Module 1 and increase returns which will motivate

people to save more It helps the

Introduction to Financial Markets and Institutions government in deciding monetary policy.
TOPIC OUTLINE:
Topic 1 Topic 1. Components of Financial System
 Overview of Financial System
 Fundamental of Financial Markets 1. Financial institutions: It is a corporation
Topic 2. affianced in the business of dealing with
 The function of Financial Markets financial and monetary matters such as
 Structure of Financial Markets deposits, loans, investments, and currency
Topic 3. exchange.
 Fundamental of Financial Institutions - They are providing various services to the
 Types of Financial Intermediaries economic development with the help of issuing
 Investment Intermediaries financial instruments. They are further divided
into banking institutions and non-banking
Topic 1. Overview of the Financial System institutions.
The financial system a) Banking institutions: they are the
key part of economic development. They
- is an organized and regulated structure play a vital role in the field of savings and
where an exchange of funds takes place investment of money from the public and
between the lender and the borrower. lending to business concerns.
- It supplies the necessary financial inputs
b) Non-banking institutions: they are
for the production of goods and services, the entities and the institutions that provide
in turn, promote the well-being and certain bank-like and financial services but
standard of living of people in the do not have a banking license.
country.
- Government nonbank financial
institutions, on the other hand, consist of
The financial system consists of a variety of the Government Service Insurance
institutions, markets, and instruments that are System (GSIS), Social Security System
related in a systematic manner and provide the (SSS), National Home
principal means by which savings are transformed Mortgage Finance Corporation, Philippine
into instruments, according to Prasanna Chandra. Veterans Investment Development
Corporation, and National Development
Corporation The private nonbank financial
institutions are First Metro Investment
Corporation. Philippine Depository and
Trust Corporation and many more
(www.bsp.gov.ph)
2. Financial market: it is a market that deals with
various financial instruments such as shares,
debentures, bonds, etc., and financial services such
as merchant banking, underwriting, etc. They are
further divided into
a) Capital market: institutional
The financial system arrangement for borrowing medium and
long-term funds and which provides facility
for marketing and trading of securities.
- is significant to attain economic Examples are shares, debentures, bonds,
development since they induce people to etc. They are then divided into:
save by offering attractive interest rates.
- These savings are then channelized by Primary market: where
lending to various business concerns that securities are offered for the first
are involved in production and distribution. time for receiving the public
It helps in monitoring corporate subscription.
performance It links savers and investors.
Secondary market: where
- This process is known as capital formation pre-issued securities are dealt
It helps in decreasing the transaction cost between the investors.
 b) Money market: it is for short-term Funds are transferred in financial markets when one
funds, which deals in financial assets party purchases financial assets previously held by
whose period of maturity is up to 1 year. another party.
They are highly liquid and easily
marketable. Examples are treasury bills, Financial markets facilitate the flow of funds and
commercial paper, etc. thereby allow financing and investing by households,
firms, and government agencies.
3. Financial services: these services are provided
by the finance industry. They are usually customer-
focused. They study the needs of the customer in
detail before deciding their financial strategy, giving
due regard to cost, liquidity, and maturity. Examples
are insurance companies, credit rating facilities, etc
4. Financial instruments: it is any contract that
gives rise to a financial asset of one entity and
financial liabilities or equity instruments to another
entity. The various instruments are shares,
debentures, bonds in the capital market and
Treasury bills, commercial paper, certificates of
deposit, repurchase agreements in the money
Overview of the Philippine Financial Market
market.
Money Market
The money market is a financial market that
deals with short-term maturities of financial
contracts. Most money market instruments are fixed-
income debts.
The available money market instruments are:

- Treasury Bills (T-bills), Small Investors

Program Bills, Cash Management Bills,
Banko Sentral Ng Pilipinas (BSP) Reverse
Repurchase, BSP Special Peso Deposit,
Bankers Acceptances, and Short-term
Commercial Papers (CPs).
The domestic money market is dominated by
government debt issued regularly. Other major
investors of money are the Social Security System
(SSS), the Government Service Insurance System
(GSIS), the Home Development Mutual Fund
(HDMF), trust funds, mutual funds, and retail
investors.
Capital Market
A financial market that deals with beyond
one (1) year maturities is the capital market.
Subdivided into two types of market:
1. primary market vs. secondary,
and
Topic 2: Financial Markets 2. debt vs. equity.
Financial Markets is a market in which financial Primary market refers to the issuance of new
assets (securities) such as stocks and bonds be securities representing an actual transfer of funds
purchased or sold. from the investors to the issuing entity through an
initial public offering (IPO),
while secondary market refers to the trading of The derivatives market includes all financial
securities thus providing for investors a liquidity contracts deriving their value from any other
mechanism in the market. underlying assets.
On the other hand, debt is a financial obligation that Derivatives provide a risk management tool
has to be repaid with interest, in the financial system. The derivatives instruments
are the Forward Contracts, Swap Contracts, and
while equity is a form of ownership in an enterprise Option Contracts.
and does not have to be repaid. The available
capital market debt instruments are Treasury Bonds, The increase in derivatives trading is
Fixed Rate Note, Small Investor Program Bonds, attributed to the bank’s acquisition of derivative
Municipal Bonds, and Government Bonds. licenses and the existence of derivative instruments
as risk management tools.
The Philippine Stock Exchange (PSE)
provides an active trading platform in the Philippine The BSP regularly issues circulars and
equities market. The instruments traded in the PSE guidelines affecting the trading of derivatives. It sets
are common stocks, preferred stocks (convertible standards and gives accreditation to financial
and non-convertible), warrants, and bonds. institutions for derivative transactions.
The issues in the Philippine equities market are
classified:
1. Commercial and Industrial
Issues
2. Property Issues
3. Mining Issues
4. Oil Issues
5. Small Denominated Treasury.
The active participants of the Philippine stock market
are the trust departments, insurance firms, and other
institutional investors both local and foreign. PSE is
the formal market for equities transactions.
Foreign Exchange Market
The foreign exchange market (forex) refers
to the market that deals with foreign currencies like
the Philippine peso, US dollar, and other major
currencies.
The trading in foreign currencies is merely
done through Philippine Dealing System. The
foreign exchange instruments are the Spot
Transactions. Foreign Exchange Forward Contracts,
and Swap Contracts.
The Philippines maintains a floating
exchange rate whereby market forces primarily
determine the rate of exchange, Peso/US dollar spot
transactions corner the bulk of forex transactions in
the country.
The investors in the forex market are
commercial banks, mutual funds, trust departments,
and institutional and retail investors. Trading in the
forex market is done through the Philippine Dealing
System; it provides a platform for the buyers and the
sellers to meet with provisions of real-time-weighted
average rate and volumes of trade for the peso.
Derivatives Market