• Contemporary issues affecting financial institutions.

Money Laundering

➢ According to the result of the Third Sector Risk Assessment (SRA) by the Bangko Sentral
ng Pilipinas (BSP), Anti-Money Laundering Council, domestic banks and other financial
institutions are at medium risk from money laundering, terrorism and proliferation
financing (AMLC) and other relevant institutions.

➢ The country was blacklisted by the FATF in 2000 for failing to address dirty money issues,
paving the way for the passage of the AMLA in 2001. It narrowly avoided being
blacklisted in 2012 for criminalizing terrorist financing and after seeking an accelerated
freeze of suspect accounts, it was subsequently de-blacklisted in February 2005.

➢ The latest risk assessment aims to further improve and update stakeholders' understanding
of the scope of the proceeds from illicit activities channeled through banks and BSFIs.

➢ The Philippine financial system poses a moderate risk of being used for money laundering,
terrorist financing and as a channel for financing weapons of mass destruction, according
to the results of the latest cross-sectoral assessment conducted by the central bank.

Security Breaches/Data Breaches

➢ With a string of high-profile security breaches in recent years, security is one of the biggest
challenges facing the banking industry and a top concern for bank and credit union
customers.

➢ The risks of data breaches or leaks have become a major concern, according to Bangko
Sentral ng Pilipinas, as the banking industry continues to increasingly use digital platforms
to provide essential financial services amid the pandemic. "With these emerging trends in
the technology and cybersecurity landscape, the risks of data, breaches or breaches are
 becoming a major concern, leading to reputational, operational, legal and regulatory risks,
among others," Fonacier said.

Philippine Banks or Financial Institutions Have Difficulty in Maintaining Customers

Expectations.

➢ Despite the realization that digital banking is the way forward, many Filipino banks are
struggling to develop and implement innovative solutions, citing outdated legacy systems
and uncertainty on how to partner with fintech companies as key challenges, a new research
conducted by Forrester Consulting for Backbase found. The other segments of the financial
system are underdeveloped. Non-bank financial institutions (NBFIs) are much smaller than
some Asian peers. Informal financing between family members is more important for
households than loans from retail banks. Domestic equity market capitalization and
outstanding bonds account for about 90% and 30% of GDP, respectively, but government
bonds dominate the debt market.

➢ Customers are looking for an integrated experience or "one stop shop" for all their banking
needs. While the financial industry has already transitioned to online banking and digital
experiences, keeping up with rising customer expectations will remain a challenge for the
foreseeable future.

Staying Regulatory Compliant

➢ Financial services are already one of the most heavily regulated industries. As the industry
adapts to new technologies, so do the regulations. Regulators are moving toward more
oversight and enforcement. Regulatory challenges expected in 2021 include privacy and
governance, as well as differing regulations (differences in state, federal and global
policies) and new mandates related to debt collection practices. The Bangko Sentral ng
Pilipinas (BSP) (or the Philippine Central Bank) is the central monetary authority in charge
of regulating money, banking and credit in the Philippines.

Changing Business Models

 ➢ The costs associated with managing compliance are just one of many banking industries
challenges that are forcing financial institutions to change the way they do business. The
rising cost of capital combined with low and persistent interest rates, declining returns on
capital and declining proprietary trading are putting pressure on banks' traditional sources
of profitability. Despite this, shareholder expectations remain unchanged.

➢ This combination of factors has prompted many institutions to create new competitive
service offerings, streamline business lines, and seek sustained improvements in
operational efficiencies to maintain profitability. Not adapting to changing needs is not an
option; therefore, financial institutions need to be structured to be agile and ready to turn
when needed.

Rising interest rates

➢ Interest rates in the Philippines have been rising over the past few years, making it more
difficult for financial institutions to operate. This has caused a decrease in lending and
borrowing, which has caused a decrease in the availability of credit.

Regulatory changes

➢ In recent years, the Philippine government has implemented several regulatory changes
that have had a major impact on the financial sector. These changes include the
introduction of new capital requirements, stricter lending rules, and more stringent
regulations on financial institutions.

Increasing competition

➢ The financial sector in the Philippines is becoming increasingly competitive, as new

financial institutions enter the market and existing ones expand their operations. This has
 caused a decrease in the profits of established financial institutions, as they are forced to
compete for customers with the new entrants.

Economic uncertainty

➢ The Philippine economy has been facing a period of economic uncertainty in recent years,
with a slowdown in economic growth and an increase in inflation. This has caused a
decrease in consumer confidence, which has had a major impact on the financial sector.

• Money, capital, mortgage, futures and options markets and

instruments and relationship to financial institution
management
What is the Money Market?

The money market refers to trading in very short-term debt investments. At the wholesale
level, it involves large-volume trade between institutions and traders. At the retail level, it
includes money market mutual funds bought by individual investors and money market accounts
opened by bank customers.

Functions of The Money Market:

Financing Trade

The money market provides financing to local and international traders who are in urgent
need of short-term funds. It provides a facility to discount bills of exchange, and this provides
immediate financing to pay for goods and services.

Central Bank Policies

The central bank is responsible for guiding the monetary policy of a country and taking
measures to ensure a healthy financial system. Through the money market, the central bank can
perform its policy-making function efficiently.
Growth of Industries

The money market provides an easy avenue where businesses can obtain short-term loans
to finance their working capital needs. Due to the large volume of transactions, businesses may
experience cash shortages related to buying raw materials, paying employees, or meeting other
short-term expenses.

Commercial Banks Self-Sufficiency

The money market provides commercial banks with a ready market where they can invest
their excess reserves and earn interest while maintaining liquidity. Short-term investments, such
as bills of exchange, can easily be converted to cash to support customer withdrawals.

Types of Instruments Traded in The Money Market:

1. Treasury Bills

Treasury bills are considered the safest instruments since they are issued with a full
guarantee by the United States government. They are issued by the U.S. Treasury regularly to
refinance Treasury bills reaching maturity and to finance the federal government’s deficits. They
come with a maturity of one, three, six, or twelve months.

2. Certificate of Deposit (CD)

A certificate of deposit (CD) is issued directly by a commercial bank, but it can be

purchased through brokerage firms. It comes with a maturity date ranging from three months to
five years and can be issued in any denomination.

3. Commercial Paper

Commercial paper is an unsecured loan issued by large institutions or corporations to

finance short-term cash flow needs, such as inventory and accounts payables. It is issued at a
discount, with the difference between the price and face value of the commercial paper being the
profit to the investor.

4. Banker’s Acceptance

A banker’s acceptance is a form of short-term debt that is issued by a firm but guaranteed
by a bank. It is created by a drawer, providing the bearer the rights to the money indicated on its
face at a specified date. It is often used in international trade because of the benefits to both the
drawer and the bearer.

5. Repurchase Agreements

A repurchase agreement (repo) is a short-term form of borrowing that involves selling

a security with an agreement to repurchase it at a higher price at a later date. It is commonly
used by dealers in government securities who sell Treasury bills to a lender and agree to
repurchase them at an agreed price at a later date.

What are Capital Markets?

Capital markets are where savings and investments are channeled between suppliers and
those in need. Suppliers are people or institutions with capital to lend or invest and typically
include banks and investors. Those who seek capital in this market are businesses, governments,
and individuals. Capital markets are composed of primary and secondary markets. The most
common capital markets are the stock market and the bond market. They seek to improve
transactional efficiencies by bringing suppliers together with those seeking capital and providing
a place where they can exchange securities.

Types of Capital Markets:

Equity Securities
 Equity securities are traded on the stock market and are essentially ownership shares
of a business or venture. When you own equity securities of a company, you essentially own
a portion of that company and are entitled to any future earnings that the company brings in.

Debt Securities

Debt securities are traded on the bond market and are IOUs that can come in the form of
bonds or notes. They essentially represent the borrowing of money that will be paid back at a later
date with interest. Interest is the required compensation that entices lenders to lend their money.
The borrowers will take the money today, use it to finance their operations, and pay back the
money in addition to a prescribed rate of interest at a later date.

The securities can be bought and sold on two types of markets:

✓ The primary market is when a company directly issues the securities in exchange for
capital.

✓ The secondary market is when the security holders trade with other investors in a
transaction that is separate from the issuing company.

Other Capital Markets

Capital markets feature trading of other securities as well, including:

✓ Foreign exchange (forex)

✓ Commodities

✓ Derivatives

What Is a Mortgage?

A mortgage is a type of loan used to purchase or maintain a home, land, or other types of
real estate. The borrower agrees to pay the lender over time, typically in a series of regular
payments that are divided into principal and interest. The property then serves as collateral to
secure the loan.

A borrower must apply for a mortgage through their preferred lender and ensure that they
meet several requirements, including minimum credit scores and down payments. Mortgage
applications go through a rigorous underwriting process before they reach the closing phase.
Mortgage types vary based on the needs of the borrower, such as conventional and fixed-rate
loans.

Mortgage Market defined:

The business of lending money to buy houses and other property. Mortgage markets are a
key element in the overall functioning of the financial system, not least in relation to the depth
and liquidity of markets on the funding side of banks.

The mortgage market is a phrase that describes a vast array of institutions and individuals
who are involved with mortgage finance in one way or another. This market is broken down into
two separates yet connected entities: the primary mort-gage market and the secondary mortgage
market. The primary mortgage market is a market where new mortgages are originated. The
secondary mortgage market is a market where existing mort-gages are bought and sold.

Primary Mortgage Market

▪ Primary lenders generally offer adjustable rate mortgage loans

BENEFITS:

Low Costing Costs - Primary lenders are typically owned bank.

Small Down Payments - A borrower put down less money than the typical
down payment required.

- The direct contact can provide flexibility if the

Flexibility
borrowers have a unique financial situation.

Secondary Mortgage Market

 ▪ Market where primary lenders sell mortgage to investors

▪ New source of income

▪ Mortgage Backed Securities

LENDERS:

- These lenders tend to specialize in lending for large

Insurance Companies
projects.

- These companies are set up by the investors to

Mortgage Banking Companies
make mortgage loans.

- Pension fund managers may lend money from the

Pension Funds fund’s asset for the construction of large real estate
projects.

THREE PARTICIPANTS:

1. Originators

2. Aggregators

3. Investors

ADVANTAGES

▪ Fixed rate
▪ Little or No down payment

TYPES OF MORTGAGE INSTRUMENTS

A mortgage represents a contract between two parties related to the financing of real
property. The lender receives interest payments in exchange for providing cash up front and
assuming the risk of a borrower's default in the purchase of property.

Conventional Mortgage
 A conventional mortgage creates a lien against the property's title until the loan is paid
off. If you default on your payments, the lender must go through the judicial foreclosure process
to evict you and take possession.

Deed of Trust

A deed of trust makes it easier for the lender to foreclose than a conventional mortgage.
The deed creates a security interest in the property. The trustee is usually a title company or an
independent attorney. If the borrower defaults, the trustee can sell the property without waiting
for a court order.

Credit Line

A home equity line of credit does not give you cash upfront when you sign the loan.
Instead, you are authorized for a line of credit up to a specific limit. The equity in your home is
used as collateral to secure the line of credit.

Reverse Mortgage

A reverse mortgage allows you to tap the equity in your home to receive monthly
payments. You may stay in the home over the duration of the loan.

What is Future and Options Market?

These are the agreements between two parties for the future exchange of assets at a certain
price. The fundamentals of futures and options allow investors to lower their future risk by using
pre-determined pricing. These two derivatives protect the investor from future changes in the
market by setting the price of the trade. It could also result in significant gains or losses.

Basic Terms in Future and Options Market

Underlying Security
 ✓ The primary element of the future and options through which this derivative contract
derives its value. It can be a stock, bond, currency, interest rate, index, or commodity on
which F&O are based.

Strike Price

✓ It is a price at which the options contract owner agrees to buy or sell the underlying asset
at the time of exercising the contract.

Premium

✓ Is the current price (or a fee) of an options agreement paid by the option buyer to the seller.
It is quoted on the Exchange as a rule. The higher the volatility of the underlying asset.
The higher the premium.

Expiry Date

✓ It is the fixed date by which the options must be exercised otherwise it will be
expired

Difference Between Future and Options Market

Future Transaction

It is a derivative agreement that involves the sale of goods at a future date with a
predetermined price.

Example: A corn cereal stays at roughly the same price day-to-day and week-to-week but corn
prices can change daily. Sometimes by a few cents, sometimes by a lot more. The producer is
always looking to sell her corn at a high price and on the other side the corn user (the cereal
company) is always looking to buy corn at a lower price. The farmer has a little bit of a problem,
because her whole crop gets harvested at once. Lots and lots of farmers will be harvesting at the
same time and the huge supply can send the price falling and even though that price may be
appealing to the company that makes cereal from corn, it doesn't want to purchase all of its corn
at once because it is costly to store it. This is where future market kicks in, both parties will have
 a contract. Future contract provides a hedge against a change in price. These contracts can be
made anytime even before the farmer plants the corn. She’ll use the futures market to sell some
of her anticipated crop on a certain day in the future. Contracts will gain or lose money in the
future markets.

Options

It is a contract between a buyer and seller, that gives the purchaser the right (not an
obligation) to buy or sell a specific goods at a specific price on or before a specific date.

Types of Option

1. Put Option

✓ Gives right to SELL underlying asset at specified price on or before specified

date

2. Call Option

✓ Gives right to BUY underlying asset at specified price on or before specified

date.

Types of Future and Options Market Instruments

1. Index Based Futures

2. Index Based Options

3. Individual Stock Options

4. Individual Stock Futures

Who should invest in Futures and Options Market?

1. Hedgers: Hedgers are those who might get impacted due to price movement of a certain asset
and so invests in a derivative contract to hedge the risks involved with the price movements
in an asset.
2. Speculators: Speculators people who invests in securities purely to take benefit of price
fluctuations to draw profit.

3. Arbitrageurs: Arbitrageurs are those who try to make profit from the difference in the prices
of an asset due to market conditions.

Factors to Consider Before Entering into Future and Options

Market:

1. Don’t be fooled by the leverage

Both futures and options are high-leveraged assets, but futures are usually harder to sell
than options. Most people will tell you about how you can make money in the future by setting a
good price. What you don't hear as often is that margins can work both ways. You might have to
sell for less than the market price or pay more than the market price when you buy. In other words,
the chances of making a profit are the same as the chances of making a loss. Options may seem
like the safer choice, but as we've already talked about, you're much more likely to put off the
trade and lose the premium value, which means you lose money in the end.

2. Staying within your risk margins

Your risk appetite is the level of risk you are willing to take to reach your goals. The main
reason people trade in derivatives is to reduce risk by setting the price ahead of time. In real life,
a trader will always try to find a price that will give them a good profit. But one rule of investing
applies here as well: the bigger the reward, the bigger the risk. In other words, before agreeing to
any price, think about how much risk you are willing to take.

3. Margins and market volatility

Even though it might seem like we're hedging our bets and making sure we have healthy
margins on a futures and options trade, you have to remember that these margins are also affected
by how the market moves. In a volatile market, if your trade is losing a lot of money, you will
need to put up more margin quickly or the broker could square off your trade and take your
margin.

4. Setting up stop-loss and take-profit level

Setting stop-loss or take-profit levels is a common way for experienced traders to keep
their trades under control. A stop-loss is the most money you are willing to lose, and a take-profit
is the most money you are willing to make. Even though the second seems to go against the first,
a take-profit point lets you set a price where the stock can stabilize before going down. These are
the two price ranges that a trader works with.

5. Be aware of the costs

Derivative trading does not require a demat account. People often think of it as a cheaper
alternative in terms of price. But don't let the lower brokerage fee fool you. Stamp duty, statutory
charges, goods and services tax (GST), and securities transaction tax are some of the extra costs
(STT). But the number of trades is what really drives up costs. When you trade derivatives, you
can make many transactions in a short amount of time, which raises the cost of your trading as a
whole. So, it's always a good idea to keep track of how many trades you're making and how much
money you're making.