MODULE 1: Financial Systems and the Financial Markets 2.

Market Type: Financial markets may be classified to

Finance – the application of economic principles to decision-
making that involves the allocation of money under conditions
of uncertainty.
- It provides for the framework for making decisions as
to how those funds should be obtained and then
invested.
Financial system – provides the platform by which funds are
transferred from those entities that have funds to invest to
those entities that needs funds to invest.
According to Dr. Faure (2013):
“Financial system – is a set of arrangements or conventions
embracing the lending and borrowing of funds by non-financial
economic units and the intermediation of this function by the
financial intermediaries in order to facilitate the transfer of
funds, to create additional money when required, and to create
markets in debt and equity instruments (and their derivatives)
so that the price and allocation of funds are determined
efficiently.”
the type of market that trades. If the instrument used
to trade are issued first-hand or original issuance
these are called Primary Market.
*Once these are traded again the player is now called
Secondary Market.*
3. Origination: Financial Markets may be classified
according to where it originated or players are
originated.
 If the transaction is perfected within the same national
boundary this is called Domestic Market.
 *Otherwise, it is International, or Foreign Market. *
Private Placement – are intermediaries with a particular,
private or specific individual or entity where the supply and
demand of fund will be taken. For equity trade, these are
normally issuance of stocks to pre-selected investors.
*Financial Intermediaries allow for the acceleration of flow of
funds between entities or players, efficiently allocating funds,
creation of money and supports price discovery. *

The Elements of Financial System: 4. Regulators

1. Demanders of Funds
- Are the individuals or groups that need financing.
They are those who are in need of additional financing
to sustain their business operations or livelihood for
domestic.
- plays an important role in the financial system. They set the
framework and boundaries to protect the interest of the players
in the system.
- The regulators are the governance body ensures that all
complies with the laws, rules, and regulations imposed to them.

- In the Philippines, the major financial regulator is the

- In commerce, demanders of fund are those who are
Bangko Sentral ng Pilipinas or BSP. BSP, through its
willing to do actions to earn more but restricted with
monetary board, issues policies and guidelines where the
financial resources.
players in the financial systems must comply.
2. Suppliers of funds 5. Financial Instruments
- Are players in the system that have excess or willing
to invest their funds in the systems with the intent of - are documents or representation for the exchange. This
earning more out of these funds. represents a specific value. The value maybe agreed by the
parties or already been determined. The financial instruments
3. Financial intermediaries must adhere to the form which the laws require.
- They don’t have their own funds but acts as channels
of transmitting those funds from the demanders and
suppliers of funds. They may be financial institution,
financial markets or through private placement.

Financial Institutions – entities that aims to collect or gather

funds from the suppliers and in return extend this to the
demanders of fund normally in the form of loans or any
interest-bearing instruments. Financial institutions may be
generally classified into commercial banks, investment banks
or universal banks.

Financial Markets – arrangers of transactions between the

suppliers and demanders of fund.

- It acts as the middleman or conduit between the

parties with the aim to perfect the exchange.

Financial Markets are classified to:

1. Instruments Traded: Financial Markets may be

classified according to the instruments it is trading.
 Money market – are those who are trading in short term
financial instruments that are legally traded
(e. g. Treasury Bills, Commercial papers,
Certificates of Deposits, Repurchase Agreement,
or Bankers’ acceptances.

Capital Market – which trades equity or debt

instruments which are normally to mature in long
term period. These will take the form of stock
markets and bond markets.
MODULE 2: Financial Regulation
According to the Public Utility Research Center of University of
Florida,
Regulation – is a process whereby the designated government
authority provides oversight and establishes rules for firms in
an industry.
*A regulatory agency who is the governance body to ensure
compliance to laws, rules and regulation is identified to provide
oversight to the players in the industry.
Financial Regulation ensures that the risks are managed and
all parties in the financial system are protected.
- This type of regulation that imposes standards and
policies to set controls over the market factors that will
affect that financial sustainability.
Financial Regulation – is a process of governing in the financial
systems to ensure balance and protection of the interest of all
players in the systems. By doing so this manages the risk that
will potentially arise in the financial market system.
General form of risks in the financial systems are:
1. Credit Risk – is the probability that the payor will not pay
or settle its obligation.
2. Liquidity Risk – is the probability to raise sufficient
resources to repay its financial obligation.
3. Default Risk – is the probability that currently maturing
portion were not settled on time.
4. Technological Risk – is the probability that services will
be interrupted due technological resource limitation.
5. Legal Risk - is the probability that new laws, rules, and
regulation will be imposed and might affect the ability to
sustain its creditworthiness.
Since these risks, among others, may affect he financial
operations of the business, or organizations. Laws are created
to enforce financial regulations. In financial markets, these
laws, rules and regulations control the following drivers:
a. Competitiveness
b. Market behavior
c. Consistency
d. Stability
Competitiveness
- Policies were imposed to the financial system to
ensure parity among parties which could drive the
following:
 Access to capital
 Credit and loan term offerings
 support to providers of financing
 management of business risks
 transaction costs
 tariffs
 It must be noted that the main determinant of
competition are the main forces that drives the market
(i.e., buyers and sellers).
Market Behavior
- Financial Regulation sets the parameters to ensure
that firms will comply with the standards and level the
playing field.
 The policies were set to regulate the:
 information disclosure
 advantage over internal information
 entry of new players
 minimum capital requirement
 minimum governance requirements.
Consistency
- the reason why in the field of accountancy
consistency is an important principle because it
enables development of reasonable decision.
- Consistency plays a key attribute to ensure that the
other drivers affecting the results were isolated for
better analysis and at the same time reducing the risk
inherent in the results.
Stability
- Market Stability is important. Given that market
behavior is dependent on a lot of factors, the risk is
very high.
- Most players failed to survive because their ability to
forecast and to mitigate the market risk.
- In the financial market, the impact of financial risk is
something that the regulatory environment should
consider.
- The regulation must be able to protect the interest of
the clients as well as companies to enable their
corporate sustainability.
These drivers are among the key factors that were controller or
regulated by the Financial Regulators.
In the Philippines, the key financial regulators are:
 Bangko Sentral ng Pilipinas
 Insurance Commission
 Philippine Securities and Exchange Commission
 Board of Investments
*Each financial regulator has specific industry, risk and players
in the financial system that they are tasked to oversee.*
Particularly for the Bangko Sentral ng Pilipinas which is a
Self-Regulating agency attached to the Department of
Finance which is generally focused on regulating the:
 liquidity management
 currency issues
 currency reserves
 exchange rates
Basically, the financial regulators are focused on controlling the
payment systems. Payment system enables the transfer of
funds from a party to another thereby effecting settlement.
Nowadays due to the emergence of financial technology,
payment systems are being automated, but nonetheless, it is
importance remain to be the same which are:
 Managing safe and real time transaction
 Effective risk management
 Facilitates financial market transactions
MODULE 3: Money Market Financial Instruments
Financial Instruments – are the main vehicle used for
transactions in the financial market.
Two parties involved in the financial instruments:
1. Issuer
2. Investors
*Financial Instruments are traded in the Financial Market. *
Money Market – is the type of financial market where these
financial instruments with less than one year tenor are traded.
3 fundamental characteristics:
1. Solid in large denomination
2. Low default risk
3. Mature in one year or less from original issue date
Common types of money market financial instruments:
a. Treasury bills
b. Repurchase agreements or Repo
c. Negotiable certificates of deposits
d. Commercial paper
e. Banker’s acceptances
In evaluating money market securities, interest and tenor of
the securities before maturity are large factors.
 Tenor - refers to the length of time remaining before a
financial contract expires. It is often used
interchangeably with the term "maturity."
 Interest - is the monetary charge for the privilege of
borrowing money, typically expressed as an annual
percentage rate (APR). Interest is the amount of money
a lender or financial institution receives for lending
out money.
*As the interest increases the value of the securities
reduces. *
- Investors must ensure apples-to-apples comparison among
the securities to determine the value to be used in investing
decisions.
Financial Instruments according to Conceptual Framework
for Financial Reporting (2018)
“An asset is a resource controlled by the entity as a result of
past events and from which future economic benefits are
expected to flow to the entity. Assets can be classified in terms
of physicality: tangible and intangible assets.”
Tangible assets – are assets that has physical properties and
can be easily seen, touched or perceived by the five senses.
Intangible assets – are identifiable assets that do not have
physical substance and usually represents a legal claim to
some future economic benefit.
Financial instruments (also called as financial assets or
securities) – are basically intangible as future economic benefit
takes form of a claim to cash that will be received in the future.
- It is the main vehicle used for transactions in the
financial market.
*For the purposes of presentation in financial statements,
financial instruments may be presented under CASH
equivalents. Otherwise, they are classified under
INVESTMENTS. *
There is a minimum of two parties involved in a financial
instrument: the issuer and the investor;
Issuer – is the party that issues the financial instrument and
agrees to make future cash payments to the investor.
Investor – is the party that receives and owns the financial
instrument and bears the right to receive payments to be made
by the issuer.
On an accounting perspective, investors recognize financial
instruments as an asset.
Financial instruments have two main economic purposes:
*An economic purpose is the original reason for your incoming
or outgoing payment: What product or service did the sender
buy from you? *
1) Allows transfer of fund from entities with excess funds
(investors) to entities who needs funds (issuer) for
business purposes (e.g., to pay for tangible assets)
2) Permit to transfer of fund that allows sharing of
inherent risk associated with the cash flows coming
from tangible asset investment between the issuer
and investor.
Usually, the initial investor does not hold on to the instrument
up until the time the issuer can make the payment. In such
cases, investors trade their financial securities to other
individuals or institutions who are willing to pay for their claim
to future payment.
Financial intermediaries that operate in the financial system
demands funds from “investors” and convert these to
various financial assets that the general public is willing to
buy.
As a result of these interlinked activities, claims of the final
wealth holders generally differ from the liabilities recognized
by the issuers (final demanders of funds)
Money Market
Financial instruments are the primary subject of
trading in a money market. The financial instruments traded in
the money market are short-term and highly liquid, that it can
be considered close to being money.
Money market securities have 3 fundamental characteristics:
1) Usually sold in large denominations
2) Low default risk
3) Mature in one year or less from the original issue date.
Most money markets instruments mature in less than 4
months.
Transactions in the money market are not confined to one
singular location.