Chapter? FINANCIAL REGULATION Scanned with CamScannerFINANCIAL MARKETS: Fundamentals and Trends Financial Regulation Every country must implement its regulatory system to ensure controls and governance. Regulation was designed to set rules and guidelines to be followed to ensure balance among individuals, firms and/or citizens. Regulation is also designed to reconcile conflicting interests. Public Utility Research Center in the University of Florida defined regulation as a process whereby the designated government authority provides oversight and establishes rules for firms in an industry. Normally, a regulatory agency is identified by law or by order to execute the regulatory framework and serves as oversight of a certain industry or particular firm. Its presence sets the boundaries to manage or control the behavior of the individuals, firms and/or citizens. World Bank' sets regulatory measures to address certain risks and social factors. These are systemic risk, consumer protection, efficiency enhancement, and social objectives. Systemic risk is the probability of a firm to fail its objective that may result in a ripple effect to the economy. Consumer protection is a factor that requires established policies to consider the effect on the consumers’ welfare. Efficiency enhancement is a factor that is considered to ensure the dynamism and agility of the policy to adopt in a fast-changing environment. In broader scope, the policies should take into consideration the alignment to the objectives of the society or what is factored as social objectives. Table 2.1 presents what regulatory measures address the risks identified. Financial regulation is a type of regulation whereby rules and standards are set to oversee the ability of the companies to establish and maintain appropriate levels of capital to sustain its operation. It also includes setting controls over the market factors that will affect the financial sustainability of the firms and players in the industry. Table 2.1 Regulatory Measures and Risk Management Objective Cee Lemar fares) Antithrust / competition policy Y Disclosure standards Y Y Conduct of business rules Y Conflict of interest rules me Capital adequacy standards y Y Fit and Proper entry tests Y i Y Liquidity Requirements Y Y Reporting Requirements Y Restriction on services Y Y * Carmichael, Jeffrey. The Development and Regulation of Non-Bank Financial Institutions. World Bank. 2002 55 | Scanned with CamScannerFINANCIAL MARKETS: Fundamentals ang = Tre i tory Measures a pst eso Y : roe y Devens : pesere requirement : Customer siti” ern : ion Ceiling ~ Deposits : rest fate Inert ate celing—(03"® investment Requirements Geographic Restrictions ' market Drivers Regulated j firms failed to sury; In financial markets, some players or. ailed vive a majyanth the regulation set. The reason being is that these gu! d by the following market drivers: (1) competitiveness. a 3) consistency; and (4) stability 0) they c are affecte market behavior; ( Competitiveness Governments are duty bound to regulate competition in the financial sector. Financial sector has an important role .in shaping the overall economy of a country hence it is a must that this must be Tegulated, The following activities are regulated in the financial sector: access tg capital, credit and loan term offerings, support to providers of financing, management of business risks, transaction costs and tariffs. The main determinant of competition are the forces that drive the market i.e. buyers and sellers. Firms in the financial market must be able to understand how to respond and maximize their leverage in the industry and compete. Normally, investors explore for investments which can offer less.tisk with favorable retums. The question is, how favorable is favorable? The challenge is for the firm to manage the degree of risk it can assume to pratle them to compete in the market. Consequently, connivance in the piers my be Probable and impose a high collaborative rate among yers. To prevent this, government regulation takes place. brokerane iustate, Company A, a brokerage company, imposes 2 1 brokerage fee of, its clients. Company B as a new player imposes # player enters the 2 (OF every transaction it closes. Company C anote transaction. CommanK@t offering a brokerage fee of 0.70% for eve" mPany A kept its price policy, In this ca ‘ : Service, Company a ic suming all companies provide the same lev : are adjust to the om high going concern risk in the future if} Trey shit to theme ston. In the given scenario, thei let ers that offer a lower rate. In this c25 6! Scanned with CamScannerFINANCIAL MARKETS: Fundamentals and Trends Sx government may provide support to Company A to enable the cor compete should there be internal consideration or risk that they ean that can be passed on in other means. Pricing for services mat with the risks assumed by a firm. y be affected Market Behavior The behavior of the firms in the industry can also be regulated. Their behavior in the market can be demonstrated through: (1) integrity in their activities; and (2) integrity in representation. Regulation will come into play by setting parameters to ensure that firms will comply with certain standards to ensure integrity of the firms and level the playing field. The government normally sets: © full disclosure of information @ prohibition on insider trading control of new players setting minimum capital requirement e minimum governance rules. Consistency Consistency is considered as an important principle in the business, Consistency in the market is normally demonstrated by firms through their information disclosure and policies. The firm must enable themselves to ensure that they provide sufficient information to their customers. Given that the financial market is heavily a service providing industry, information symmetry is a plus to all customers/clients that enable them to make sound decisions. Information is a vital asset in financial markets. Government role is to set standards to regulate and ensure that information provided in the market is fair, consistent, and conservative. This will allow the investors to make decisions. In most of the times, the degree of risks assumed by investors are based on the information made available. The most common issue is the company’s ability to provide fair and consistent information. Trust of the clients is maintained based on how the firms are able to share their information to them. ‘ The principle of prudential regulation whereby the government imposes rules to govern the behavior of the financial institutions and financial markets intends to minimize the risk of uncertainty and strengthen the integrity of the firms. Stability Market stability is a critical factor that firms should achieve in the ong run, Given that market behavior is dependent on a lot of factors, the is very high. Most of the players fail to survive because their ability to 57| Scanned with CamScannerFINANCIAL MARKETS: Fundamentals ang Trendy forecast and to mitigate the market risk is wee ne impact of Financia, tisk to players is. something that the oe Es ri iehtarn shoulg consider, The regulation must be able to pro! ae siietaks ie the Clients as well as the companies to enable their corpo ability. Systemic instability is a threat that arises where a Segment of fm is not able to meet its commitment because of ao to address the Tig of the market. At the end of the day, the default a may materialize ang the firm fails to settle its obligations, thereby disrupting the continuous flow, of finances in the industry. Regulators of Financial Activities Financial activities have been referred to activities that deal with funding certain transactions or expenditures. In the financial market, the financial activities are focused on the trading of securities and financial instruments. Setting rules to set standards, control and order on the financial activities, regardless of the source, is called financial activity regulation. Figure 2.1 presents the key financial regulators in the Philippine Financial Systems. Bangko Sentral ng Board of Pilipinas Investment Insurance Commission PIELIPPINED Philippine RD OY Vf Figure 2.1 Financial Regulators Scanned with CamScannerFINANCIAL MARKETS: Fundamentals and Trends Bangko Sentral ng Pilipinas (BSP)? The BSP is created under the New Central Bank Act or Republic ‘Act 7653 and an attached agency of the Department of Finance, Under the Philippine law, this will act as the central monetary authority which will act as a corporate body that is responsible concerning money, banking and credit. BSP shall provide policy directions in these areas. It is also responsible for the supervision of financial institutions and exercise regulatory powers. The function of BSP are following: Liquidity Management The BSP formulates and issues monetary policy aimed at influencing money supply in order to maintain price stability. Money supply will be further discussed in the later part of this chapter. e Currency Issue The sole responsibility to issue notes and coins representing the national currency for the Philippines. All issuances made by the BSP are with sovereign guarantee and shall be considered legal tender in exchange for private and public debts. e Lender of last resort BSP acts as the provider of discounts, advances and financial support to financial institutions for them to maintain their liquidity. e Financial supervision BSP regularly supervises the financial institutions and is empowered to exercise regulatory powers over non-bank institutions conducting quasi-banking functions. Management of foreign currency reserves Manages the financial foreign currency requirement of the Republic by ensuring sufficient international reserves will be made available on time. This is to preserve the international stability and Position of the Philippine Peso. sol Scanned with CamScannerFINANCIAL MARKETS: Fundamentals ang Bhd ds Determination of exchange rate policy li ill determine the rate of ts the policy that will uy ae ts ne Paver different currencies. Current ar tS ‘bes to.a market-oriented foreign rate policy hence the ra ee ‘dependent on the behavior of the market. es iti ial advisor and official q activities as banker, financial advis Le . ofthe Government and its instrumentalities. BSP is governed by the Monetary Board. The Monetary Board is composed of seven members. The | The BSP has its money board is chaired by the Governor of the | museum within their complex. BSP and composed of six other | was constructed since January members coming from: 1 member — | 3, 1999. It serves are the member of the cabinet designated by | repository of all currencies and the President of the republic (that | other historical financial cabinet member can designate an | "sources. undersecretary of his department to attend on his behalf); 5 members — | The Museo ng Bangko Sentral shall be coming from the private sector | 79 Pilipinas is open from (3 members shall serve for a term of | Monday to Friday 9:00 am. to six months while 2 will serve for three | #00.P-™. Visiting the museum months). All members can only be re, | ® Sublect for appointment appointed once. POsitory Point of Information! The Governor acts as the Chief Exe: t ects ‘Cutive Officer of the BSP. In order sien hed runctions, itis Supported by four sectors / functions. (1) Financial of banks and ‘ector is responsible mainly for the supervision and regulation other financial institutions under the scope of the BSP. (2) Monetar : monetary paleys seanmies Sector aims to conduct the formulation of (3) Currency Ma ‘ts implementation and assess its effectiveness: distribution, disposarorret Se" wil be responsible in the production security documenta: At 3591(with amendments introduced tou Plays a significant S008 25 insurer of deposits placed in banks." insurance coverage Since this entity Protects depositors through oat which help Maintain financial stability in the ma" 62! Scanned with CamScannerFINANCIAL MARKETS: Fundamentals and Trends TEE PDIC has three main mandates as aligned to public policy: a. Provision of deposit insurance. Depositors are insured by the Philippine Deposit Insurance Corporation (PDIC) up to a maximum amount of PhpS00,000. PDIC accumulates its Deposit Insurance Funds by collecting an annual assessment of 1/5 of 1% of total deposit liabilities of its member banks. b. Examination and resolution. PDIC issues regulations to implement its role as deposit insurer, examine financial soundness of banks and ensure their compliance to deposit insurance regulations and give financial assistance for distressed banks. PDIC works with BSP to keep the Philippine banking system stable. c. Receivership and liquidation. PDIC is the assigned legal receiver and liquidator of banks that have closed already upon order of the Monetary Board of BSP. PDIC managing the records, assets and affairs of closed banks in behalf the bank’s creditors (i.e. depositors). PDIC ensures that there is seamless transition between closure to liquidation in order to efficiently dispose assets of the closed banks and use the proceeds to settle the claims of creditors. Insurance Commission (IC)° IC mandated by virtue of Executive Order No. 192 s. 2015 to ensure enforcement of the provisions of the Insurance Code or Republic Act 10607, i.e. to regulate and supervise the insurance, pre-need, and health maintenance organization industry. It is governed by the Department of Finance that supervises and regulates the operations of life and non-life companies, mutual benefit associations, and trusts for Charitable uses. IC issues licenses to insurance agents, general agents, resident agents, underwriters, brokers, adjusters and actuaries. It has also the authority to suspend or revoke such licenses. —— a ee 3 https://www.insurance.gov.ph 63 | Scanned with CamScannerFINANCIAL MARKETS: Fundamentals ang, Nr The functions of IC are as follow: 1. Promulgation and implementation of policies, rules and regula ng joverning the operations of entities engaged in insurance feed, and HMO activities as well as benevolent features," 2. Licensing of insurance, reinsurance companies, its intermediag, mutual benefit associations, trusts for charitable uses, Pre-nee! companies, pre-need intermediaries, and HMO companies 3. Conducting insurance agent's examinations, as well as process, of reinsurance treaties and request for investments of insurance companies 4. Examination/verification of the financial condition and methods o doing business of entities engaged in insurance business, pre. need, mutual benefit associations, trusts for charitable uses, ang HMO companies 5. Evaluation and preparation of statistical reports, studies, researches, annual reports, and position papers relative to insurance, pre-need matters, and HMO matters 6. Review of premium rates imposed by life and non-life companies, mutual benefit associations; statistical reports of adjusters to determine compliance with established standards. 7. Adjudication of claims and complaints involving loss, damage o liability incurred by an insurer under any kind of policy or contrat of insurance or suretyship; 8. Review and approval of all life and non-life policies, pre-need. a4 HMO plans before sale to prospective clients. Philippine Securities and Exchange Commission (SEC) __The SEC is the national goverment regulatory agen’) administer oversight on the corporate sector, capital market partici? and securities and investment instruments and promote core te governance over these. It was created on October 26, 1936 und! Commonwealth Act No. 83. 6 In the Republic Act 8799 or the Securities Regulation Code. Wa" the responsibility and scope of the SEC to include the following: al Scanned with CamScannerFINANCIAL MARKETS: Fundamentals and Trends et Have jurisdiction and supervision over all corporations, partnerships or associations who are the grantees of primary franchises and/or a license or permit issued by the Government, n |. Formulate policies and recommendations on issues concerning the securities market, advise Congress and other government agencies on all aspects of the securities market and propose legislation and amendments thereto; 3. Approve, reject, suspend, revoke or require amendments to registration statements, and registration and licensing applications; 4. Regulate, investigate or supervise the activities of persons to ensure compliance; 5. Supervise, monitor, suspend or take over the activities of exchanges, clearing agencies and other self-regulated organizations; 6. Impose sanctions for the Violation of laws and the rules, regulations and orders issued pursuant thereto; 7. Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and provide guidance on and supervise compliance with such rules, regulations and orders; 8. Enlist the aid and support of and/or deputize any and all enforcement agencies of the Government, civil or military as well as any private institution, corporation, firm, association or person in the implementation of its powers and functions under this Code; 9. Issue cease and desist orders to prevent fraud or injury to the investing public; 40. Punish for contempt of the SEC, both direct and indirect, in accordance with the pertinent provisions of and penalties prescribed by the Rules of Court; . Compel the officers of any registered corporation or association to call meetings of stockholders or members thereof under its supervision; 12. Issue subpoena duces tecum and summon witnesses to appear in any proceedings of the Commission and in appropriate cases, 651 Scanned with CamScanner= FINANCIAL MARKETS: Fundamentals and Tren i h and seizure of all docy der the examination, searcl mens, ares files and records, tax returns, and books of accounts of any entity or person under investigation as may be necessary for the, proper disposition of the cases before it, subject to the provisions of existing laws; i id hearing the fr end, or revoke, after proper notice and hearing the franchg, 13. Suspetifcate of registration of corporations, partnerships 3 associations, upon any of the grounds provided by law; and 14, Exercise such other powers as may be provided by law as well as those which may be implied from, or which are necessary o, incidental to the carrying out of, the express powers granted the SEC to achieve the objectives and purposes of these laws. Board of Investments (BOI) BOI is the lead agency to promote investment in the country and thereby generate local and foreign investment in the country. It is an attached agency of the Department of Trade and Industry. The agency provides advisory, actualization and post services to the investors. BOI provides the following services to encourage new investments: Provide information for knowledge-based research. © Incentivize the investors through the provision of tax holidays, tax and duty exemption of imported capital equipment etc. ¢ Participate through policy advocacy initiatives to ensure that the laws and regulation are investment friendly. Money Supply and Payment System The financial system is an interrelated financial process whe sed by money. Money supply is the availability of financial resources fol leployment in the financial system. It is making the money avait USS ‘oF for trade or investment. This is, of course, balanced wit Monetary demand of the market. i ‘ . the This balance is Managed by the central bank. For the ca5¢ ot Philippines, it is the Bai je the , ni ini i take the 1 of the folowing, gko Sentral ng Pilipinas. Money wil * Cash (coins and bills) © Demand deposits 6 Scanned with CamScannerFINANCIAL MARKETS: Fundamentals and Trends Other financial instruments Money is expected to be regulated somehow to enable the sovereign to have control of its economy. As mentioned in the earlier chapters, money is an essential factor in the financial system. In order to do this, monetary policies must be enforced with the objective of promoting sustainable output and employment at its peak and stabilize prices. For a monetary policy to be appropriate or effective, the BSP must ensure the following are present: © Alignment to the target goals Access to information Responsiveness of the variable set Regulation of Circulation of Notes Bangko Sentral ng Pilipinas is authorized by the republic under R.A. 7653 to have the sole power to issue currency, within the territory of the Philippines. Given it is a sole authority, no one is allowed to issue or reproduce any document or object for general monetary circulation. Violators will be facing imprisonment of no less than five (5) years but not more than (10) years, greater penalty may be imposed depending on the gravity pursuant to the Revised Penal Code of the Philippines. In foreign countries, different manners of regulation are imposed. According to Chapter 4 of the BSP Circular No. 829 series 2014 amending the consolidated rules and regulations on currency notes and coins issued in the Philippines, for the banks, including their branches, if applicable, must observe the following for the deposit of their notes: © Banks shall classify their cash deposits and sort by series and by denomination. They should classify it according to: (1) clean or fit notes; and (2) dirty or unfit notes. © Banks shall provide securely sealed bags or containers separately for the clear or fit notes, and for the dirty or unfit notes accompanied by a deposit slip for each type/category. It must be labeled “UNFIT”. Handling of deposits, banks’ deposits shall be packed in sealed bags or containers in standard quantity of twenty (20) full bundles per denomination. Each bundle contains 1,000 notes in 10 equal straps. Each strap contains 100 notes. Banks located in the provinces may make direct deposits of currency notes, duly identified and sorted, with the nearest BSP regional office/branch. For those without regional offices available, they may arrange it with their respective head offices to be shipped a71 Scanned with CamScannerFINANCIAL MARKETS: Fundamentals and Trends to BSP in Quezon City. The cost shall be borne by the bank to concerned. ks shall incorporate measures on the implementation there, Banks in their compliance program. For the deposit of their coins, the following are observed: i from adhesive tapes. “ cana shall ie Seiad into fit, unfit or mutilated per denomination in and per series. Each bag of coins shalll contain the following standard number of . pieces and amount per denomination: Denomination Pieces per Amount per Bag Bag Php 10.00 1,200 Php 12,000 Php 5.00 1,500 Php 7,500 Php 1.00 2,000 Php 2,000 Php 0.25 3,000 Php 750 Php 0.10 4,500 Php 450, Php 0.05 5,000 Php 250 Php 0.01 5,000 Php 50 Personnel in charge for Setting up the controls for financial institutions (e.g. accountants, internal auditors, controllers, etc) must ensure that these guidelines are properly observed, As described by the BSP in its circulars, a currency note shall be Considered unfit for Circulation when: Point of {nformation! As of 2020, there are 8 countries using Peso as a Currency. These are Argentina, Chile, Colombia, Cuba, Dominican Republic, Mexico, the Philippines, ang Uruguay. There are other 14, Countries that used the Currency previously, ¢ Itcontains heavy crinkles which break the fiber of the paper and indicate that disintegration of the note has begun; or * _ Itis badly soiled/contaminated and/or with writings even if it has Proper life or sizing; oF * Itpresents a limp or rag-like appearance and/or it cannot sustain its upright position when held at the mid-portion of one of the Shorter borders. A Currency coin shall be considered unt for Circulation when: ed * _Itis bent or twisted out of shape or defac ness OF show signs of Corrosion, but its genuinen 68! Scanned with CamScannerFINANCIAL MARKETS: Fundamentals and Trends ee and/or denomination can still be readily and clearly determined/identified; or Ithas been considerably reduced in weight by natural abrasions/wear and tear. For guidance, unfit currencies are no longer allowed to be used for circulation but may be presented for exchange to or deposited with any bank. However, BSP may not accept these currencies if: © The notes and coins can no longer be identified; or © The coins have indications of filing, clipping or perforation; or * Notes which have lost more than 2/5 of their surface or all of the signatures inscribed thereon; or © Notes which are split edgewise resulting in the loss of the whole of or part of, either the face or back portion of the banknote paper; or ¢ Notes where the Embedded Security Thread or Windowed Security Thread placed thereon is completely lost except when the damage appears to be caused by wear and tear, accidental burning, action of water or chemical or bites of insects etc. Purchasing Power The purchasing power is practically based on the consumer price index. In economics, the consumer price index or CPI is the weighted average value of the basket of prices of all commodities representing the market. The commodity groups in the consumer price index are: food and non-alcoholic beverages; alcoholic beverages and tobacco; clothing and footwear; housing, utilities and other fuels; furnishings and maintenance costs; health; transport; communication; recreation and culture; education; restaurant and miscellaneous. The degree of movement of the CPI from a period to another is called the inflation rate. Inflation is derived in EQ 2.1 CPI, Eq 3.1 Inflation = (e)-4 Y q flation = }{— fe x 100% CPI; = Current price index CPlo = Base price index To illustrate, the CPI for years 1 and-2 are as follows: Year 1 = 112; Year 2 = 116. The inflation is computed as follows: 69 | Scanned with CamScanner= FINANCIAL MARKETS: Fundamentals ang Trend 116 Inflation = (® - 4} x 100% Inflation = 0.0357 x 100% Inflation = 3.57% i is that the prices went up by 3.57%. In terms of the eer power this signifies that P1.00 can buy less than the previg ear to about 3.57%. Inflation is an indication of the market risk. Hence, this also affects the ability of the people to make new purchases OF Settle their obligations. In finance, inflation is a driver of the financing COSts. Fo, regulatory purposes, BSP finds its way to control inflation and enabie continuous flow of funds in the market. Thus, BSP is one of the credible agencies that sets target for the country's inflation. Philippine Statistics Authority, for the case of the Philippines, is the body that determines the current inflation based on the current movement of the commodities set ag index in the market. There are two types of inflation: the core inflation and headline inflation. Per the BSP, core inflation is used for most of the economic estimates since it excludes in the equation the movement of the commodities or incidents with very volatile movement or outliers. On the other hand, headiine inflation captures the changes of the cost of living based on the movement of the basket of commodities as a whole. In figure 2.1, you may note the trajectory of the headline and core inflation for the years 2013 to 2018. You May observe that the relationship of the headline to core is not consistent over the years where the headline is not always higher than the Core inflation. This is because the excluded incident or commodity may overstate or understate the basket of prices, but that effect will not last for long term. It is important to know which movement should be considered for their long-term decision. For those it the capital market for example, thi it 1g , this is buy hold their securities, aren eee Ea 70! Scanned with CamScannerFINANCIAL MARKETS: Fundamentals and Trends é 30 - 20 10 201s rors 2017, re | 20192020 = — Co 10 16 aa 42 32 32 —Heatline oF 13 29 | 52 2s 26 Figure 2.1 Headline and Core Inflation from 2013 to 2018 Payment System The business is not a business if without any trade or exchange. In civil law of the Philippines there are different ways to settle an obligation after the delivery of products or render of service. One of the modes of settlement is through payment of the products or services through a payment system. The payment system is a set of interrelated processes of settlement of goods or services rendered in exchange for a set of instruments that will undergo either banking or non-banking procedures. Characteristics for an Effective Payment System There is no ideal or best methodology to administer a payment system. The system is dependent on the best amenable, convenient and acceptable solution for both patties i.e. the payee and the payor. The Payment system will work on a certain network or sub-systems that will link the parties grounded by certain rules and procedures. According to BSP, a payment system normally requires the following: Standard methods of transmitting payment messages within the system * Agreed means of settlement © Common operating procedures and rules e.g. admission, fees and operating hours. " 71 Scanned with CamScannerFINANCIAL MARKETS: Fundamentals ang = s nt 1d Methods of Transmitting Payme of transmitting payment isthe j The conventions! transaction whereby the sell arm's length exe rmsods or render service while the other ry obligor deliver the oP However, this became a chalengt deliver in the . located in a remote location or far from each especially f% Merri is no longer a challenge. Banking eysian other, NowadayS ent ways to settle obligations or already provides Or ectronic banking or e-banking System, payments. Wt ament to be made through fund transfer, oni enables ine cpecial requests from the bank made virtually, faite paymer 2.2 presents an interface of a personal e-banking service. a. Standal Ca Perr nes ‘ =i Figure 2.2 E-banking interface The e-banking with the other features allows payment and transfers. This shows that the payment system that works an infrastructure providing efficient solutions and real-time ’ssing of payment May reduce risk. Money within Proce: ' Agreed Means of Settlement itis eg ive" that the exchange is a contract between the 2 payne sential that they also agree on the manner on in WiTentis 0 be rendered. Even though there is an available 0 infrast Mucture to make Payments, some people are still keen! nl Scanned with CamScannerFINANCIAL MARKETS: Fundamentals and Trends ee i oa Manual or the conventional way. Although the payment nade rough cheques is not that warranted, except if it is a ger cheque, some people still prefer this type of payment. What is important in a payment system is that the parties will agree on the manner of payment. In accounts payable processing or AP processing, all transactions for purposes of controls are charged to accounts payable account. Now, the settlement of these transactions varies depending on the manner on how it is agreed for settlement. The normal means of settlement are as follows: Cash or cheque Payment © Online payment (if the supplier of goods or service is an accredited merchant of a bank) Automated Teller Machine Fund transfer Credit Cards Debt Cards and Stored Value Cards Electronic Money Manual Money transfer Paybox System Cash deposit Assignment ee eceesee c. Common Operating Procedures and Rules Other than the agreement on the manner on how it will be settled, another key requirement for an effective payment system is the operating procedures and rules. Like any other contract these information or guidelines must be mutually accepted by both parties. These agreements are normally provided by the payment system facility to provide guidelines and protection for both parties in case of breach as well protection of the system that the transactions are cleared from the settling party. In an online banking system, these agreements are provided as a template to all clients or users of the system. This provides a formal authority to the facility to use information and the users agree to subscribe to the banking policies. These policies sent by the banks or financial institutions are regulated by the BSP. 2B Scanned with CamScannerFINANCIAL MARKETS: Fundamentals and7, ST ee Importance of Payment System Payment system is an essential facility to enable the comp, course of the transaction. Based on the characteristics and feature? payment system, BSP identified the following importance of the o ysl among others: em, Safe and real time transactions; Effective risk management; and i Facilitates financial market transactions, Safe and Real Time Transactions The payment systems are designed to safeguard the identity ang transaction as a whole especially on electronic payment system facilities, Payment systems are deemed safe given that the characteristics are mutually agreed by the parties including the manner of payment whichis convenient for both. For e-banking payment system facilities, it is debited to the account of the payor real-time. However, most of the systems require 3 banking days before it is credited to the account of the payee. The payor should not worry about potential interest due to missed payment as long as itis clear that the reference should be the date of the transaction of the payor and not the posting date to the payee. The three banking day mules required as part of the clearing process, but most of the time, itis credited real time especially for fund transfers. The Fiiiippine Bureau of Internal Revenue adopts the us of the Electronic Filing and Payment System. This allows individual od corporate taxpayers to file and pay their tax due. This payment system a hybrid that is primarily designed to encourage compliance in tax filieg and facilitates the payment to provide convenience to the taxpayers. Effective Risk Management Since the pay 7 ies and rules. The payment yee System facility involve well defined partes o syste! 2 tte users to validate the taney nates have verification process 10 allow payments, Ales ,'@nsaction before completing the authori © Me ' one advantage for established payment system ©" al Scanned with CamScannerFINANCIAL MARKETS: Fundamentals and Trends a absence of physical cash or financial instrument, everything can be made virtually or if applicable electronically, this i 5s ; , this or iraleapproarations ly, this minimizes the risk of loss, theft Although itis an effective risk mitigation methodology, there are still risks that need to be recognized upon usin i 9 payment systems. are enumerated in Table below Peet ete nese Tie Risks of Payment Systems aE Ability of the payor to meet the full value Credit Risk of its obligation due to unforeseen charges. Timing difference on posting may affect the visibility of the user or a party to TCMCUSA Camm determine that full amount due and end up its ability to calculate currently maturing obligation Risk that payment will not be made on Default Risk js time. ‘System downtime and system “bugs” may Brirlestl each occur. Changes in rules and regulations affecting the payment system Rea In commerce, risk is a very important factor to consider that may drives the business up or down. Risk relates to the volatility of return patterns in the business. Thus, the challenge on quantifying the risk is imperative for the investors to be able to determine how much they can keep themselves whole. There are risks that are inherent in every financing transaction, These are default risk, liquidity risk, legal risks, and market risks, among others. Default risk arise on the inability to make payment consistently. Most of the businesses was able to raise financing on their demands, however their cash flows projected were not that guaranteed. Basically, the cash flows management principle is to allow the business to self- liquidate or self-finance. While, the company is made aware of their Periodic obligation but there are still chances that they may fait to make Sure that the funds were available upon servicing of debt or paying the wl Scanned with CamScanneraN FINANCIAL MARKETS: Fundamentals ang fr i amortization including interest. may be quanti determining the probabilly of the borrower to default in their Paymeni! the duration of the loan. in identified by ensuring the business to be ca maturing obligation. Thi is ateren i deat cf iquidi is focusing on the entire liquidity of the company o, , pai eerie portion oftheir debt as it comes due. rage” this risk is quantified by determining the opportunity cost of the lender a the period within which the borrowers were able to recoup or worst ty value there cannot be salvage because of the ability of the company tq : liquid. Liquidity Risk is i of meeting all its currently Legal risk is dependent on the covenants set and agreed in between the lenders and the borrowers. The legal risk will arise only upoy the ability of any of the parties to comply with the covenants of the contract, Normally, the burden is to the borrower to comply given that the party who is obliged to pay back is them. The common defaults in the covenants are as follows: (1) maintaining the financial ratios; (2) significant acquisition or disposal of assets; (3) repayment of other obligation; or (4) declaration of dividends of any form without the consent of the lenders. Market risk is the impact of the market drivers to the ability of the borrowers to settle the obligation. Market risk is classified as a systematic tisk because it arises from external forces or based on the movement of the industry. Among the risks that affects the interest, market risk is the most difficult to quantify. The experts and analysts can just only set certain parameters to measure it. Facilitates Financial Market Transactions In the emergence of the e-banking system as a platform of payment system, this is also widely used to facilitate the efficient settlement of the financial market transactions. The database is used to make fulue analysis Or projections of the investors. The system can also be used! validate the credit rating of certain instruments before completing the trad. compamentiy Certain platforms are integrated with online brokerad? OF sale of tra paatltate opening an account; (2) facilitate purches® provide an obansattions; and (3) reduce human intervention transaction, I°C'”® APProach to manage financial mat 16! Scanned with CamScannerFINANCIAL MARKETS: Fundamentals and Trends Financial regulation is a type of regulation whereby rules and standards are set to oversee the ability of the companies to establish and maintain appropriate levels of capital to sustain its operation. Some of the financial regulators in the Philippines are Bangko Sentral ng Pilipinas, Philippine Securities and Exchange Commission, Board of Investments, Insurance Commission. Bangko Sentral ng Pilipinas is a self regulating agency. With the following responsibilities: liquidity management, currency issue, lender of last resort, financial supervision over banks and financial institutions, management of foreign currency reserves, determination of exchange rate policy, and other activities as banker, financial advisor and official depository of the Government and its instrumentalities. Payment System is a set of interrelated processes of settlement of goods or services rendered in exchange for a set of instruments that will undergo either banking or non-banking procedures. Standard methods of transmitting payment messages within the system, Agreed means of settlement and Common operating procedures and rules e.g. admission, fees and operating hours are some of the characteristics of the sound payment system. Having a sound payment system doesn’t mean it is risk free. The following risks may be inherent such as credit risk, liquidity risk, default risk, technological risk and legal risk. mI Scanned with CamScanner