INTRODUCTION TO FINANCIAL MARKET - intermediaries

- financial instruments
Introduction
Financial market is a common term that we normally hear when we The Basic Functions of the Financial System
talk:
1. Promote saving functions
• Investment
2. Payment function
• Financing
3. Protection against risk functions
• The flow of funds
4. Means to wealth function
• Savings
5. Provide liquidity function
• Issuance of stocks or bonds
6. Credit facility function
Financial market is crucial in facilitating the transfer of funds from the
savers to the users at the least cost and the shortest possible time.
Classification of the Philippine Financial System
▪ Financial market is part of the entire financial system of one
country and it helps to efficiently direct the flow of savings and A. Banking Institutions
investment in the economy and facilitates the accumulation of
capital and the production off goods and services. A. Private Banking Institutions

▪ It also act as intermediary between providers of funds and 1. Commercial Banks

users of funds. a. Universal Bank
▪ It also helps the savers to become investors in their capacity. b. Commercial Banks
▪ It also helps private and public institutions to raise money to 2. Thrift Banks
expand their businesses or to carry on projects and
infrastructures. a. Savings and Mortgage Banks

Financial system is a group of financial institutions and financial b. Stocks savings and loan associations
markets that creates financial instruments and financial services.
c. Private Development Banks
▪ It efficiently transfer the funds from one party to another.
3. Rural Banks
▪ The parties are consist of the following:
4. Cooperative Banks
- savers - lenders
5. Islamic Banks
- investors - users of funds
 6. Other classification of banks as determined by the Monetary 4. Private – owned
Board of the Bangko Sentral ng Pilipinas
 ANZ Banking Group Ltd.
B. Government Banks
 Asia United Bank Corporation
1. Development Bank of the Philippines
 Bank of the Philippine Islands
2. Land Bank of the Philippines
 BDO Unibank, Inc.
B. Non-Bank Financial Institutions
 China Banking Corporation
A. Private Non-Bank Financial Institutions
 Deutsche Bank AG
1. Investment Bank
 East West Banking Corporation
2. Investment Companies
 The Hongkong and Shanghai Banking Corporation
3. Securities Dealers/Brokers
 Metropolitan Bank and Trust and Company
4. Insurance Companies
 Mizuho Bank, Ltd. – Manila Branch
5. Credit Unions
 Philippine National bank
6. Pawnshops
 Philippine Trust Company
B. Government Non-Bank Financial Institutions
 Rizal Commercial Banking Corporation
1. Government Service Insurance System
 Security Bank Corporation
2. Social Security System
 Standard Chartered Bank
 Union Bank of the Philippines
Universal Bank provides financial service conglomerates that
 United Coconut Planters Bank
combine investment banking, development banking and insurance
to encompass a wider variety of services. Universal banks are
under the supervision of Bangko Sentral ng Pilipinas.
Commercial Bank
List of Local Universal Banks
In terms of capitalization, a commercial bank is next to the universal
Government –owned bank. It’s common functions are:
1. Al-Amanah Islamic Investment Bank of the Philippines a. Accept drafts and issue letter of credits
2. Development Bank of the Philippines b. Discount and negotiate promissory notes, drafts, bills of
exchange and other evidence of debt
3. Land Bank of the Philippines
c. Accept or create demand deposits
 d. Receive other types of deposits substitutes diversified financial and allied services for their chosen market
especially for small and medium enterprises and individuals.
e. Buy and sell foreign exchange and gold or silver boullion
Examples of Thrift Banks:
f. Acquire marketable bonds and other debt securities
1. Allied Savings Banks
g. Extend credit, subject to such rules as the Monetary Board
may promulgate 2. Equicom Savings Bank, Inc.
Examples of Commercial Bank: 3. Asiatrust Development Bank
1. Bank of America, N.A. 4. Bank One Savings and Trsut Corporation
2. Bank of Commerce 5. Bataan Development Bank
3. BDO Private Bank, Inc. 6. Bank of Calape
4. Citibank. N.A. 7. Bataan Savings and Loan Associations, Inc.
5. CTBC Bank (Philippine) Corporation 8. BPI Direct Savings Bank
6. First Commercial Bank, Ltd., Manila Branch
7. Hua Nan Commercial Bank , Ltd. – Manila Branch Cooperative Bank
8. Industrial Bank of Korea – Manila Branch It is a retail and commercial bank organized on a cooperative basis.
Just like Thrift banks it accepts deposits and provides loans to
9. JP Morgan Chase Bank, N.A.
individuals to undertake ventures using the principles of the
10. Maybank Philippines, Inc. cooperative. Cooperative banking is common in barangays, farmers
and even in the workplace.
11. Mega International Commercial Bank Co., Ltd.
Examples of Cooperative Banks:
12. Philippine Bank of Communication
1. One Network Bank
13. Philippine Veterans Bank
2. CARD Bank, Inc.
14. Robinsons Bank Corporation
3. First Isabela Cooperative Bank (FICO Bank)
15. United Overseas Bank Limited, Manila Branch
4. GM Bank of Luzon
5. Metro South Cooperative Bank
Thrift Bank
6. Bank of Florida (BOF Inc.)
Primary concerned with the mobilization of savings and loans. It also
provides short term working capital, medium and long term and
Islamic Bank Pawnshops
Has the function and purpose of conventional banking however They are financial institutions that cater to financing relatively low-
adhering to Islamic Law and ensuring fair play are the core of Islamic income individuals. Borrowing requires collateral to guarantee
banking. The basic principle is based on risk sharing which is a payment. Collateral may take the forms of rings, necklaces, earrings,
component of trade rather than risk transfer which is seen in gadgets, and small valuable items.
conventional banking.
Government Bank
Financial Intermediary
A financial institution controlled by the government. This kind of bank
 A financial intermediary brings together the users and the
plays a special role in the economic development of one country.
providers of funds without having them meet face to face.
Investment Bank They are also known as an indirect form of funds channelling.
People and firms have the option to go directly to the provider
It is an enterprise whose function is to un or enterprise underwrite
of funds or the users of funds.
securities of another person or enterprise including securities of
government and private companies .It also provides planning, Advantages of Financial Intermediary
consultancy, fund management, and raising of funds through equity
1. Financial intermediaries hire people who are highly qualifies to
financing and borrowings.
assess risky investments.
Investment Companies
2. Financial intermediaries know how to diversify. Instead of
These companies are engaged in the buying and selling of securities. placing the money in a single investment, they would rather
The trust is engaged in the business of investing the pooled capital of have it scattered among the different investment opportunities.
investors in financial securities. They can combine stocks, bonds, mutual funds, and fixed
income securities in portfolio.
Securities Dealers/Brokers
3. It has a cost advantage or economies of scale. Just imagine if
Securities dealers are companies that buy and sell stocks of other
a firm needs a substantial amount of money, it will take time
companies to resell them for a profit. They do not receive commission
and money before they can raise the amount needed. With the
since they are generating profits based on their trading. Securities
help of the financial intermediary, they can pool the money
brokers are individuals or firms engaged in the buying and selling of
invested by people and have it lent to the company.
stocks for commission.
4. It helps reconcile conflicting interests of the users and lenders
Credit Unions
of funds. Normally, lenders would like to lend their money for
These are composed of member-owned producers and consumers. the short term while borrowers would like to have it for long
They are operated to promote thrift, short term credit at competitive term. With the presence of financial intermediary it can provide
rates, and provide other financial services to their members. Most both the demands and preferences of the two parties.
credit unions provide services to support community development or
5. It gives savers liquidity. Liquidity is the ability to convert assets
sustainable international development on a local level.
into spendable form quickly.
Financial Market securities with average maturities of one year or less. Money
markets also allow individual investors to invest small amounts
It is a mechanism where buyers and sellers participate in the trade of
of money in a low-risk setting.
financial assets such as stocks, bonds, currencies and derivatives.
Money Market Instrument:
▪ Unlike financial intermediaries, it is not a source of funds but a
link to provide a forum in which suppliers of funds and 1. Negotiable Certificate of Deposit
demanders of loans/investments can transact business.
 It is a time deposit where the investor and the bank agree on
▪ Financial markets are generally characterized by having formal the term of placement. The amount in consideration for this
regulations, transparent pricing, basic regulations on trading, kind of security is considerably higher than the regular time
costs and fees, and market forces determining the prices of deposit. The investor may invest in the span of at least 14
the securities that are being traded. days to less than a year and is entitled to receive the agreed
interest payment.
Functions of Financial Market:
2. Commercial Paper
▪ It facilitates mobilization of savings and puts it to the most
productive uses  an unsecured promissory note with a fixed maturity of 1 to 270
days
▪ It helps in determining the price of the securities. The frequent
 a money market security issued by high credit rating
interaction between investors helps in fixing the price of
companies to raise money to meet short term obligations.
securities, on the basis of their demand and supply in the
 no collateral needed due to excellent credit ratings
market.
 It provides liquidity to tradable assets, by facilitating the 3. Repurchase Agreement (Repo)
exchange, as the investors can readily sell their securities and  one party sells a financial instrument to another party for a
convert assets into cash. specified price with a commitment to repurchase the
financial instrument at a fixed amount agreed upon at a
 It saves the time, money and efforts of the parties, as they specific date.
don’t have to waste resources to find probable buyers or
sellers of securities. Further, it reduces cost by providing 4. Treasury Bills (T-Bills)
valuable information, regarding the securities traded in the
 an obligation by the national government
financial market.
 interest is normally higher than the savings and time
deposit
 regarded as risk free investment because the payment of
CLASSIFICATION OF FINANCIAL MARKET which is guaranteed by government
Money Market 5. Bankers Acceptance
 bank draft where the bank is required to pay the holder a
 This is a market intended for short term placements. The specified amount on a specified date.
placement usually takes one year or less to mature. The  maturity of 90 days from the date of issue but can be extended
money market is an organized exchange market where to 180 days.
participants can lend and borrow short-term, high-quality debt
  A banker’s acceptance is a form of short-term debt that is Players in the Primary Market
issued by a firm but guaranteed by a bank.
 Issuers – public or private corporation, funds are raised
 It is often used in international trade because of the benefits to
using public issues; right issues or private placements.
both the draw and the bearer.
 Financial Instruments – these are the instruments
purchased by the investors in the form of bonds, equities
Capital Market and warrants.
 Financial Intermediaries – these are the financial
 are financial markets where people buy and sell long-term
institutions that facilitate the issuance of securities.
debt or equity-backed securities. These markets direct savers’
Examples are universal banks and investment banks.
funds to those who can put them to long-term productive use.
 Investors – individuals or firms who have excess funds
For example, governments and corporations making long-term and are willing to invest in the securities offered.
investments are always looking for long-term investors. 2. Secondary Market
 It is also called the aftermarket. It is the place where financial
Elements of Capital Market instruments already issued are traded. The secondary market
1. Organized Security Exchange provides for the first owner of the issued securities to be sold
to the market. The securities are sold by the investor to
 A securities exchange operates under the rules and another investor for profit or cutting loss.
regulations formulated by an exchange.
Other types of Financial Market:
Example: Philippine Stock Exchange
Bond Market
2. Over the Counter Markets (OTC)
 It is a place where long term debt instruments are issued by
 It is involved in the buying and selling of financial firms and government agencies to raise money. It is also a
instruments but not in organized securities exchange. market where the participants are buying and selling bonds.
These are stocks of corporations that were registered and Interest rate and bond price have an inverse effect. When the
licensed by the Securities and Exchange Commission to interest rate is high, the price of the bond is low and when the
sell stocks , which were not being traded in the PSE to the interest rate is low, the price of the bond is high.
public.
Commodity Market
Types of Capital Market
 It is a place where raw or primary commodities are traded. The
1. Primary Market commodities are traded on regulated commodities exchange
where they are bought and sold in standardized contract.
 It is a venue where firms and government agencies raise
money using issuing financial instruments like stocks or Examples of commodities are corn, sugar, coffee, cotton, copra,
bonds for the first time. The proceeds from the new issues and tea.
go directly to the issuer.
Stock Market
 It is a place where publicly listed stocks are bought and sold. If
the firm would like to raise money in the form of stocks they
 normally go to an investment banker to facilitate the selling. buying, selling and exchanging currencies at the current or
The stock market facilitates the subsequent selling of the determined prices.
stock.
Derivatives Market
 This provides financial instruments to manage risk. A
derivative market is a financial market where derivatives
contracts whose value is derived from an underlying asset are
traded. These underlying assets can include stocks, bonds,
commodities, currencies, interest rates, and market indices.
Types of Derivatives:
▪ Futures – Agreements to buy/sell an asset at a future date at a
predetermined price.
▪ Options – Contracts giving the right (but not the obligation) to
buy or sell an asset at a set price before expiration.
▪ Swaps – Agreements to exchange cash flows, such as interest
rate swaps or currency swaps.
▪ Forwards – Customized agreements between two parties to
buy/sell an asset at a future date for a fixed price.
Purpose of Derivatives:
▪ Hedging: Reducing risk by offsetting potential losses (e.g.,
companies hedge currency risks).
▪ Speculation: Investors bet on price movements for potential
profit.
▪ Arbitrage: Traders exploit price differences in different
markets.

Foreign Exchange Market

 It is a global decentralized or over the counter market for the
trading of currencies. This market determines foreign
exchange rate for every currency. It includes all aspect of