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CHAPTER 3- FINANCIAL REGULATION AND THE enable themselves to ensure that they
CENTRAL BANK provide sufficient information to their
customers.
World bank sets regulatory measurement to access
certain risks and social factors: Information - vital asset in financial markets
a. Systemic Risk - probability of a firm to fail
its objective that will result to ripple effect Government role:
b. Consumer protection - policies enforced Set standards to ensure that the information
assumes the effect of the consumers’ welfare provided in the market are fair, consistent
c. Efficiency enhancement - ensure the and conservative.
dynamism and agility of the policy to adopt
in a fast-changing environment 4. Stability
External and fatal factor to be considered by
Financial Regulation the firms in the financial market.
Rules and standards were set to oversight the ability
of the companies to establish and maintain an The regulation must be able to protect the
appropriate level of capital to sustain its operation. interest of
the clients as well as the companies to
Market Drivers Regulated enable their corporate sustainability.
1. Competitiveness
The main determinants of competition are Systemic instability - threat whereby it arises
the main forces that drives the market --- where a segment or firm was not able to
buyers and sellers meet its commitment because of their
failure to address the risks of the market.
Firms in the financial market must be able
to understand how to respond and maximize
their leverage in the industry and compete.

Investors explore for those which can offer

with the less risk with favorable returns. Regulators of Financial Activities

2. Market Behavior Financial Activities

Behavior can be demonstrated on their Activities that deals on funding certain transaction
a. Integrity on their activities or expenditures.
b. Integrity on their representation
Financial Activity Regulation
Regulation sets parameters to ensure that Setting rules to set standards, control and order on
firms will comply with certain standards to the financial activities
ensure the integrity of the firms and level
the playing field. In the Philippines, financial regulation is observed
by:
The government sets:
● Full disclosure of information Bangko Sentral ng Pilipinas (BSP)
● Prohibition on insider trading Created under the New Central Bank Act or
● Control of new players Republic Act 7653 and an attached agency of the
● Setting minimum capital Department of Finance.
requirement
● Minimum governance rules Acts as the central monetary authority which will
act as a corporate body that is responsible
3. Consistency concerning money, banking and credit.
Demonstrated to the market’s information
disclosure and policies. The firm must Functions of BSP:
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● Liquidity Management
Formulates and issues monetary policy
aimed at influencing money supply in order
to maintain price stability.
● Currency Issue
Issue notes and coins representing the
national currency of the Philippines
● Lender of last resort
Acts as the provider of discounts, advances
and financial support to financial institution
for them to maintain liquidity
● Financial supervision
Supervises the financial institutions and is
empowered to exercise regulatory powers
over nonbank institutions conducting quasi-
banking functions
● Management of foreign currency reserves
Ensures that sufficient international reserves
will be available on time
● Determination of exchange rate policy
Sets the policy that will determine the rate
of
exchange of Philippine Peso over different
currency
● Other activities as a banker, financial
advisor and official depository of the
Government and its instrumentalities.
BSP shall be governed by the Monetary Board
Monetary Board
- Composed of 7 members; Governor of the
BSP, 1 member of the cabinet designated by
the President, 5 members coming from the
private sector.
The Governor/CEO is supported by four
sectors/functions
1. Financial Supervision Sector
2. Monetary and Economics Sector
3. Currency Management Sector
4. Corporate Services Group
Insurance Commission (IC)
Mandated by virtue of Executive Order No. 192 s.
2015 to ensure enforcement of the Insurance Code
or Republic Act 10607
Governed by Department of Finance
IC issues licenses to insurance agents, general
agents, resident agents, underwriters, brokers,
adjusters and actuaries.
Functions of IC:
1. Promulgation and implementation of
policies, rules and regulations governing the
operations of entities engaged in insurance,
pre-need and HMO Activities as well as
benevolent features.
2. Licensing of insurance, reinsurance
companies, its intermediaries, mutual
benefit associations, trusts for charitable
uses, pre-need companies, pre-need
intermediaries, and HMO companies
3. Conducting insurance agent’s examinations,
as well as processing of reinsurance treaties
and request for investments of insurance
companies
4. Examination/verification of the financial
condition and methods of doing business of
entities engaged in insurance business, pre-
need, mutual benefit associations, trust for
charitable uses, and 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 nonlife companies, mutual benefit
associations; statistical reports of adjusters
to determine compliance with established
standards.
7. Adjudication of claims and complaints
involving loss, damage or liability incurred
by an insurer under
any kind of policy or contract of insurance
or suretyship
8. Review and approval of all life and non-life
policies, pre-need and HMO plans before
sale to prospective clients
Philippine Securities and Exchange Commission
(SEC)
Created on October 26, 1936 under the
Commonwealth Act No. 83
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National government regulatory agency to
administer oversight on the corporate sector, capital
market participants and securities and investment
instrument and promote corporate governance over
these.
Responsibilities of SEC under the Republic Act
8799 or the Securities Regulation Code:
1. 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;
2. 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
the activities of persons to ensure
compliance;
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
SROs;
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;
10. Punish for contempt of the SEC, both direct
and indirect, in accordance with the
pertinent provisions and penalties prescribed
by the Rules of Court;
11. 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, order
the examination, search and seizure of all
documents, papers, files and record, 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;
13. Suspend, or revoke, after proper notice of
hearing the franchise or certificate of
registration of corporations, partnerships, or
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 or
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)
Lead agency to promote investment in the country
and thereby generate local and foreign investment
in the country An attached agency of the
Department of Trade and Industry
BOI provides the following services:
● Providing information for the 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
Financial System
An interrelated financial process by which is fueled
by money
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Money Supply ● Coins shall be sorted into fit, unfit or

Availability of financial resources for deployment mutilated per denomination and per series
in the financial system Currency note is unfit when:
● It contains heavy crinkles which break the
Money will take the form of the following: fiber of the paper and indicate that
● Cash (bills and coins) disintegration of the note has begun
● Demand deposits ● It is badly soiled with writing even if it has
● Other financial instruments proper life or sizing
● It presents a limp or rag-like appearance and
For a monetary policy to be effective, the BSP must it cannot sustain its upright position when
ensure the following: help at the midportion of one of the shorter
● Alignment to the target goals borders
● Access to information
● Responsiveness of the variable set Currency coin is unfit when:
● It is bent or twisted out of shape or defaced,
Regulation of Circulation of Notes but its genuineness and denomination can
BSP has the sole power to issue currency, within the still be readily and clearly determined
territory of the Philippines. ● It has been considerable reduced in weight
by natural abrasion/wear and tear
Chapter 4 of BSP Circular No. 829 series 2014
amending the consolidated rules and regulations on 8 countries using Peso as a currency:
currency notes and coins issued in the Argentina. Chile, Colombia, Cuba, Dominican
Philippines… Republic,
Mexico, and the Philippines
For notes:
● Banks shall classify their cash deposits and Purchasing Power
sorted by series and by denomination. They Based on the Consumer Price Index
should classify it according to:
1. Clean or fit notes Consumer Price Index
2. Dirty of unfit notes Weighted average of the basket of prices of all
● Banks shall provide securely sealed bags commodities
separately for the clear or fit notes, and for
the dirty or unfit notes. It must be labelled Commodity group:
“UNFIT” Food and non-alcoholic beverages; Alcoholic
● Handling of deposits, banks’ deposits shall beverages and tobacco; Clothings and footwear;
be packed in sealed bags in standard Housing, utilities and other fuels; Furnishings and
quantity of twento full bundles per maintenance costs; Health; Transport;
denomination. Each bundle containing 1,000 Communication; Recreation and culture;
notes in equal 10 straps. Education; Restaurant and miscellaneous.
● Banks located in the provinces may make
direct deposits of currency notes with the Inflation rate
nearest BSP regional office. For those Degree of the movement of CPI from a period to
without regional office, they may arrange it another
with their respective head offices to be
shipped to BSP in Quezon City. CPI 1
● Banks shall incorporate measures on the
implementation thereof in their compliance Inflation
{ = ()
program

For coins:
● Coins shall be free from adhesive tapes
−1 } x100% CPI 0
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CPI1 = Current price index 3. Common operating procedures and rules

CPI0 = Base price index These agreements are normally provided
by the payment system facility to provide
Inflation guidelines and protection for both parties
A driver of the financing costs in case of breach

BSP - controls inflation and enable continuous flow

of funds in the marker
PSA - determines the current inflation based on the Importance of Payment System
current movement of the commodities set as index 1. Safe and Real Time Transactions Payment
in the market systems are deemed safe given that the
2 types of inflation: characteristics are mutually agreed by the
1. Core inflation - excludes in the equation the parties, including the manner of payment
movement of the commodities or incidents
with very volatile movement Real time are normally applicable for
2. Headline inflation - captures the change of electronic/internet-based system, but can
the cost of living based on the movement of also be applicable to manual payment
the basket of commodities as a whole system.

Payment System 2. Effective Risk Management

Set of interrelated processes of settlement of goods 3. Facilitates Financial Market Transactions
and services rendered in exchange for a set of
instruments CHAPTER 4 - MONEY MARKET &
RELATED FINANCIAL INSTRUMENTS
Characteristics for an Effective Payment System
1. Standard methods of Transmitting Financial Instruments
Payment - Are basically intangible assets as future
Conventional way of transmitting is the economic benefit takes form of a claim to
literal arm's length exchange of transaction cash that will be received in the future.
- Are the main vehicle used for transactions in
It is a challenge for those located in a the financial market
remote location
Two parties involved in a financial instrument:
Electronic banking or e-banking system 1. Issuer
enables settlement to be made through fund Party that issues the financial instrument
transfer, online payment or special requests and agrees to make future cash payments
from the bank made virtually. to the investor Needs additional funds for
2. Agreed means of settlement Normal investment
means of settlement includes:
● Cash or cheque payment 2. Investor
● Online payment Party that receives and owns the financial
● Automated Teller Machine instrument and bears the right to receive
● Fund Transfer payments to be made by the investor
● Credit cards Have surplus funds
● Debt Cards and Store Calue Cards
● Electronic Money Two main economic purposes of Financial
● Manual Money transfer Instruments:
● Paybox System 1. Allows transfer of funds from entities with
● Cash deposit excess funds (investors) to entities who need
● Assignment funds (issuer) for business purposes.
2. Permit transfer of fund that allows sharing
of inherent risk associated with the cash
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flows coming from tangible asset investment 3 tenors of treasury bills:

between the issuer and investor. 1. 91 day
2. 182-day
Money Market 3. 364-day
Where short-term and highly liquid financial
instruments are being traded Treasury bills are quoted either by their yield rate,
which is the discount, or by their price based on
Characteristics of Money market securities: 100 points per unit.
1. Usually sold in large denominations
2. Low default risk Cash Management Bills - those that mature in less
3. Mature in one year or less from the original than 91 days
issue date. Most money market instruments
mature in less than 4 months Treasury bills have virtually zero default risk since
the government can always print more money that
Money markets offer a least expensive alternative they can use to redeem these securities at maturity.
for fund demanders such as the government and Market for Treasury bills:
financial intermediaries when they have short term 1. Deep - market has numerous different
fund requirements. buyers and sellers
2. Liquid - securities can be quickly traded at
Participants in the money market: low transactions costs
● Bureau of Treasury - sells government
securities to raise funds Government securities
● Commercial banks - primary issuer of - safest investment instrument in the market
negotiable certificates of deposits, banker’s - Backed by the full taxing power of the
acceptances and repurchase agreements government, making them default risk-free
● Private Individual - made their investment - Marketable and highly liquid
through money market mutual fund - Can be traded easily in the secondary market
● Commercial Non-Financial Institutions -
buy and sells money market securities to Interest rate is not explicitly stated in the Treasury
manage their cash bill Treasury bills are issued at a discount (lower
● Investment Companies - trade securities on price than the par value at maturity)
behalf of their clients. Help maintain
liquidity of money market since they make 2 methods of selling T-Bills:
sure that sellers can easily 1. Auctions or Competitive bidding
sell their securities when the need arises Bureau of Treasury announces quantity and
● Finance/commercial leasing companies - type of
raise money market instruments to lend securities that they will sell
funds to individual borrowers Interested parties give bid
● Insurance companies - invest on money offering
market to maintain liquidity level in case of Treasury accepts highest bids
unexpected demands Treasury accepts the bids in ascending order
● Pension funds - maintain funds as of yield until the accepted bids reach the
preparation for long-term investing in stocks offering amount Each accepted bid is
and bonds market awarded at the highest yield paid to any
● Money market mutual funds - permit small accepted bid
investors to invest in the money market
2. Noncompetitive bidding
Types of Money Market Financial Instruments Bidders give the amount of securities
Treasury Bills Treasury accepts all noncompetitive bids
Government securities issued by the Bureau of The price for all the securities under is set
Treasury which mature in less than a year. at the highest yield paid to any accepted
competitive bid Noncompetitive bidders
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still pay the same price that are paid out by
competitive bidders
*difference: Competitive bidders may not receive
allocation from the securities being sold, while
Noncompetitive bidders are guaranteed to receive
the securities.
Dealers of government securities use repos to
manage liquidity and take advantage of expected
changes in interest rates. Dealers sell their securities
to a bank with an accompanying repo agreement
promising to buy the securities back at a specified
future date.

Discount Rate Repos are collateralized loans, usually treated as

The discount rate indicates how much return, in %, low-risk investments with low interest rates
they can get from a particular security.
Negotiable Certificates of Deposit
Securities issued by banks which records a deposit
−Bp 360
Annualized Discount Rate=Bv x made. The certificate indicates the interest rate and
Bp D the maturity date of the deposit.
Essentially restricts holders from withdrawing
Bv = Face Value or Market Value funds on demand.
Bp = Purchase price
D = tenor or period in days The concept of CD is that investors are willing to
accept a higher return in exchange of having no
access to liquidity.

Classified as a bearer instrument (whoever

Investment Rate possesses the instrument upon maturity will receive
Addresses two weaknesses of discount rate; the use the principal and interest)
of face amount as the denominator; the use of 360
days to annualize the return which also understates Interest rates of CDs are based on the outcome of
the return. the negotiation between the depositor and the bank.
It is usually at the same level with other money
market securities since it carries a low level of risk.
−Bp
Annualized Investment Rate= Bv x
Long-term Negotiable Certificates of
365
Deposits(LTNCD) Refers to the interest bearing
Bp M negotiable COD with a minimum maturity of 5
years. Offers a higher return compared to regular
Bv = Face Value or Market Value time deposit account because of the long period that
Bp = Purchase price depositors be unable to withdraw the money.
M = number of days to maturity
Commercial Paper
Repurchase Agreement (repo) Unsecured promissory
A financial contract involving two securities notes May be:
transactions a. Short-term - maturity of 365 days or less
a. Sale/purchase of a debt security on a near b. Long-term - maturity of more than 365 days
date
b. Reversing sale/purchase of the same or Only large and creditworthy corporations can issue
equivalent security on a future date this security. Lenders will not accept commercial
papers from small companies since they are going
Repos are a key component of the debt securities to assume a high level of risk.
market that produces short-term cash or securities
liquidity critical to price-making activity of fixed Issued directly to the buyer and usually, there is no
income dealers. secondary market for commercial papers.
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Nonbank corporations like financing companies T-Bills, that have a ready secondary market,
usually issue commercial papers and use the are more liquid than Commercial Papers
proceeds to fund loans that they extend to their
clients.
Valuation of Money Market Securities
Issuers maintain line of credit Determines at what amount an investor is willing to
- To serve as backup for a commercial paper pay in exchange for a security
- Primarily for the benefit of the issuer
- The availability of line of credit reduces the Money market securities can be valued using the
risk associated with commercial papers, present value approach
hence, reduces the interest rate
Sb
Commercial papers may either have a stated interest Market SecurityValue= n
rate on its face or sold at a discounted basis (1+I)❑
In PH, commercial papers are not required to Sb = Face value of the security
register with SEC if they meet the ff requirements: I = Interest rate
● Issued to not more than 19 non-institutional N = Number of periods
lenders
● Payable to a specific person As a general rule, as the interest rate rises, the
● Neither negotiable nor assignable and held value of the security becomes lower. This means
on to maturity that the market risk increases, thus the impact
● Amount not exceeding P50 million
on the value of the securities also reduces.
Banker’s Acceptances
An order to pay a specified amount of money to the
bearer on a specified date.

Used to finance the purchase of goods that have not

yet been transferred from the seller to the buyer.

Usually offered to importers and exporters

Formed when a draft or promise to pay is made by

the bank’s client and the bank then ultimately
accepts, promising to pay on behalf of the client.

Banker’s acceptances are usually sold at a

discount. Interest rates on banker’s acceptances
are usually low since default risk is very minimal

Evaluating Money Market Securities

May be evaluated based one:

a. Interest rates
Dictate the potential return that can be
received from the investment.

b. Liquidity
Refers to how quick, efficient and cheap to
convert a security into cash.