UNDER WRITING

The efficient functioning of financial markets requires a number of financial in situations.

One of these institutions, the investment banking firm, acts as middleman in the
distribution of new securities to the public. Its principal function in to buy the securities
from the company and the resell them to investors. For this service, investment bankers
receive the difference, or spread, between the price they pay for the security and the
price at which the securities are resold to the public ( which means underwriting is a
process where in the financial institutions decides kung gaano kahigpit yung mga terms
and conditions na tatanggapin or I aaproved nila. Kaya sinasabi dito sa definition na ang
underwriting acts as middleman because underwriting facilitates interaction between
distribution of new securities to the public. In this context pinapakita rin sa underwriting
kung gaano ka-risky or safe ang isang investment or transaction, and also how it should
be considered by the underwriter or the institution offering this service.)

( Part din ng underwriting ang pag ooverseeing ng research at pag assess ng mga risk
sa bawat applicant or entity before pa man mangyare ang risk na hindi ineexpect. This
check helps to set fair borrowing rates for loans, establish appropriate premiums to
adequately cover the true cost of insuring policyholders, and create a market for
securities by accurately pricing investment risk. So underwriting nakakatulong din sya
para ma set yung tamang borrowing rates to be fair, nag eestablish din sya ng mga
premium na sapat para macover up yung true cost of insuring policyholders. If mataas
yung risk, ang isang underwriter ay possible na tumanggi sa coverage hindi magtatake
ng resposibility ang underwriter if alam nyang mataas yung risk dahil sya rin ang
maaffectohan. And one of the importance of underwriting is the initial public offering or
IPO ito yung nag lilist ng stock exchange where in ang mga underwriter ay nag-audit at
pinag-aaralan yung quality at value ng mga shares that they offered to the public.

EXAMPLE OF UNDERWRITING
For instance, an insurance company uses underwriting to judge applicants for coverage
and decide whether to accept or deny their application. Similarly, a mortgage lender
relies on underwriting to evaluate a loan application and determine whether to approve
or reject a home loan. (dito sa example is underwriting is like ineevaluate mo yung isang
applicant kung sya ba ay pasok sa mga qualities na required para maapproved yung
loan or the borrower’s creditworthiness . underwriters yung mag dedecide kung I
aapproved nila of irereject. Just like mortgage lender umaasa sila sa underwriting to
process the loan application sila yung mag dedetermine if they accept or I deny yung
isang home loan.)

UNDERWRITING PROCESS INCLUDE THIS TWO

FIRST IS THE TRADITIONAL UNDERWITING AND SECOND IS THE SHELF
REGISTRATION, and traditional under writing includes best effort and market making
so let’s tacle those terms kung ano ano ba yung connections nila.

TRADITIONAL UNDERWITING- The underwriting bearing the risk of not being able to
sell a security at the established price. Also known as firm commitment underwriting If
the security issue does not sell well, either because of
An adverse turn in the market or because it is overpriced, the underwriter, not the
company, takes the loss. (here in traditional underwriting, ito yung responsible or mag
mamanage ng risk if hindi ito nabenta sa naka established na price. It is also called firm
commitment underwriting, Kung hindi maayos ang pagbebenta ng security issue, its
either dahil sa pag turned against the market or mataas masyado yung presyo, so
kapag ganito yung situation, yung underwriter ang maaapektuhan at hindi yung
company it is the underwriter loss.

- Yun nga gaya ng sinabe ko kanina isa ito sa pinakaimportateng step where in
underwriting process that guarantees financial institutions and insurance firms can
appropriately price their policies, control the risk they take on, and decide whether
or not to insure a certain applicant. Sila yung magdedecide kung I iinsure nila ang
isang applicant base sa creditworthiness nito. Sila rin yung nag cocontrol ng risk
kung paano nila ito ihahandle and also
But it’s important to remember that the insurance sector has been changing as a result
of data analytics and technology advancements, which have produced automated or
algorithmic underwriting procedures that can improve and speed up decision-making.
We need to consider also na ang insurance sector ay nagbabago it might change based
on thr result of data analytics and sa technology advancement ngayon, na gumawa ng
mga automated o algorithmic underwriting na ways para mas mapabuti at mapabilis
yung decision making.)

Traditional underwriting includes:

- Application Submission
- Initial Assessment
- Risk Evaluation
- Underwriting Guidelines
- Acceptance or Rejection
- Ongoing Monitoring
- Claims Processing

SHELF REGISTRATION
Shelf registration also differ in terms of underwriter selection. In a traditional offering, the
firm first selects the lead underwriter and then files the required documents with the
SEC. The underwriter does not commit to pricing or issue size at the time of selection.
While firms that use shelf registrations, generally hire their underwriter at a later stage in
the issuance process than is typical for traditional issues. Once a shelf registration is
effective and the firm decides to issue equity, it requests proposals or bids from one or
more underwriters for the sale of securities. (Naiiba din ang shelf registration sa mga
rules ng pagpili ng underwriter. Kase sa traditional underwriting, pipiliin muna ng
company ang lead underwriter and after that i-fifile ang mga kinakailangang documents
sa SEC (Securities and Exchange Commission). Ang underwriter ay hindi sila yung
responsible sa pag pepresyo. While ang shelf registration is sa pangkalahatan
kumukuha ng kanilang underwriter sa mas last stage ng process. Kapag naging
effective yung shelf registration at nag decide ang firm na mag-isyu ng equity, dito na
nagre requests ng proposals or bids from one or more underwriters for the sale of
securities)

It's Important to note that shelf registration is a U.S.-specific regulatory mechanism, and
other countries may have different processes for bringing securities to the market. Here
in self registration kase is lalo syang mapapakinabangan especially sa mga malalaking
corporations and other entities na nangangailangan ng access sa capital market. Paano
sya nakakatulong sa companies to raise capital more efficient, its because of flexibility
in timing and adaptation to market conditions where in the flexibility in timing it means
companies choose the most opportune times to issue their securities. And also
nakakapag hintay sila kung kailan papabor yung market conditions just like higher stock
prices or lower interest rates, bago yung releasing ng securities. While sa adaptation to
market conditions, ang mga companies ay may right sila or they can quickly adapt to
changing market conditions. Madali nilang naaddapt yung bawat changes ng market
conditions. If napansin nila or na observe na may pagbabago na sa market conditions
ay they take action its either maglalabas ng securities agad or hindi itutuloy I hohold off
nila if the timing is unfavorable. In short, shelf registration is ito yung mas may
responsible and may kakayahan to control the market opportunities and risks.
UNDER TRADITIONAL UNDERWRITING IT INCLUDES BEST EFFORT OFFERINGS
AND MARKET MAKING

Best effort offering, a security offering in which the investment bankers agree
To use only their best effort to sell the issuer’s securities. The investment bankers do
not commit to purchase any unsold securities

Explanation
In best effort offerings, The term best efforts refers to an agreement made by a service
provider to do whatever it takes to fulfill the requirements of a contract. In finance, an
underwriter makes a best efforts or good faith promise to the issuer to sell as much of
their securities offering as possible. (In best efforts offering, the underwriters do not
agree to purchase all of the securities from the issuer. Underwriters agree to use their
best efforts to sell the securities and act only as an agent of the issuer in marketing the
securities to investors. So bakit hindi nag aagree yung underwriters na bilhin lahat ng
securities from the issuer, its because of these following reasons, para ma manage
yung risk, and to match the securities with market demand, allocate their capital
efficiently, negotiate favorable terms, and often work in syndicates to spread the risk
and responsibilities. Their role is to facilitate the sale of securities to investors and
ensure a successful offering for the issuer. Those reasons is makakatulong sya para
maging successful yung offering for the issuer.

- Example of this best effort offering is where the issue is $5 million. In a best efforts
offering, the underwriter is given the option to purchase the entire issue of $5
million. If there is investor demand for only $3 million of the issue, the underwriter
could purchase $3 million of the issue to sell to investors. ( dito sa example na to,
and underwriter ay may option sya kung I pupurchase ba nya yung boung 5 million
dollars or if merong mag demand na investor for 3 million dollars mas pipiliin ni
underwriter yung investor na nagdedemand for 3million dollars because yung
underwriter nga hindi sila pumapayag na bibilhan lahat ng securities because of
market demand.)

Next is the making a market

- At this system of underwriting the underwriter will make or create a market for a
security after it is issued. In the first public offering of common stock, making a
market is important to investors. In making a market, the underwriter maintains a
position in the stock, quotes or fix bid or buying price and asked or
Selling prices, and stands ready to buy and sell it at those prices.
( making a market is isa itong concept where in ang mga underwriter ng securities ay
sila yung nag liliquidate sila yung may kakayahan to buy and sell the securities of
underwriting para mamaintain yung pag angat or para maging successful sa market.
Under making a market, ang mga underwriter din ang nag poprovide ng tools for
investors to buy and sell the securities they underwrite. They are also responsible role
as financiaries kase sila yung nag poprovide ng ask prices where in yung investors they
can buy securities and bid prices na possible masesell ng mga securities. Ito rin yung
nag bibigay ng way para sa investors para mas mapadali yung pag trade at pag cause
liquidation in the market.)

For example, there is a stock called ABC. This investment bank is a market maker for
this stock ABC. When a market maker means that trades happen in the market, yung
role ng market maker is essentially to provide liquidity to the stocks. That could be done
by either buying the shares or selling them shares. ( kase yung market maker sila yung
nag ooffer to buy or sell at a specified price kung ano yung specific na price ng stocks.
A trade occurs when another trader uses a market order para I accept yung terms na
naka post that is offer.

So lets go back sa example natin. For which investment banks are market makers.
Suppose an investor wants to buy 1,000 shares of ABC yung investor gusto nya bumili
ng 1,000 shares sa ABC company, but the price is $50. If there is a seller in the market,
wants to sell this share of ABC at $100 for 1,000 shares. If may iba rin seller sa market
gusto nila yung 1000 shares ng ABC ibebenta nila ng $100 So now, if you look at the
distance between $50 and $100 is too huge. Ang laki rin ng difference between $50 at
$100 kalahati rin.
So, you know the transaction may never get completed at all. In that situation alam mo
na na hindi maayos yung transaction. What happens is that there may be few buyers
and few sellers in this company altogether. Possible na konti lang yung buyers and
sellers sa company kung ganun yung situation. Kase yun nga yung role ng market
maker sila yung nag seset ng standards sa prices sila yung mag lalagay at mag ooffer
ng price. In this way napopondo yung mga na sell at I tatrade nila yun in a future time
where in mas makakagain ng tubo.)

METHOD OF SELLING SHARE TO RAISE CAPITAL

- When a company requires long-term fund & it want to raise the fund by issuing
common stock, the company can appoint a number of methods to raise capital for
sale of share to raise capital from the market, In fact for initial public
Offering there are several methods of selling share.

(dito sa Selling shares to raise capital is a common method for businesses, especially
corporations, to secure funds for various purposes such as expansion, research and
development, debt reduction, or other strategic initiatives. When a company sells
shares, it essentially offers ownership stakes in the company to investors in exchange
for cash. Yung process na to is also known as equity financing and is typically
conducted through a stock market or in private transactions, depending on the
company’s size and circumstances.

Public Placement – Public placement is a method of selling shares to raise capital that
involves offering company shares directly to the general public through a stock
exchange or another public market. In this process, a company makes its shares
available for purchase by anyone interested in buying them, rather than limiting the
offering to a select group of investors or institutions.
Public placement is a means of raising substantial capital, increasing visibility, and
providing liquidity to existing shareholders who can now trade their shares on the open
market.
Private Placement – Private placement is a method of selling shares to raise capital that
involves offering company shares to a select group of accredited investors or
institutions, rather than the general public. This method is typically used by smaller
companies or startups seeking to secure funding. In a private placement, the company
negotiates directly with investors, often avoiding the regulatory and disclosure
requirements associated with public offerings. The terms and conditions of the share
sale, including the share price and the number of shares offered, are customized
through private negotiations. Private placements are a way to raise capital more quickly
and with less public scrutiny than in public markets.