INTRODUCTION TO FINANCIAL SYSTEM AND FINANCIAL MARKET

NATURE & IMPORTANCE OF FINANCIAL SYSTEM ELEMENTS OF FINANCIAL SYSTEM

Finance  Lenders and Borrowers - The Players

a. Represents the money management of a company  Financial Intermediaries – financial entity acting as
b. The process of acquiring needed funds a third party to facilitate the borrowing activities
c. The application of economic principles to decision between borrowers and lenders
making that involves the allocation of money under  Financial Instruments – medium of exchange of
conditions of uncertainty. It is how funds are obtained contractual obligation which can be traded (tangible
and invested to make money. or intangible).
Can be:
Functions in a Financial Management
o Cash
1. Accounting – the goal of employees is to maximize
o Derivative – is a contract between two or
profit for their benefits, driven by rewards and
promotions more parties, and the derivative derives its
2. Finance – the goal is to maximize wealth of the price from fluctuations in the underlying
owners. The owners’ ultimate goal is to maximize asset. The most common underlying assets
wealth for derivatives are stocks, bonds,
commodities, currencies, interest rates, and
*difference: market indexes. These assets are commonly
accounting end result: financial statements purchased through brokerages.
finance end result: management of finances  Financial Markets
maximization of profit: traditional approach, profit is o the place of trading
revenue less expenses o money market for cash financial
maximization of wealth: modern approach, wealth is net instruments
asset o capital market for derivative financial
instruments
Sources of Wealth
- capital assets which may be money to earn interest  Regulatory Control Envireonment
- capital assets which can be land or building to earn o controller of trading activities
rent o involves different businesses and financial
- labor/profession in order to earn wages/salaries/fees risks
o regulated by central bank
Flow of Funds  Money Creation – the value created
- Direct Financing – where borrowers/spenders deal  Price Discovery – how much is created; the process
directly from lenders thru financial instruments or of determining or valuing the financial instrument in
securities (cash, bonds, stocks) the market. the price is driven by risks (high risk high
- Indirect Financing – where borrowers and lenders return, low risk low return)
transact thru intermediaries (banks)
 TYPES OF FINANCIAL MARKET
(based on instrument traded)

 Money Market
- sector in the financial market where financial
instruments that will mature or be redeemed in
one year or less from issuance date are traded
- liquid investments (can easily be converted into
cash)

 Capital Market
- sector in the financial market where financial
instruments issued by government and
corporations that will mature beyond one year
from issuance date are traded
- two types: equity (stocks/shares), debt
(promissory notes, bonds)

TYPES OF FINANCIAL MARKET

(based on instrument traded)

 Primary Market
- financial market wherein fund demanders like
corporation or government agencies raise funds
through new issuances of financial instruments
(bonds or stocks)
- Why? - normally to finance new projects or
expansions.
- How? - Coursed thru investment banks as
intermediary.
- Who? - Borrowers are fund demanders and
lenders are fund providers
- Four Types of Issue Methods:
1. Public offering – the issuer offers for
subscription or sale to general public
2. Private placement -the issuer looks for
single investor to purchase the whole
securities issuance than to general public
3. Auction – this is another offering to general
public on treasury bills, bonds and other
securities issued by the govt.
4. Tap issue – this happens when issuer is open
to receive bids for their securities at all times.
Issuers maintain the right to accept or reject
the bid prices.

 Secondary Market
- This is where securities issued in the primary
market are subsequently traded (resold and
repurchased – second hand).
- Who are the players?
1. Securities brokers are facilitators
2. Sellers are demanders and buyers are funds
providers
 FINANCIAL REGULATION

Financial Regulation is a process of governing in the The policies were set to regulate the;
financial systems to ensure balance and protection of the a. information disclosure,
interest of all players in the systems. By doing so this manages b. advantage over internal information,
the risk that will potentially arise in the financial market c. entry of new players,
system. d. minimum capital requirement and
e. minimum governance requirements
c
 Consistency
 Credit Risk – the probability that the payor will not it enables development of reasonable decision.
pay or settle its obligation (risk na hindi tayo Consistency plays a key attribute to ensure that the other
mababayaran) drivers affecting the results were isolated for better analysis
and at the same time reducing the risk inherent in the results
 Liquidity Risk – the probability to raise insufficient
resources to repay its financial obligation (measures  Stability
short-term assets and liabilities, risk na hindi agad na- The regulation must be able to protect the interest of the
convert into cash yung short-term assets mo resulting clients as well as the companies to enable their corporate
to inability to pay your obligations) sustainability
 Default Risk – the probability that currently MAJOR REGULATORS IN THE PHILIPPINES
maturing portion were not settled on time

 Technological Risk – the probability that services - Bangko Sentral ng Pilipinas,

will be interrupted due to technological resource - Insurance Commission,
limitation - Securities and Exchange Commission; and
- Board of Investments
 Legal Risk – the probability that new laws, rules, and
PAYMENT SYSTEMS
regulation will be imposed and might affect the
ability to sustain its creditworthiness
Enables the transfer of funds from a party to another thereby
FACTORS THAT LEAD TO CREATION OF LAWS
effecting settlement.

 Competitiveness Nowadays due to the emergence of financial technology,

Policies were imposed to the financial system to ensure parity payment systems are being automated, but nonetheless, it
(equality/fairness) among parties which could drive the importance remain to be the same which are:
following: - Managing safe and real time transaction
- access to capital, - Effective risk management
- credit and loan term offerings, - Facilitates financial market transactions
- support to providers of financing,
- management of business risks,
- transaction costs; and
- tariffs.
It must be noted that the main determinant of competition are
the main forces (law of supply and demand, buyers and
sellers) that drives the market

 Market Behavior
Financial Regulation sets the parameters to ensure that firms
will comply with the standards and level the playing field.