where a one-on-one transaction takes place between
a borrower and a lender. Mortgage market is where a real property, building, and big
machineries, are used to guarantee or secure big loans. Lease market is where equipment,
building or other property is being leased/rented out to another party.
• Auction market is where an independent third party matching prices on orders received to buy
and sell a particular security does the trading.
• Foreign exchange market provides the physical and institutional structure through which the
money of one country is exchanged to the money of another country, the rate of exchange
between currencies is determined, and foreign exchange transactions are physically completed.
• Futures market is where contracts are originated and traded that give the holder right to buy
something in the future at a price specified in the contracts.
• Forward contracts are contractual agreements between a buyer and a seller at time 0 to
exchange a pre-specified, non-standardized asset for cash at some later date
• Options market is where stock options the right to buy stocks are traded. Options are called
warrants if they are issued by corporations and calls if they are issued by individuals.
• Swaps are agreements between two parties in exchanging specified periodic cash flows in the
future based on an underlying instrument or price.
• The third market comprises OTC transactions between broker-dealers and large institutions. The
fourth market is made up of transactions that take place between large institutions.
• Investors are generally classified as bulls, bears, chickens or pigs.

Types of Investors:
1. Risk-averse investors (bulls and chickens) - type of investors who, when faced with two
investment alternatives with equal returns but one is riskier that the other, will choose the
less risky investment.
2. Risk-taker investors (bears and pigs) – type of investors who are ready to pay a higher price
for an investment regardless of the risks involved.
3. Risk-neutral investors – type of investors who do not take into account the risks involved in
the investment and who are focused only on the expected returns.