CAPITAL MARKET MANAGEMENT

OVERVIEW

Philippine Financial System. Financial Intermediary. Financial Market. Money Market. Money Market
Instruments. Capital Market. The PSE. Types of Capital Market. Other Examples of Financial Market.
Investment Banker. Investing Procedures. The Trading Cycle. Board Lot System. Trading Transaction
Fees and Taxes. Schedule of Transaction Fees and Taxes Levied on Investors.

Philippines Financial System

 Financial System

Diversified financial activities performed by different economic units whose activities are so
closely related to one another and which take into account the use of money, credit, and
the various instruments associated with money.

 Financial

Reference to money matters

Economic Units
 Financial Institutions: Banks & Non-banks
 Business Organizations
 Individuals

Non-Bank Financial Institutions

A non-bank financial institution (NBFI) is a financial institution that does not have a full banking
license and cannot accept deposits from the public.

 Risk Pooling Institutions

Insurance companies underwrite economic risks associated with death, illness, damage to or loss of
property, and other risk of loss. They provide a contingent promise of economic protection in the case of
loss. There are two main types of insurance companies: life insurance and general insurance. General
insurance tends to be short-term, while life insurance is a longer contract, ending at the death of the
insured. Both types of insurance, life and property, are available to all sectors of the community. Because
of the nature of the insurance industry (companies must access a plethora of information to assess the risk
in each individual case), insurance companies enjoy a high level of information efficiency.

• Contractual Savings Institutions

Contractual savings institutions (also called institutional investors) provide the opportunity for
individuals to invest in collective investment vehicles in a fiduciary rather than a principle role. Collective
investment vehicles invest the pooled resources of the individuals and firms in to numerous equities, debt,
and derivatives promises. The individual, however, holds equity in the CIV itself rather what the CIV invests
in specifically. The two most popular examples of contractual savings institutions are mutual funds and
private pension plans.
 • Other Non-bank Financial Institutions

Market makers are broker-dealer institutions that quote both a buy and sell price for an asset held in
inventory. Such assets include equities, government and corporate debt, derivatives, and foreign
currencies. Once an order is received, the market maker immediately sells from its inventory or makes a
purchase to offset the loss in inventory. The difference in the buying and selling quotes, or the bid-offer
spread, is how the market-maker makes profit. Market makers improve the liquidity of any asset in their
inventory.

FINANCIAL INSTITUTIONS:

Banks NBFCs
1. Definition Banking is acceptance of NBFCs are companies carrying
deposits withdrawal by cheque financial business. NBFCs cannot
or on demand accept demand deposits
2. Licensing Licensing requirements are It is quite easy to form an NBFC.
requirements quite stringent. Acquisition of NBFCs is
procedurally regulated but not
approval required.
3. Major limitations No non-banking activities can be Cannot provide checking facilities
carried
4. Foreign investment Up to 74% allowed to private Up to 100% allowed
sector banks

FINANCIAL INTERMEDIARY:
Types of Financial Intermediaries
 Banks
 Credit Unions
 Non-Banking Finance Companies
 Stock Exchanges
 Collective Investment Schemes
 Mutual Fund Companies
 Insurance Companies
 Financial Advisers or Brokers
 Investment Bankers
 Escrow Companies
 Pension Funds
 Building Societies

Advantages of Financial Intermediaries

 Risk Spreading
 Convenience
 Economics of Sale
 Financial Specialist
 Greater Liquidity
 Safe Investment

Drawbacks of Financial Intermediaries

 Opposing Goals
 Low Returns on Investment
 Fees and Commissions
 False Opportunities
 High Interest on Loans

Financial Intermediary
1. Financial intermediaries hire highly qualified people to assess risky investments.
2. Financial intermediaries know how to diversify.
3. Hiring financial intermediaries has a cost advantage or economy of scale.
4. Financial intermediaries reconcile the conflicting interests of the users and lenders of funds.
5. Financial intermediaries provide savers with liquidity.

Financial Markets:
 Money Market
 Capital Market
Flow of Funds in the Economy:

INDIRECT FINANCE

Financial
Intermediaries

FUNDS
FFFFUNDS
FF
FUNDS

Borrower-Spenders
Lender-Savers
Financial
1. Business firms
1. Households
FUNDS Markets FUNDS 2. Government
2. Business firms
3. Households
3. Government
4. Foreigners
4. Foreigners

DIRECT FINANCE

Money Market Instruments:

 Certificate of Deposit

Time deposit; MD= depends

product offered by banks and credit unions that provides an interest rate premium in exchange for the
customer agreeing to leave a lump-sum deposit untouched for a predetermined period of time.

 Commercial Paper

It is a commonly used type of unsecured, short-term debt instrument issued by corporations, typically used
for the financing of payroll, accounts payable and inventories, and meeting other short-term liabilities.

Unsecured promissory note

MD= 1-270 days

Marcus Goldman of Goldman Sachs was the first dealer in the money market to purchase commercial
paper, and his company became one of the biggest commercial paper dealers in America following the Civil
War.
  Repurchase Agreement

Financial instrument in which one party sells a financial instrument to another at a fixed amount at specific
date. form of short-term borrowing for dealers in government securities. In the case of a repo, a dealer
sells government securities to investors, usually on an overnight basis, and buys them back the following
day at a slightly higher price.

MD= 1-2 weeks, but can be extended

 Treasury Bills (T-bills)

These are short-term investments issued by the Philippine government through the Bureau of Treasury.
These bonds carry minimal risk and are originally issued with tenors of 91 to 364 days.

o Obligation incurred by national government.

o Capital appreciation
o Risk free investments

 Banker’s Acceptance

Acceptance is a negotiable piece of paper that functions like a post-dated check, although the bank rather
than an account holder guarantees the payment. Banker's acceptances are used by companies as a
relatively safe form of payment for large transactions.

o Bank draft
o Capital appreciation
o Less risky

MD= 90 days; can be extended to 180 days

Money Market Instruments Sample:

Certificate of Deposit
Commercial Paper
Repurchase agreement Treasury Bills (T-bills)

Banker’s Acceptance
Elements of Capital Market:

Capital Market
o Organized Securities Exchanges
o Over-the Counter Markets

Primary Market and Secondary Market

Difference:

Primary Market Secondary Market

Securities are traded. Securities are traded by investors.

Capital Market

Primary Market
Newly Issued Bonds
Newly Issued Securities

o Secondary Market
Old Bonds
Old Equities

Players in the Capital Market:

o Primary Market
Issuers
Financial instruments
Financial intermediaries
Investors

o Secondary Market
First owner
Investor to investor

Method of Floatation of Securities in Primary Market:

1. Public Issue through Prospectus:

Under this method company issues a prospectus to inform and attract general public. In
prospectus company provides details about the purpose for which funds are being
raised, past financial performance of the company, background and future prospects of
company.

2. Offer for Sale:

Under this method new securities are offered to ge eral public but not directly by the
company but by a n intermediary who buys whole lot of securities from the company.
 3. Private Placement:
The private placement method is a cost saving method as company is saved from the
expenses of underwriter fees, manager fees, agents’ commission, listing of company’s
names in stock exchange etc. Small and new companies prefer private placement as
they cannot afford to raise from public issue.

4. Right Issue (For Existing Companies):

The stock exchange does not allow the existing companies to go for new issue without
giving pre-emptive rights to existing shareholders because if new issue is directly issued
to new subscribers then the existing equity shareholders may lose their share in capital
and control of company i.e., it would water their equity. To stop this the pre-emptive or
right issue is compulsory for existing company.

5. e-IPOs, (electronic Initial Public Offer):

• It is the new method of issuing securities through online system of stock exchange. In
this company has to appoint registered brokers for the purpose of accepting applications
and placing orders. The company issuing security has to apply for listing of its securities
on any exchange other than the exchange it has offered its securities earlier. The
manager coordinates the activities through various intermediaries connected with the
issue.

Other Examples of Financial Markets:

Bond Market

• Long-term debt instruments

• Interest rate and bond price have an inverse relationship

Commodity Market

• Primary commodities

• Forward and future contracts

Stock Market

• Publicly listed stocks

Derivatives Market

• Provides instruments

• Over-the-counter derivatives

• Exchange-traded derivatives

Foreign Exchange Market

• Exchange of currencies
Money Market vs Capital Market – Differences

Basis of Differentiation Money Market Capital Market

Borrowing Term Lending and borrowing is for It is for a longer term
short-term. comparatively.
Participants Central Bank, Commercial Banks, Stockbrokers, Retail Investors,
Mutual Fund Underwriters
Instruments T-Bills, Call money, Promissory Bonds, Debentures, Preference
Notes, etc. shares, etc.
Structure These are comparatively more These markets are more formal
informal. than other.
Classification There is no classification. Two types: Primary and
Secondary Market
Liquidity Being short-term, it is more Comparatively less liquid.
liquid.
Risk Factor Less risky as deal in short-term Risk is more as deal in long-term
liquid asset. assets.
Purpose For meeting short-term To meet long-term
requirements. requirements.
Returns Returns are less (as risk is lower). Returns are high (as risk is
higher).
Relevance to Economy Helps to boost liquidity in Converts savings into productive
economy. instrument.
Maturity Period Maximum maturity of one year. No specified period. (generally, >
1 year)

DIFFERENCE BETWEEN MONEY MARKET AND CAPITAL MARKET

Money Market Capital Market

Definition Is a component of the financial Is a component of financial
markets where short-term markets where long-term
borrowing takes place. borrowing takes place.
Maturity Period Lasts anywhere from 1 hour to Lasts for more than one year and
90 days. can also include life-time of a
company.
Credit Instruments Certificate of deposit, Stocks, Shares, Debentures,
Repurchase agreements, Bonds, Securities of the
Commercial paper, Eurodollar Government
deposit, Federal funds, Municipal
notes, Treasury bills, Money
funds, Foreign Exchange Swaps,
short-lived mortgage and asset-
backed securities.
Nature of Credit Instruments Homogenous. A lot of variety Heterogenous. A lot of varieties
causes problems for investors. are required.
PHILIPPINE EQUITY MARKET AND MAJOR IMPROVEMENT IN THE CAPITAL

EQUITY MARKET

The market in which shares are issued and traded, either through exchange. Also known as the stock
market, it is one of the most vital areas of a market economy because it gives companies access to capital
and investors a slice of ownership in the company with the potential to realize gains based on its future
performance.

PHILIPPINE STOCK EXCHANGE

 Manila Stock Exchange
 Makati Stock Exchange
 Philippine Stock Exchange

IMPORTANT DATES
 August 8, 1927 – Manila Stock Exchange was established
 May 15, 1963 – Makati Stock Exchange was established
 May 27, 1963 – Makati Stock Exchange was founded
 December 23, 1992 – Manila Stock Exchange and Makati Stock Exchange was merged and
became Philippines Stock Exchange.
 June 1998 – Securities and Exchange Commission granted the PSE a "Self-Regulatory
Organization" (SRO) status
 2001 - PSE was transformed from a non-profit, non-stock, member- governed
organization into a shareholder-based, revenue-earning corporation headed by a
president and a board of directors
 December 15, 2003 - listed its own shares on the exchange (traded under the ticker
symbol PSE).

 1993 – MSE Stratus Trading System (STS), MkSE-MakTrade trading system

 1994 – One-Price-One Market Exchange (STS and MakTrade where linked).

 1995 – Unified Trading System

 2004 – Securities Clearing Corporation of the Philippines became a wholly owned subsidiary of the
PSE.

 2005 – Online Daily Disclosure System (ODiSy)

 2010 – PSEtrade

 2015 – PSEtrade XTS

 2016 – PSE was recognized as the best stock exchange in Southeast Asia for 2015

 2017 – PSE was again recognized as the Best Stock Market in Southeast Asia

 2019 – Total Return Index (PSEi TRI)

PSE VISION

A premier exchange with world-class standards for trading securities and raising capital that serves as a
strong engine for a robust economy.

PSE MISSION

 Offer products and services responsive to the needs of investors and other stakeholders.

 Provide a facility for fair, accurate, complete and timely information about listed companies, while
extending market education and awareness programs to investors.

 Be a preferred venue for raising capital.

 Practice and promote good governance within the Exchange and among listed companies and
trading participants.

 Operate efficiently to optimize shareholder value.

 Adopt world-class systems and global best practices for an efficient, fair and orderly market.

 Develop a highly motivated and professional workforce, committed to serve and excel.

PSE CORPORATE VALUES

 Professionalism in delivering quality service and in meeting the highest standards of excellence.

 Integrity, transparency and accountability in implementing business programs and enforcing

decisions.

 Teamwork in working towards a common and favorable goal for the market.

 Mutual respect in relating with fellow employees.

 Inner strength in prioritizing the common good of the market instead of individual interest.

 Corporate responsibility in promoting market growth hand in hand with community welfare.

TIMELINE
1927
The Manila Stock Exchange, Inc. (MSE) was established on August 8 by five businessmen, namely, W. Eric
Little, Gordon W. Mackay, John J. Russell, Frank W. Wakefield and W.P.G. Elliot.

1936
Commonwealth Act No. 83 or the Securities Act of 1936 was enacted on October 26. It created the
Securities and Exchange Commission (SEC) in response to the need for an agency that would safeguard
public interest brought about by the local stock market boom in 1936. The SEC started operations on
November 11 under the executive supervision of the Department of Justice.

1937
The MSE introduced the ticker transmitting service for better and faster communication system for the
expanding volume of transactions as well as for transmitting news reports on business and industry from
all parts of the world as brought in by news services in Manila.

1940
The MSE suspended operations during the Japanese Occupation. The SEC was also abolished by the
Philippine Executive Commission and later reactivated in 1945.

1946
The MSE resumed trading operations.

1958
The Industrial Share Average was initiated. A Mining-Oil Index was also introduced.

1963
The Makati Stock Exchange, Inc. (MkSE) was organized by Hermenegildo B. Reyes, Bernard Gaberman,
Eduardo Ortigas, Aristeo Lat and Miguel Campos on May 27.

1965
The MkSE started operations on November 16.

1969
The MSE implemented separate indices for mining and oil.

1973
Presidential Decree (PD) No. 167 dated April 12 was passed. PD No. 282, was also adopted.

1975
The SEC, through Order No. 153 dated February 4, implemented the uniformity of price fluctuations, board
lots and trading symbols for all existing stock exchanges.

1979
The Securities Investors Protection Fund, Inc. was formally established.

1982
The Revised Securities Act (RSA) or BP Blg. 178 was signed into law.

1987
The MSE introduced the MSE Composite Index using the variable multiplier method (fixed weights at base
date), which was different from the variable divisor method the MkSE used. MSE and MkSE agreed to use a
common set of index stocks and resolved to adopt the variable multiplier method.

1989
MSE installed a computerized real-time price reporting system.

1990
The computation of the indices was changed from price-weighted to full market capitalization-weighted.
The East Asian and Oceanian Stock Exchanges Federation, now known as the Asian and Oceanian Stock
Exchange Federation (AOSEF), was formally organized.

1992
The Philippine-SEC Institute Foundation, Inc. (Phil-SEC) was incorporated.
The Philippine Stock Exchange, Inc. (PSE) was incorporate.
MSE and MkSE forged and issued a joint declaration on the unification of the country's two bourses under
the Philippine Stock Exchange, Inc.

1993
Trading at the MSE through its fully computerized match trading system, the Stratus Trading System with
Equicom started.
The first general membership meeting of PSE took.
The MkSE launched its automated trading system referred to as MakTrade.
The SEC approved the PSE's By-Laws.

1994
The SEC granted the PSE its license to operate as a securities exchange on March 4. It simultaneously
canceled the licenses of the MSE and MkSE.
The one price-one market exchange was achieved through the successful link-up of the two existing
trading floors.
The PSE Composite Index (PHISIX) underwent revision.

1995
The PSE was accepted as the 37th full-pledged member of the Federation Internationale des Bourses de
Valeurs or International Federation of Stock Exchanges (FIBV), now known as the World Federation of
Exchanges.
The Philippine Stock Exchange Foundation, Inc. (PSEFI) was incorporated.
The Unified Trading System on was launched on November 13 using the single-order-book system on a
MakTrade software.

1996
The PSE introduced the Banking and Financial Services Index to reflect the financial environment and the
All Shares Index that includes all listed companies
The PSE was granted by the SEC, on a temporary basis, the status of a Self-Regulatory Organization (SRO).
The Communication Front-End System went online.

1997
The PSE went into scripless trading after the Philippine Central Depository finished conversion of 293 active
issues into its book-entry settlement system.

1998
President Fidel V. Ramos handed over the SEC certificate that conferred the SRO status to the PSE. In line
with its SRO status, the PSE adopted the policies of the SEC by incorporating in its rules 42 provisions of the
RSA in its efforts to effectively discipline erring member-brokers.

1999
PSE adopted and implemented the International Securities and Identification Numbering system on the
MakTrade System.
PSE was conferred membership in the Association of National Numbering Agencies in New York, USA and
became the National Numbering Agency for the Philippines.

2000
Securities Clearing Corporation of the Philippines (SCCP) started commercial operations.
The PSE's SRO status was temporarily suspended due to alleged irregularities arising from the trading of
BW Resources Corporation (BW).
Republic Act No. 8799 or Securities Regulation Code (SRC) was signed into law on July 19 and took effect on
August 8. Section 33.2 (a) of the SRC prescribed the PSE's reorganization as a stock corporation by August
2001 pursuant to a demutualization plan approved by the SEC.
SRC provision to increase the membership of non-brokers in the PSE's 15man board was effected with the
election of five non-brokers in addition to the existing three non-brokers in the board.
SEC lifted the suspension of the SRO status of the PSE.

2001
The implementing rules and regulations of the SRC took effect on January 2.
The SME Board was launched, simultaneous with the listing of the securities of the first company on the
said board.
PSE demutualized, transforming from a non-stock, member governed entity into a stock, shareholder-
based organization.
Pursuant to the SEC's approval of the PSE's proposal to allow brokers to transact for their own account, the
rules and procedures for implementing the customer first policy trading environment was programmed
into the trading system and activated on August 22.
The SEC adopted a resolution to: (a) raise the threshold of the tender offer to 35% (from 15% for a single
acquisition and 30% for creeping acquisition), and (b) exempt all brokers from the prohibition of the
broker-director rule.

2003
PSE shares were listed by way of introduction. It opened at P100.00 per share and reached as high as
P252.50 before settling at P200.00 at the end of the year.

2004
The Exchange re-imposed the collection of the transaction fee of 1/200 of 1% (0.5 basis points) on the
gross value for every buy and sell transaction executed.
PSE sold 16.5% or 6,077,505 shares of its authorized capital stock to strategic investors by way of private
placement.
The PSE invested in the Philippine Dealing System Holdings
The PSE amended the rule on minimum commission by placing a minimum rate for all trades regardless of
the amount of transaction to create a more level-playing field for all trading participants, especially on
large volume trades.
The Governance Committee was replaced by the Market Integrity Board (MIB).
The SCCP became a wholly-owned subsidiary of PSE and a new Clearing and Settlement System was
acquired.

2005
The PSE implemented the Online Disclosure System or the ODiSy, providing 24/7 online system access for
the submission and announcement of all types of disclosures.
The PSE forged a memorandum of agreement with Globaltronics, Inc.
The PSE, FTSE International Limited (FTSE) and Association of Southeast Asian Nations (ASEAN) exchanges,
Jakarta Stock Exchange, Bursa Malaysia Berhad, Singapore Exchange Securities Trading Limited, and The
Stock Exchange of Thailand signed a memorandum of agreement creating the FTSE/ASEAN Index.
The PSE added a new criterion, tradability, for listed companies to be included in the Composite Index.

2006
PSE revised the industry classification of listed companies by categorizing companies according to its major
source of revenue.
The PSE shifted to use free float market capitalization in computing the index from the use of full market
capitalization of listed stocks.
The PSE also revised its criteria in selecting companies for inclusion in the index. The criteria were the
following: 1) Free float level of at least 10%; 2) Liquidity or average daily trading value of at least P5 million;
3) Tradability of at least 95%; and 4) volume turnover ratio of at least 10%. The PSE changed the name of
its main indicator from PSE Composite Index to PSE Index (PSEi).
The SCCP migrated from trade-for-trade processing to a multilateral netting system called Central Clearing
and Central Settlement System (CCCS).
The FTSE/ASEAN 40 exchange-traded fund (ETF) was officially launched with its listing on the Singapore
Exchange. The ETF was designed to track the 40 largest companies across five stock markets within the
ASEAN region.
The PSE launched the Certified PSE Securities Specialist Course.

2007
The Exchange acquired the Advanced Warning and Control System.
The Philippine Mineral Reporting Code (PMRC) was formally launched. Considered an internationally
accepted standard in the mining industry, the PMRC sets out the minimum requirements,
recommendations, and guidelines for public reporting of exploration results, mineral resources and ore
reserves.

2008
PSE entered into a memorandum of understanding with NYSE Euronext, and signed the new trading system
license, implementation and maintenance agreement with NYSE Euronext Technology SAS (NYXT).
The Personal Equity and Retirement Account (PERA) Law was signed by President Gloria Macapagal-
Arroyo.
The PSE approved the implementation of a circuit breaker rule, a 15minute trading halt in the event the
PSEi declines by at least 10% based on the previous day's closing index value, to allow investors time to
digest the impact of an unusual market drop and help restore normalcy in the stock market.
President Arroyo signed into law Republic Act No. 9510, otherwise known as the Credit Information System
Act (CISA).

2009
The PSE signed a memorandum of agreement with the Department of Education for the integration of a
capital markets segment in the high school curriculum, particularly in the 4th year economics subject.
President Arroyo signed into law Republic Act No. 9648, which exempts from documentary stamp tax the
sale, barter or exchange of shares of stock listed and traded through the stock exchange, with retroactive
effect to March 20, 2009.
The Real Estate Investment Trust (REIT) Act of 2009 lapsed into law.

2010
The PSE revised its rules on listing by way of introduction. The amendments include, among others, the
following additional requirements:
1) fairness opinion and valuation report issued by a third-party financial institution on the pricing of the
applicant company's securities to be listed in accordance with the Guidelines for Fairness Opinions and
Valuation Reports; 2) enhanced lock-up provisions; and 3) lifting of the trading band on the listing date of
the securities.
The PSE's new trading system, now known as PSEtrade, was launched.
The Corporate Governance (CG) Guidebook was launched in November as another initiative of the
Exchange to promote good governance among listed companies.
The Amended Minimum Public Ownership (MPO) Rule took effect and became a continuing listing
requirement for listed companies.

2011
The PSE signed a memorandum of agreement with the Department of Education for the integration of a
capital markets segment in the high school curriculum, particularly in the 4th year economics subject.
President Arroyo signed into law Republic Act No. 9648, which exempts from documentary stamp tax the
sale, barter or exchange of shares of stock listed and traded through the stock exchange, with retroactive
effect to March 20, 2009.
The Real Estate Investment Trust (REIT) Act of 2009 lapsed into law.

2012
The Exchange implemented whole day trading on the first trading day of the year. Trading starts at 9:30AM
with a recess at 12:00NN-1:30PM, and continues until the close at 3:30 PM.
The CMIC received its provisional Self-Regulatory Organization status on February 2 and subsequently
began operations in March. On May 8, the CMIC launched its new surveillance system called Total Market
Surveillance (TMS), which was acquired from the Korea Stock Exchange.

2013
The PSE rolls out its new three-year strategic plan which focuses on introducing more products and
services to the market.
The PSE adopted a new listing board structure. From a three-board set up, the Exchange retained the main
board and created the new the Small, Medium and Emerging (SME) board. The listing requirements were
also managed to make listing easier.
The PSE launched its online service bureau called PSETradex. Six months later, two brokers launched their
online trading facility using the PSETradex. The PSE partnered with Takara Printing Co., Ltd. to create
awareness and investor interest on the Philippine market in Japan. One of their initiatives is to translate
PSE's listing kit and new listing rules in Japanese.
The co-branded SGX-PSE MSCI Philippines Index Futures was listed at the Singapore Exchange on
November 25.
The first Exchange Traded Fund, First Metro Philippine Equity Exchange Traded Fund, Inc. (FMETF), was
listed at the PSE on December 2.
The Exchange released the list of Shariah-compliant securities.
The PSE was named the Best Stock Exchange in Southeast Asia by investment magazine publisher Alpha
Southeast Asia.
The Exchange unveiled its new LED electronic board at the Ayala Trading Floor.
The portal for the new disclosure system co-developed with the Korea Exchange known as EDGE
(Electronic Disclosure Generation Technology) went live.

2014
The PSE introduced the mobile application format of its disclosure platform, the PSE EDGE.
PSE announced that it will be adopting NASDAQ OMX's X-Stream Trading Technology as its trading
technology system by 2015.
The Exchange announced another partnership in August, this time with Deutsche Boerse.
In October 2014, the PSE inked a term sheet with the Bankers Association of the Philippines (BAP) for the
acquisition of BAP's 28.9 percent stake in the Philippine Dealing System Holdings Corporation (PDS).
The PSE received commendations on Corporate Governance from Corporate Governance Asia. The PSE was
also among the top 50 best performing publicly listed companies in the Philippines based on the ASEAN
Corporate Governance Scorecard country reports and assessments 2013-2014.
The PSE organized a special bell ringing ceremony in November for select players of the International
Premiere Tennis League. This event was a first for the Exchange, it being the first time that international
celebrities were at the trading floor to ring the opening bell.

2015
The PSE was recognized as Best Stock Exchange in Asia by institutional investment magazine Alpha
Southeast Asia.
The PSE shifted to a new trading system, the PSEtrade XTS which utilizes NASDAQ's X-stream Technology.
To formalize its transfer to a new headquarters in Bonifacio Global City, the PSE acquired office units in a
new building located at One Bonifacio High Street.

2016
The PSE was named Best Stock Exchange in Asia by institutional investment magazine Alpha Southeast
Asia.
The Exchange received regulatory approval to introduce new products in the stock market - the Dollar
Denominated Securities and the Listing of PPP Companies.
PSE partnered with the Social Security System.
Other market education initiatives include the partnership with De La SalleCollege of Saint Benilde, Inc.'s
(DLS-CSB) School of Professional and Continuing Education (SPaCE) for the Certified Securities Specialist
Course and the addition of free stock market seminar sessions.

2017
PSE inked a memorandum of agreement with the Public-Private Partnership (PPP) Center of the Philippines
in February to formalize its partnership for information sharing to facilitate the processing of PPP listing
applications.
PSE had its first Dollar-Denominates Securities listing in April. There were three (3) DDS offerings recorded
for the year, which raised a total of USD367 million. At the end of the year, there were 16 Eligible Brokers
that can trade DDS.
PSE recognized two domestic listed companies, SM Prime Holdings, Inc. and SM Investments Corporation,
whose market capitalization broke past the one-trillion-peso mark on June 9 and August 16 respectively.
The PSE was once again named the Best Stock Exchange in Southeast Asia by institutional investment
magazine, Alpha Southeast Asia.

2018
PSE moved its corporate offices to PSE Tower in Bonifacio Global City, Taguig City. The Exchange also
merged the two trading floors it used to maintain in the cities of Makati and Pasig to the same building.
The company conducted a stock rights offering and raised P2.90 billion from the exercise.
PSE received approval from the SEC on the implementing guidelines for short selling. The company
conducted a series of product seminars and forums on short selling for various stock market stakeholders.
Officials of PSE and its wholly-owned subsidiaries, Capital Markets Integrity Corporation and Securities
Clearing Corporation of the Philippines, visited the Shenzhen Stock Exchange (SZSE) to know more about
SZSE's listing and disclosure regulations, market services and connectivity, market data products, and
trading, surveillance, and clearing and depository systems.
PSE CONSTITUENT INDICES:

 PSE All Shares Index (ALL)

 PSE Composite Index (PSEi)

 PSE Financial Index (FIN)

 PSE Holding Firms Index (HDG)

 PSE Property Index (PRO)

 PSE Industrial Index (IND)

 PSE Services Index (SVC)

 PSE SME Sector (SME)

 Mining and Oil Index (MO)

 PSE Total Returns Index (TRI)

BOARD OF DIRECTORS

Jose T. Pardo - Chairman and Independent Director

Ramon S. Monzon - President and Chief Executive Officer

Diosdado M. Arroyo
Anabelle L. Chua
Ferdinand K. Constantino
Chief Justice Teresita J. Leonardo - De Castro (ret.) - Independent Director
Consuelo D. Garcia - Independent Director
Edgardo G. Lacson
Roberto Cecilio O. Lim (Independent Director)
Eusebio H. Tanco
Rolando L. Macasaet
Eddie T. Gobing
Vicente L. Panlilio (Independent Director)
Ma. Vivian Yuchengco
Wilson L. Sy
Omelita J. Tiangco Treasurer
Aissa V. Encarnacion - Corporate Secretary

Additional Lecture Notes

Types of Financial Institutions

 Commercial Banks
A commercial bank is a type of financial institution that accepts deposits, offers checking account
services, makes business, personal, and mortgage loans, and offers basic financial products like
certificates of deposit (CDs) and savings accounts to individuals and small businesses. A commercial
bank is where most people do their banking, as opposed to an investment bank.

 Investment Banks
Investment banks specialize in providing services designed to facilitate business operations, such as
capital expenditure financing and equity offerings, including initial public offerings (IPOs). They also
commonly offer brokerage services for investors, act as market makers for trading exchanges, and
manage mergers, acquisitions, and other corporate restructurings.

 Insurance Companies
Among the most familiar non-bank financial institutions are insurance companies. Providing
insurance, whether for individuals or corporations, is one of the oldest financial services. Protection
of assets and protection against financial risk, secured through insurance products, is an essential
service that facilitates individual and corporate investments that fuel economic growth.

 Brokerage Firms
Investment companies and brokerages, such as mutual fund and exchange-traded fund (ETF)
provider Fidelity Investments, specialize in providing investment services that include wealth
management and financial advisory services. They also provide access to investment products that
may range from stocks and bonds all the way to lesser-known alternative investments, such as
hedge funds and private equity investments.

A nonbank financial institution (NBFI) is a financial institution that does not have a full banking license and
cannot accept deposits from the public. However, NBFIs do facilitate alternative financial services, such as
investment (both collective and individual), risk pooling, financial consulting, brokering, money
transmission, and check cashing. NBFIs are a source of consumer credit (along with licensed banks).

Risk pooling institutions

Insurance companies underwrite economic risks associated with death, illness, damage to or loss of
property, and other risk of loss. They provide a contingent promise of economic protection in the case of
loss. There are two main types of insurance companies: life insurance and general insurance.

 General insurance is further divided into two categories: Market and Social insurance.
 Social insurance is against the risk of loss of income due to sudden unemployment, disability,
illness, and natural disasters. Because of the unpredictability of these risks, the ease at which the
insured can hide pertinent information from the insurer, and the presence of moral hazard, private
insurance companies frequently do not provide social insurance, a gap in the insurance industry
which government usually fills.

 Social insurance is more prevalent in industrialized Western societies where family networks and
other organic social support groups are not as prevalent.

 Market insurance is privatized insurance for damage or loss of property. General insurance
companies take a single premium payment. In return, the companies will make a specified payment
contingent on the event that it is being insured against. Examples include theft, fire, damage,
natural disaster, etc.
Contractual savings institutions
Contractual savings institutions (also called institutional investors) provide the opportunity for individuals
to invest in collective investment vehicles in a fiduciary rather than a principle role. Collective investment
vehicles invest the pooled resources of the individuals and firms into numerous equity, debt, and
derivatives promises.

The two main types of mutual funds are open-end and closed-end funds.
Open-end funds generate new investments by allowing the public buy new shares at any time.
Shareholders can liquidate their shares by selling them back to the open-end fund at the net asset value.
Closed-end funds issue a fixed number of shares in an IPO. The shareholders capitalize on the value of their
assets by selling their shares in a stock exchange.

Mutual funds can be delineated along the nature of their investments. For example, some funds make
high-risk, high return investments, while others focus on tax-exempt securities. Still others specialize in
speculative trading (i.e. hedge funds), a specific sector, or cross-border investments. Pension funds are
mutual funds that limit the investor’s ability to access their investment until after a certain date. In return,
pension funds are granted large tax breaks in order to incentivize the working public to set aside a
percentage of their current income for a later date when they are no longer amongst the labor force
(retirement income).

Other nonbank financial institutions

Market makers are broker-dealer institutions that quote both a buy and sell price for an asset held in
inventory. Such assets include equities, government and corporate debt, derivatives, and foreign
currencies. Once an order is received, the market maker immediately sells from its inventory or makes a
purchase to offset the loss in inventory. The difference in the buying and selling quotes, or the bid-offer
spread, is how the market-maker makes profit. Market makers improve the liquidity of any asset in their
inventory.

Specialized sectoral financiers provide a limited range of financial services to a targeted sector. For
example, leasing companies provide financing for equipment, while real estate financiers channel capital to
prospective homeowners. Leasing companies generally have two unique advantages over other specialized
sectoral financiers. They are somewhat insulated against the risk of default because they own the leased
equipment as part of their collateral agreement. Additionally, leasing companies enjoy the preferential tax
treatment on equipment investment. Other financial service providers include brokers (both securities and
mortgage), management consultants, and financial advisors. They operate on a fee-for-service basis. For
the most part, financial service providers improve informational efficiency for the investor. However, in the
case of brokers, they do offer a transactions service by which an investor can liquidate existing assets.

Role in financial system

NBFIs supplement banks in providing financial services to individuals and firms. They can provide
competition for banks in the provision of these services. While banks may offer a set of financial services as
a package deal, NBFIs unbundle these services, tailoring their services to particular groups. Additionally,
individual NBFIs may specialize in a particular sector, gaining an informational advantage. By this
unbundling, targeting, and specializing, NBFIs promote competition within the financial services industry.

Having a multi-faceted financial system, which includes non-bank financial institutions, can protect
economies from financial shocks and recover from those shocks. NBFIs provide multiple alternatives to
transform an economy's savings into capital investment, which act as backup facilities should the primary
form of intermediation fail.
However, in countries that lack effective regulations, non-bank financial institutions can exacerbate the
fragility of the financial system. While not all NBFIs are lightly regulated, the NBFIs that comprise the
shadow banking system are. In the run-up to the recent global financial crisis, institutions such as hedge
funds and structured investment vehicles, were largely overlooked by regulators, who focused NBFI
supervision on pension funds and insurance companies. If a large share of the financial system is in NBFIs
that operate largely unsupervised by government regulators and anybody else, it can put the stability of
the entire system at risk. Weaknesses in NBFI regulation can fuel a credit bubble and asset overpricing,
followed by asset price collapse and loan defaults.

Banking financial institutions

Banks, more precisely – retail or commercial banks, fall under the category of banking financial institutions.
A bank is a financial intermediary with a purpose to act as a middleman between suppliers of funds or
depositors and borrowers. The main task of a bank is to accept deposits and use these funds later on to
offer loans to its customers. Another duty of a bank is to act as a payment agent, which is done by offering
a host of payment services, such as credit and debit cards, direct deposit facilities, cheques and bank
drafts. A bank makes money by investing the deposits in financial securities and assets, but mostly by
lending the funds further to its customers. The primary reasons for depositing money in banks are
convenience, safety and interest income.

Non-banking financial institutions

The other type of financial institutions includes investment banks, insurance companies, investment funds
and other. A range of financial services offered by non-banking financial institutions differ from those of a
bank. The main difference between both is that non-banking financial institutions cannot accept deposits
into savings and demand deposit accounts, while it is one of the core businesses for banking financial
institutions.

Meanwhile, they offer a variety of other services. For example, investment banks offer services to their
clients such as underwriting of debt and share issues, corporate advisory, securities trading and derivative
transactions and other investment services. Insurance companies offer a protection against specific losses
in exchange for an insurance premium. Pension and mutual funds are savings institutions where investors
are able to invest their funds in collective investment vehicles. There are financial services that are
provided by both banking and non-banking financial institutions, such as granting loans, financial
consultancy, leasing of equipment and investment in financial securities.

Banks: The central and commercial banks are the most well-known financial intermediaries simplifying the
lending and borrowing process, along with providing various other services to its customers on a large
scale.

Credit Unions: These are the cooperative financial units which facilitate lending and borrowing of funds to
provide financial assistance to its members.

Non-Banking Finance Companies: A NBFC is a financial company engaged in activities such as advancing
loans to its clients at a very high rate of interest.

Stock Exchanges: The stock exchange facilitates the trading of securities and stocks, and in every trading
activity, it charges the brokerage from each party which is its profit.

Mutual Fund Companies: The mutual fund organizations club the amount collected from various investors.
These investors have identical investment objectives and risk-taking ability. The funds are then collectively
invested in the securities, bonds, and other investment options, to ensure a capital gain in the long run.
Insurance Companies: These companies provide insurance policies to the individuals and business entities
to secure them against accident, death, risk, uncertainties and default. For this purpose, they accept
deposits in the form of premium, which is pooled into profitable investments to gain returns. The insured
person can claim the money in case of any mishap as per the agreement.

Financial Advisers or Brokers: The investment brokers also collect the funds from various investors to
invest it in the securities, bonds, equities, etc. The financial advisers even provide guidance and expert
opinions to the investors.

Investment Bankers: These banks specialize in services like initial public offerings (IPO), other equity
offerings, proving for mergers and acquisitions, institutional client’s broker services, underwriting debts,
etc. As a result of constant mediation, between the investor or public and the companies issuing securities.

Escrow Companies: It is a third party acting as an intermediary and responsible for getting all the
conditions fulfilled at the time of loan provided by one party to the other for the real estate mortgage.

Pension Funds: The government entities initiate a pension fund. A certain amount is deducted from the
salary of the employees each month. This collected sum is then invested in different schemes to gain
profits. The investor’s fund is returned with interest after their retirement.

Building Societies: These financial intermediaries are similar to the credit unions, owned and facilitating
mortgage loans and demand deposits to its members.

Collective Investment Schemes: Under this scheme, the various investors with common investment
objective come together to pool their funds and collectively invest this amount into a profitable investment
option. Later they distribute the interest among themselves as per the agreement.

The main components of capital market are: 1. Primary Market 2. Secondary Market

1. Primary Market (New Issue Market):

Primary market is also known as new issue market. As in this market securities are sold for the first time,
i.e., new securities are issued from the company. Primary capital market directly contributes in capital
formation because in primary market company goes directly to investors and utilizes these funds for
investment in buildings, plants, machinery etc. The primary market does not include finance in the form of
loan from financial institutions because when loan is issued from financial institution it implies converting
private capital into public capital and this process of converting private capital into public capital is called
going public. The common securities issued in primary market are equity shares, debentures, bonds,
preference shares and other innovative securities.

2. Secondary Market (Stock Exchange):

The secondary market is the market for the sale and purchase of previously issued or second-hand
securities. In secondary market securities are not directly issued by the company to investors. The
securities are sold by existing investors to other investors. Sometimes the investor is in need of cash and
another investor wants to buy the shares of the company as he could not get directly from company. Then
both the investors can meet in secondary market and exchange securities for cash through intermediary
called broker.

In secondary market companies get no additional capital as securities are bought and sold between
investors only so directly there is no capital formation but secondary market indirectly contributes in
capital formation by providing liquidity to securities of the company.
If there is no secondary market then investors could get back their investment only after redemption
period is over or when company gets dissolved which means investment will be blocked for a long period
of time but with the presence of secondary market, the investors can convert their securities into cash
whenever they want and it also gives chance to investors to make profit as securities are bought and sold
at market price which is generally more than the original price of the securities.

This liquidity offered by secondary market encourages even those investors to invest in securities who
want to invest for small period of time as there is option of selling securities at their convenience.

THE METHOD OF FLOATATION OF SECURITIES IN PRIMARY MARKET:

1. Public Issue through Prospectus:

Under this method company issues a prospectus to inform and attract general public. In prospectus
company provides details about the purpose for which funds are being raised, past financial performance
of the company, background and future prospects of company. The information in the prospectus helps
the public to know about the risk and earning potential of the company and accordingly they decide
whether to invest or not in that company.

2. Offer for Sale:

Under this method new securities are offered to general public but not directly by the company but by an
intermediary who buys whole lot of securities from the company. Generally, the intermediaries are the
firms of brokers.

3. Private Placement:

Under this method the securities are sold by the company to an intermediary at a fixed price and in second
step intermediaries sell these securities not to general public but to selected clients at higher price. The
issuing company issues prospectus to give details about its objectives, future prospects so that reputed
clients prefer to buy the security from intermediary. Under this method the intermediaries issue securities
to selected clients such as UTI, LIC, General Insurance, etc.

4. Right Issue (For Existing Companies):

This is the issue of new shares to existing shareholders. It is called right issue because it is the preemptive
right of shareholders that company must offer them the new issue before subscribing to outsiders. Each
shareholder has the right to subscribe to the new shares in the proportion of shares he already holds. A
right issue is mandatory for companies under Companies’ Act.

20.5. e-IPOs, (electronic Initial Public Offer):

It is the new method of issuing securities through online system of stock exchange. In this company has to
appoint registered brokers for the purpose of accepting applications and placing orders. The company
issuing security has to apply for listing of its securities on any exchange other than the exchange it has
offered its securities earlier. The manager coordinates the activities through various intermediaries
connected with the issue.

Other Examples of Financial Markets:

Bond market:
The bond market—often called the debt market, fixed-income market, or credit market—is the collective
name given to all trades and issues of debt securities. Governments typically issue bonds in order to raise
capital to pay down debts or fund infrastructural improvements. Publicly-traded companies issue bonds
when they need to finance business expansion projects or maintain ongoing operations.

The bond market is broadly segmented into two different silos: the primary market and the secondary
market. The primary market is frequently referred to as the "new issues" market in which transactions
strictly occur directly between the bond issuers and the bond buyers. In essence, the primary market yields
the creation of brand new debt securities that have not previously been offered to the public.

In the secondary market, securities that have already been sold in the primary market are then bought and
sold at later dates. Investors can purchase these bonds from a broker, who acts as an intermediary
between the buying and selling parties. These secondary market issues may be packaged in the form of
pension funds, mutual funds, and life insurance policies—among many other product structures.

Types of Bond Markets

The general bond market can be segmented into the following bond classifications, each with its own set of
attributes.

Corporate Bonds
Companies issue corporate bonds to raise money for a sundry of reasons, such as financing current
operations, expanding product lines, or opening up new manufacturing facilities. Corporate bonds usually
describe longer-term debt instruments that provide a maturity of at least one year.

Government Bonds
National-issued government bonds (or Treasuries) entice buyers by paying out the face value listed on the
bond certificate, on the agreed maturity date, while also issuing periodic interest payments along the way.
This characteristic makes government bonds attractive to conservative investors.

Municipal Bonds
Municipal bonds—commonly abbreviated as "muni" bonds—are locally issued by states, cities, special-
purpose districts, public utility districts, school districts, publicly-owned airports and seaports, and other
government-owned entities who seek to raise cash to fund various projects.

Mortgage-Backed Bonds
These issues, which consist of pooled mortgages on real estate properties, are locked in by the pledge of
particular collateralized assets. They pay monthly, quarterly, or semi-annual interest.

Emerging Market Bonds

Issued by governments and companies located in emerging market economies, these bonds provide much
greater growth opportunities, but also greater risk, than domestic or developed bond markets.

Commodity market

A commodity market is a marketplace for buying, selling, and trading raw materials or primary products.
There are currently about 50 major commodity markets worldwide that facilitate trade in approximately
100 primary commodities.
Commodities are often split into two broad categories: hard and soft commodities. Hard commodities
include natural resources that must be mined or extracted—such as gold, rubber, and oil, whereas soft
commodities are agricultural products or livestock—such as corn, wheat, coffee, sugar, soybeans, and
pork.

Investors can gain exposure to commodities by investing in companies that have exposure to commodities
or investing in commodities directly via futures contracts.

Stock market

A stock market is a place where investors go to trade equity securities, such as common stocks, and
derivatives—including options and futures. Stocks are traded on stock exchanges. Buying equity securities,
or stocks, means you are buying a very small ownership stake in a company. While bondholders lend
money with interest, equity holders purchase small stakes in companies on the belief that the company
performs well and the value of the shares purchased will increase.

The primary function of the stock market is to bring buyers and sellers together into a fair, regulated, and
controlled environment where they can execute their trades. This gives those involved the confidence that
trading is done with transparency, and that pricing is fair and honest. This regulation not only helps
investors, but also the corporations whose securities are being traded. The economy thrives when the
stock market maintains its robustness and overall health.

Just like the bond market, there are two components to the stock market. The primary market is reserved
for first-run equities: initial public offerings (IPOs) will be issued on this market. This market is facilitated by
underwriters, who set the initial price for securities. Equities are then

Derivative market:

 Just like shares, Derivatives are also traded in stock exchanges.

 Derivatives are a type of security, whose value is derived from an underlying asset.
 These underlying assets can be stocks, bonds, commodities or currency.
 The popularity of derivative can easily be understood by daily turnover in the derivative segment on
the exchange, which is much higher than turnover in the cash segment on the same exchange.
 Derivatives can either be exchange-traded or traded over the counter (OTC).
 Exchange refers to the formally established stock exchange wherein securities are traded and they
have a defined set of rules for the participants.

Use of Derivatives:

Derivative contracts like futures and options trade freely on exchanges and can be employed to satisfy a
variety of needs which includes the following-

a) Hedge your securities

The derivative contracts can be used to hedge your securities from price fluctuations. The shares
which you possess can be protected on the downside by entering into a derivative contract.

b) Transfer of risk
This is the most important use of derivative which helps in transferring risk from risk-averse people to a
risk-seeking investor.

c) Benefit from arbitrage opportunities

Arbitrage trading simply means buying low in one market and selling high in another market.
Participants in the derivative market
The participants in the derivative markets can be segregated into three categories namely-

a) Hedgers
These are traders who wish to protect themselves from the risk or uncertainty involved in price
movement.

For example, you can enter into an options contract (a part of the derivative strategy) by paying a small
price or premium and reduce your losses.

Moreover, it would help you benefit whether or not the price falls. This is how you can hedge your risk and
transfer it to someone who is willing to take the risk.

b) Speculators
They are extremely high-risk seekers who anticipate future price movement in the hope of making
large and quick gains.

c) Arbitrageurs
Arbitrage is a low-risk trade which involves buying of securities in one market and simultaneous
selling it in another market. This happens when same securities are trading at different prices in
two different markets. For instance, say the cash market price of a share is Rs 100 and it is trading
at Rs 110 per share on the futures market. An arbitrageur observes the same and bought 50 shares
@ Rs 100 per share in the cash market and simultaneously sells 50 shares @Rs 110 per share, thus
gaining Rs 10 per share.

Types of derivative contracts

There are four types of derivative contracts which include forwards, futures, options, and swaps.

Since swaps are complex instruments which we cannot trade in the stock market, so we’ll focus on
the first three.

a) Forward contracts
They are customized contractual agreements between two parties where they agree to trade a
particular asset at an agreed upon price and at a particular time in future.

b) Futures contracts
These are standardized version of the forward contract which takes place between two parties
where they agree to trade a particular contract at a specified time and at an agreed upon price.

c) Options
It is an agreement between a buyer and a seller which gives the buyer the right but not the
obligation to buy or sell a particular asset at a later date at an agreed-upon price.

Following are the differences between money market vs capital market:

Borrowing Term
Lending and borrowing in the money market is for the short-term. In the capital market,
investors lend and borrow securities for medium term to long-term.
Participants
Usual participants in the money market are central banks, commercial banks, mutual funds,
financial institutions and chit funds. Capital market, on the other hand, involves stock brokers,
retail investors, mutual funds, underwriters, insurance companies and stock exchanges.

Instruments
Popular instruments in the money market are commercial papers, T-bills, call money,
promissory notes and so on. Capital markets typically deal in bonds, debentures, preference
shares and so on.

Structure
Capital markets are more formal than the money market. Compared to capital markets, money
markets are more informal. Also, capital markets are more organized than the money market.

Classification
There are two types of capital markets – Primary Market and Secondary Market. There is no
such classification in the money market.

Liquidity
Since money market deals with short-term instruments, it is more liquid. Capital market deals in
medium to long-term time frame, thus liquidity is less.

Risk Factor
Money market usually involves less risk as the market is liquid and funds are for the short-term.
Due to long-term maturity and comparatively less liquidity, the risk in the capital market is
more.

Purpose
It helps borrowers to meet their short-term funding requirements. Due to its long-term nature,
the capital market works more towards stabilizing the economy by mobilizing the savings.

Returns
Since the time duration is short and the risk is less, returns in the money market are also less.
Return in the capital market is more as the investment is for more duration.

Relevance to Economy
Money market helps to boost liquidity in an economy. Capital market, on the other hand,
converts savings into productive investments.

Maturity Period
Money market instruments have a max maturity period of one year. In the capital market, there
is no specified maturity period for the instruments, but it is always more than a year.

Relation with Country’s Central Bank

Money market and Central bank work closely with each other. Central bank’s policies influence
the working of the capital markets, but there is no direct relation between the two.
As you now know that the primary function of both markets is to ensure an adequate level of
funding. Which market (money market vs capital market) does investor access depend on their
funding needs and time duration they want the funds for.