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

financial systems to ensure balance and protection Financial Regulation sets the parameters to ensure
of the interest of all players in the systems. By doing that firms will comply with the standards and level
so this manages the risk that will potentially arise in the playing field.
the financial market system.
The policies were set to regulate the;
c a. information disclosure,
b. advantage over internal information,
c. entry of new players,
• Credit Risk – the probability that the payor will
d. minimum capital requirement and
not pay or settle its obligation (risk na hindi e. minimum governance requirements
tayo mababayaran)
• Consistency
• Liquidity Risk – the probability to raise
it enables development of reasonable decision.
insufficient resources to repay its financial
obligation (measures short-term assets and Consistency plays a key attribute to ensure that the
liabilities, risk na hindi agad na-convert into other drivers affecting the results were isolated for
cash yung short-term assets mo resulting to better analysis and at the same time reducing the
inability to pay your obligations) risk inherent in the results

• Default Risk – the probability that currently • Stability

maturing portion were not settled on time The regulation must be able to protect the interest of
the clients as well as the companies to enable their
• Technological Risk – the probability that corporate sustainability
services will be interrupted due to
technological resource limitation MAJOR REGULATORS IN THE PHILIPPINES

• Legal Risk – the probability that new laws, - Bangko Sentral ng Pilipinas,
rules, and regulation will be imposed and - Insurance Commission,
might affect the ability to sustain its - Securities and Exchange Commission; and
creditworthiness - Board of Investments

FACTORS THAT LEAD TO CREATION OF LAWS PAYMENT SYSTEMS

• Competitiveness
Policies were imposed to the financial system to Enables the transfer of funds from a party to another
ensure parity (equality/fairness) among parties thereby effecting settlement.
which could drive the following:
- access to capital, Nowadays due to the emergence of financial
- credit and loan term offerings, technology, payment systems are being
- support to providers of financing, automated, but nonetheless, it importance remain
- management of business risks, to be the same which are:
- transaction costs; and - Managing safe and real time transaction
- Effective risk management
- tariffs.
- Facilitates financial market transactions
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