Financial Market
CHAPTER I
FINANCIAL SYSTEMS AND THE FINANCIAL
MARKET
Financial System
- Composed of network inter-related systems
of financial markets, intermediaries and
services.
- Permits an efficient method to move funds
between entities who have funds and entities
who needs funds
- Enhances welfare of individual consumers
as they have immediate access to funds
- Normally regulated by CENTRAL BANKS
Finance
- Key player in the continuity of operations.
- Life blood of company
- Application of economic principles to
decision making involving allocation of
money under conditions of certainty
- Set of arrangements or conventions
embracing lending and borrowing of funds
3 key areas of studying capital markets
1. Financial system
2. Structure of interest rates
3. Pricing assets
Direct Financing – borrower-spenders borrow and
deal directly with lenders through selling financial
instruments.
Indirect Financing – borrowing activity between
parties still happens indirectly through intervention of
a financial intermediary
Borrowers – financial instruments are liabilities;
willing to pay
Lenders – financial instruments are assets; with
excess funds
- helps in creating more efficient allocation of
capital
- channels or places where funds and financial
instruments are exchanged between willing
individuals
- channel to transfer excess funds from fund
providers to fund demanders
- serves as forum
Information Symmetry
- One stakeholder to a transaction holds
superior information than the other party.
7 ELEMENTS OF FINANCIAL SYSTEM
1. Lenders and Borrowers – players; fund
providers and fund demanders
respectively
2. Financial intermediaries – special type of
financial entity that acts as third party to
facilitate the borrowing activity
3. Financial Instruments – medium of
exchange of contractual obligations of a
party
4. Financial Markets
 Money Market – cash financial
instruments are exchanged
 Capital Market – derivative
financial instruments
5. Regulatory Environment – governance
body to ensure that it complies with the
laws and regulations
6. Money Creation
7. Price Discovery – process of determining
or valuing the financial instrument in the
market
Trading – exchange of financial instruments
 3 MAJOR ECONOMIC FUNCTIONS OF FINANCIAL MARKET

1. Price Discovery
- price is set at the level wherein buyers are willing to buy and sellers are willing to sell
- determines how the available funds from funds providers are allocated towards the fund demanders
based on the fund demanders’ willingness to accept return required by the fund providers
2. Liquidity –
3. Reduction in Transaction Cost
- Transaction Cost – cost incurred of parties’ transaction to trade a financial instrument
 Search Cost – cost incurred to look for financial instruments that can be purchased or sold by a
party
o Explicit Search Cost - advertisements
o Implicit Search Cost – value of time consumed to look for the counterparty for transaction
 Information Cost – cost related in evaluating investment characteristics of financial instrument;
Information about profitability, liquidity, stability and market value

- Appointed for public offerings

- Provides an undertaking to purchase
remaining securities if the offer will not be
fully subscribed by the public
Types of Financial Markets 4 Classification of Primary Market
According to Purchasers
Based on Instruments Traded
 Public Offering
1. Money Market
- when securities are offered for sale to
- Short term securities
general public through issuance of
- Conduit to efficiently transfer large amounts
prospectus
of money from fund providers to fund
- INITIAL PUBLIC OFFERING (IPO) – private
demanders for short maturity term quickly
companies who will sell shares to general
and at cheap cost
public for the first time will undergo to IPO
2. Capital Market
usually with the help of private banks
- Long term securities
o Subscription – subscribe to
- Classified into equity and debt
unissued shares
- Expected to be a liquid market where fund
o Sale – existing shareholders invites
demanders can interact with potential
potential subscribers to buy portion of
investors
their shares
Based on Market Type  Private Placement
- Limited public offer
1. Primary Market - When issuer looks for a single investor,
- Fund demanders raise funds through new institutional buyer or group of buyer or
issuances of financial instruments buyers to purchase the securities as a
whole
Underwriting - An underwriter subscribes to all securities
and sell it to a higher price
- Investment banks guarantee the price for
the securities of the issuing company and Underwriting Spread – difference between
then sells these to the general public. these two prices
 o Auction
 Dutch Auction – selling begins
at high price the lowered down
 English Auction – the
prospective buyers commence
the auction by submitting an
initial bid price
 Descending Price Sealed
Auction – bidders submit sealed
bids to sellers
o Tap Issue – when issuers are open to
receive bids for their securities at all
times; issuers has the right to reject bid.
2. Secondary Market
- Securities issued in primary market are
subsequently traded, resold and
repurchased.
- Centralized marketplace wherein buyers and
sellers can quickly and efficiently transact
with each other
- The original issuer of the financial instrument
is not involved I the subsequent transactions
in the secondary market
Economic Functions of Secondary Market
1. Price Discovery
2. Liquidity and Reduction in Borrowing
Costs
3. Support to the Primary Market
4. Implementation of Monetary Policy
Market Structure – mechanisms how buyers and
sellers interact to arrive at the price and quantity of
securities to be traded
1. Order-driven
- Buyers and sellers propose their price
through their brokers who conveys in bid in
a centralized location.
- Also called auction market
Types of Order-Driven
 Market Orders (at best orders)
Placed with broker-dealers
 Limit Orders
Clients set a price or price range
 Day Orders
Only valid are orders transacted until the end
of business day
 Good Until Cancelled Orders
Orders that remains valid for a sustained
period until withdrawn
2. Quote-driven
- Also called primary dealer market,
professional markets or market-made
markets
- Market makers establish price quote
- Market makers set a bid quote (to buy) and
offers (to sell)
- Bid quotes are usually lower
Bid Quote - to buy
Offer Quote – to sell
Spread - Difference between bid and offer
- Inures to the benefit of market makers as
profit
- Represents the traditional costs of trading
and reflects liquidity
Exchanged (formalized)
- Centralized trading locations where financial
instruments are sold between the market
participants.
- Financial instruments should be listed by
organized exchange.
Over-the-Counter Market (informal)
- Market place where unlisted financial
instruments are allowed to be traded.
- Do not have formalized mechanisms
Based on Country’s Perspective
Internal or National Market – financial market
opening in a certain country
1. Domestic Market – residents of the country
can issue securities
2. Foreign Market – not residents of the
country can trade but should comply with
the rules of the country
External Market – financial market with 2 unique
characteristics
 1. Upon issuance, securities are offered
simultaneously in different countries
2. Securities are issued outside the regulatory
jurisdiction of any country

Based on Manner of Financial Intermediaries

1. Broker Market
 Brought together by a broker and
trading occurs;
 Usually composed if national and
regional securities exchanged.
2. Dealer Market
 Not brought directly together by 3 rd
party
 Seller sells securities to dealer and
buyer buys from dealers
 Dealers earn through spread
between ask price and bid price
 Do not have centralized trading floors
compared with changes
 Ask Price - lowest price of a security for sale
 Bid Price – highest proposed price in order
for investors to buy a security

Note: Investors pay the ask price and

receives the bid price when selling them.
 CHAPTER II
FINANCIAL INTERMEDIARIES AND OTHER
PARTICIPANTS
Financial Intermediaries – formed when market
conditions make it had for lenders of funds to
transact directly with borrowers of funds.
Financial Intermediation – process of indirect
financing using financial intermediaries as the main
route to transfer funds from lenders to borrowers.
Financial Intermediaries provides the following
services:
1. Enable trading financial assets of financial
intermediary through brokering
arrangements
2. Enable trading of financial assets through its
own capital by buying a stake
3. Assist in forming financial asset
4. Provide investment advice and consultation
services
5. Manage financial assets of customers
6. Facilitate payment mechanism
Benefits: Creates opportunities to financial savvy
people
BENEFITS FROM FINANCIAL INTERMEDIARIES
1. Acceleration of flow of funds between
entities – transfer funds to fund demanders
2. Efficient allocation of funds
To ensure efficient allocation,
financial intermediaries manage asymmetric
information to a certain degree in its
operation
Risk - uncertainty
Asymmetric Information – occurs
when potential borrowers have more
information about the transaction than the
bank: it could lead to two problems:
a) Adverse Selection
 High risk borrowers that would tend
to default are more likely to be more
active in borrowing funds than low
risk borrowers who pay on time.
 Usually occurs before transaction
b. Moral Hazard
 When borrowers have the tendency
to take undesirable or immoral risks
with money once they receive it not
disclosed during the loan granting
process.
 Happens after loans are granted
3. Creation of money – banks acts as
conduits that lessen the constraint of limited
income over spending, permitting
consumers to spend while expecting future
income and businesses to get the physical
capital
4. Support in price discovery
 Price Discovery – process of
setting a price which is acceptable
for the buyer and the seller.
5. Improved Liquidity for Lenders
6. Reduce price risk for lenders
Price Risk – prices if financial instruments
may vary over time.
Risk Sharing (asset transformation) –
happens when financial intermediaries
create and sell financial assets with risk
profile that the clients are comfortable to
invest on.
7. Diversification of lenders
Diversification- process of investing funds
in a portfolio of assets that have individual
returns that do not move at the same
direction together
 Usually results in an overall portfolio
risk that may be lower than risk of
individual asset
8. Economies of scale
Occurs when fixed cost are optimized per
unit as a result of sheer volume of
transactions.
2 main economies of scale
a. Transaction cost – cost associated
with trading or managing funds
 b. Research cost – cost incurred to
monitor performance of potential
companies to invest on
9. Payments system
Financial System – serves as the main
structure for making payments for any
goods, services or securities that are
purchased
10. Risk mitigation
11. Implementation of monetary policy
function
Financial system – provides best
mechanism to allow government to
implement its monetary policies
Financial intermediaries – exist to foster a
more favorable transaction terms between
fund providers and fund demanders
ECONOMIC FUNCTIONS OF THIS
TRANSFORMATION
Note: Fees to intermediaries usually pertains to the
difference between cost of issuing financial
securities and revenues earned from primary
securities bought.
Financial securities – bonds, dividends, capital
gains, interest
Primary securities - bonds, dividends, capital gains,
interest
1. MATURITY INTERMEDIATION –
 When banks convert long term
assets into short term assets
 gives fund providers/investors more
alternatives in terms of how long they
want to invest
 allows financial intermediaries to
charge lower interest rate
2. RISK REDUCTION THROUGH
DIVERSIFICATION – converts more risky
assets to less risky assets through sharing of
risks
3. COST REDUCTION FOR CONTRACTING
AND INFORMATION PROCESSING
- Information Processing Cost – cost of
acquiring and processing information
needed to evaluate purchase or subsequent
sale of a financial instrument.
- Includes opportunity cost of time associated
with info process
- Contracting Cost – cost incurred for writing
loan agreements
- Usually incurred by investors who are willing
to extend loans to a consumer or business
- Liquidity Risk – risk that liability holders
may require cash in exchange of the financial
claims they have from the institution
CLASSIFICATION OF FINANCIAL
INTERMEDIARIES
1. DEPOSITORY INSTITUTIONS
 Firms that accept cash deposits from
individual companies and entity
 Loan – biggest portion of depository
institution
 Loans – divided into 4 categories: (1)
business, commercial, industrial
loans, (2) commercial or residential
real estate loans, (3) individual loans
for vehicle, (4) credit card purchases.
 In PH, commercial banks, thrift
banks and savings banks
a. Commercial Banks – banks authorized to
accept drafts/checks and issue letters of
credits.
 Checking Deposit Accounts –
drafts/checks can be written against.
  Saving Deposit Accounts –
payable on demand but checks
cannot be written against.
 Time Deposits – maturity in fixed
terms.
b. Thrift Banks – primarily mobilized small
savings and provide loans at generally
longer and easier terms than do commercial
banks as they cater to the lower income
groups.
c. Savings Banks – organized for the purpose
of accounting savings deposits and investing
them for specified purposes.
Banks offer variety of services to their clientele which
can be grouped into:
 Individual Banking – focuses on financial
requirements of individuals and included
services.
 Institutional Banking – caters to needs of
financial and non-financial corporations and
government entities in activities such as
commercial real estate financing and
leasing.
 Global Banking – sector wherein
commercial banks contend with investment
banks by offering broad range of service
offerings revolving around corporate
financing; providing financial advice on
strategic initiatives such as financing
sources.
BANKS play a significant role in transmitting the
impact of the monetary policy set by a country’s
central bank to the rest of the economy.
FOUR TYPES OF DEPOSIT ACCOUNTS
1. Demand Deposits/Checking Accounts –
can be withdrawn upon demand through
checks and offer very minimal interest
2. Savings Deposits – earn interest at a level
below market interest rates, can be
withdrawn upon demand and do not have a
specific maturity.
3. Money Market Demand Account – placed
on money markets that have slightly higher
interest rates compared to saving deposits
but can be withdrawn only after a short
period of time.
4. Time Deposits/Certificates of Deposits –
fixed maturity date and depositors may earn
interest at a fixed or floating interest rate.
Rediscounting is a standing credit facility offered
by BSP to aid banks to meet temporary liquidity
needs through refinancing the loans that banks
extend to their clients.
Overdraft refers to the deficit in a deposit account
resulting from withdrawing more money than what
is deposited in the account.
TAKE NOTE! Section 84 of RA No. 7653
- BSP provides fully secured emergency
loans to serve as financial assistance to
resolve liquidity woes
- Only up to the amount needed by the
bank to resolve liquidity predicament but
not exceed 50% of its deposits that any
emergency advance should be
collaterized by government securities
and unencumbered first-class collateral
Contractual Savings Institutions are financial
intermediaries that obtain funds at periodic intervals
based on an existing contract; project more
accurately how much money they need to pay in
the future.
Insurance Companies offer a unique service to
the individuals, corporations and other entities in a
country; offer services to assume risk or become
underwriters of the risk associated with the various
insurable occurrences.
 Contract of Insurance – agreement
whereby one undertakes for a consideration
to indemnify another against loss, damage
 or liability arising from an unknown or
contingent event.
INVESTMENT INTERMEDIARIES – organizations
whose primary objective is to maximize return from
investments in various financial instruments to add
value for the investors.
 Asset Management Firms – companies
that manage funds owned by individuals,
companies or the government through
buying and selling of financial instruments.
 Compensated for the management service
fee charged is based in amount of funds
being managed
 Regulated Investment Companies (RIC) –
ASSET MANAGEMENT STRATEGIES
a. Passive Funds / Indexed Funds – are
managed to mimic movements in the
market index such as the PSE index.
b. Active Funds – are managed by asset
management firms with the intention to
outperform the index fund via actively
trading securities in the fund portfolio.
𝑝𝑚 − 𝐿
NAV =
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠
Pm = Market Value of the Portfolio
 Annual fund operating expense known
as expense ratio – covers operating
expenses of the fund.
 Exchange Traded Funds (ETF) – like
mutual funds, but the shares of the portfolio
funds trade in an exchange like a regular
share offered by a company.
- Possess characteristics of both open-ended
and closed-ended funds.
- Pricing might be slightly different from the
NAV as the pricing is influenced by the
interaction of the supply and demand in the
secondary market.
- ETFs are also allowed to place limit orders,
stop orders and orders to sell short or at a
margin
 Hedge Funds – developed to cater to
sophisticated investors and are usually not
subject to the same regulations covering
mutual funds.
- Organized as a private investment
partnership or offshore investment
corporation which uses various trading
strategies to gain better position in different
markets.
Hedge usually employ the following strategies
when executing its investments:

L = Liability a. Leverage – use of borrowed money to

invest
TWO TYPES OF RICs
b. Short selling – sale of a security not owned
A. Open-end funds – known as mutual funds, with the expectation that price of the
security will eventually decline.
do not have fixed number of shares.
c. Derivatives and simultaneous selling and
B. Closed-end funds – have fixed number of
buying of securities – take advantage of
shares upon its inception and do not issue
profit from temporary mismatching of prices.
additional or redeem shares.
Prices of the shares in closed-end funds
Normally, investors of hedge funds are more
– associates with demand and supply in the
inclined to evaluate performance of the asset
secondary market where the funds are
manager through absolute return rather than
being traded.
relative return.
COST ASSOCIATED W/ INVESTING WITH RICs
Absolute return – peso amount realized from the
investment
 Shareholder Fee / Sales Charge – one
time charges
Relative return – difference between realized
return and the return shown in a benchmark index.
 Separately managed accounts –
individually managed accounts are distinct
funds solely dedicated to an individual or
institutional investor.
 Investment Banks – highly leveraged
institutions that have significant influence on
how primary and secondary markets work. It
assists entities in raising money to fund their
initiatives.
- Full-service investment banks – offer
wide range of activities.
- Boutique investment banks – specialized
in one or two activities that they offer to their
clients.
a. Public offering of securities – possess
information regarding the current
willingness of investors to buy various
kinds of securities and on the prices,
investors are willing to pay.
Red Herring - preliminary prospectus
shared to potential because of the notice
printed in red included in the front cover
signifying the tentative nature of the
information in the document.
Quiet Time - is important to ensure that all
potential investors will have access to the
same information and no unpublished data
will give them an unfair advantage.
- Underwriting syndicate - to buy and sell
the securities
- Underwriting - helps reduce information
costs between borrowers and lenders since
investment banks place their reputation on
the line for the firms that they are underwrite
for.
b. Private Placement of Securities –
securities are offered only to select
number of firms.
c. Trading of securities – commissions
when they act as a broker or dealer for
transaction.
Proprietary or Prop Trading –
investment banks use their capital
on their own volition (choosing
power) to trade based on how they
forecast potential movements in
prices, interest or foreign currency.
Exposes in 2 major risks:
 Interest Rate Risk – risk of
changes in interest rate
 Credit Risk – risk that
borrower may not pay or
default the loans
d. Advisory services for mergers,
acquisitions and financial
restructuring
e. Merchant banking – use its own money
to lend money as a creditor or buy
shares as an investor; directly assume
the risk on the capital it provides to the
invested company.
f. Securities Finance and Prime
Brokerage Service – requires them to
borrow money to buy a security or
borrow securities to sell a security short
or cover a short sale; usually enter in a
repurchase agreement.
- Repurchase agreement is like a
collateralized loan whose collateral is the
security bought.
- Securities Finance - activity or borrowing
securities or borrowing funds
g. Asset Management
h. Research
 Finance Companies – raise their funds
through issuing stocks and bonds or selling
commercial papers.
- Other Participants
- Household Sector composed of individuals
and families; unincorporated businesses
- Government regulating all participants and
the market
- Corporate Sector / Non-financial
Corporations
Financial Corporations include depositary
institutions, investments banks, asset
management companies and insurance
companies; act as financial intermediaries
and will be discussed in the next topic.
Non-financial Corporations issue financial
instruments to raise funds for their business
requirements and trade financial
instruments in the money market as
investment in case they have excess funds;
non-financial corporations with subsidiaries
that engage in activities same as financial
corporations; captive finance companies.
Foreign Sector consists of all entities
individuals, assets and organizations that
they are situated outside of the jurisdiction
of a certain country. Foreign central banks
and foreign companies invest in other
countries / markets in order (a) to stabilize
their local currency compared to foreign
currencies and (b) to gain return from
investing excess funds in attractive
countries / markets with huge growth
potential.
Non-profit organizations businesses that
exist to respond to specific causes like
humanitarian aid, socio-civic causes,
environment arts and many more; include
foundations and endowments.
 CHAPTER III
FINANCIAL REGULATION AND THE CENRAL
BANK
 FINANCIAL REGULATION – type of
regulation whereby rules and standards
were set to oversight the ability of the
companies to establish and maintain
appropriate level of capital to sustain its
operation.
 Regulation
 Designed to set rules and guidelines
to be followed hat is designed to
ensure balance among the
individuals, firms and/or citizens;
 Designed to reconcile conflicting
interests. Regulation is process
whereby the designated government
authority provides oversight and
establishes rules for firms in an
industry.
World Bank sets regulatory measures to
address certain risks and social factors:
 Systematic risk – probability of a firm to fail
its objective that will result to ripple effect.
 Consumer protection – factor to consider
that policies enforced assumes the effect to
the consumers’ welfare.
 Efficiency enhancement – factor that is
considered to ensure the dynamism and
agility of the policy to adopt in a fast-
changing environment.
 Social Objectives – policy should take
consideration the alignment in the
objectives of the society
Bangko Sentral ng Pilipinas (BSP)
Market Drivers Regulated
 Competitiveness
- Financial sector has an important role
in shaping the overall economy of a
country.
 Market Behavior – the behavior of that
firms in the industry can be regulated by
their behavior:
1. Integrity on their
2. Integrity on their representation.
 The government normally sets:
- Full disclosure of information
- Prohibition on insider trading
- Control of new plater
- Setting minimum capital requirement
- Minimum governance rules
 Consistency – market is normally
demonstrated to their information disclosure
and policies.
- Information is a vital asset in financial
markets
- Government role is to set standards to
regulate and ensure that information
provided in the market are fair,
consistent and conservative.
 Stability
- Market stability is an external and fatal
factor to be considered by the firms in
the financial market.
- Systematic instability is a challenge or
threat whereby it arises where a
segment or firm was not able to meet its
commitment because of their failure to
address the risks of the market.
 Regulators of Financial Activities
Financial activity regulation – setting
rules to set standards, control and order on
the financial activities, regardless of the
source.
- New Central Bank Act or Republic
Act 7653; central monetary authority
which will act as a corporate body that is
responsible concerning money, banking
and credit. BSP shall provide policy
directions in these areas and also
responsible for the supervision of
 financial institutions and exercise
regulatory powers.
 The function of BSP are following:
- Liquidity Management formulates and
issues monetary policy; maintain price
stability.
- Currency Issue issued notes and coins
representing the national currency for
the Philippines.
- Lender of last resort provider of
discounts, advances and financial
support
- Financial supervision supervises the
financial institutions; exercises
regulatory powers over non-bank
institutions conducting quasi-banking
functions.
- Management of foreign currency
reserves manages the financial foreign
currency requirement of the Republic by
ensuring sufficient international reserves
will be made available on time; preserve
the international stability and position of
the Philippine Peso.
- Determination of exchange rate
policy sets the policy that will determine
the rate of exchange
BSP shall be governed by the Monetary Board.
 Monetary board is composed of seven
members.
 The board is chaired by the Governor of
the BSP and composed of six other
members coming from: 1 member –
member of the cabinet designated by the
President of the republic; 3 members
shall serve for a term of six months while
2 will serve for three months.
 Four Sectors / Functions:
- Financial Supervision Sector is
responsible mainly for the supervision
and regulation of banks
- Monetary and Economic Sector aims
to conduct the formulation of monetary
policy; ensure its implementation and
assess its effectiveness.
- Currency Management Sector
responsible in the production,
distribution, disposal or retirement of
currencies
- Corporate Services Group support
group of the BSP that conducts the
human capital management, financial
services, information technology support
and other corporate resource
management
Insurance Commission (IC)
- Executive Order No. 192 s. 2015
ensure enforcement of the provisions of
the Insurance Code or Republic Act
10607; to regulate and supervise the
insurance, pre-need and health
maintenance organization industry.
Governed by Department of Finance;
authority to suspend or revoke such
licenses.
 The function of IC are as follows:
1. Promulgation and implementation of
policies rules and regulations;
insurance, pre-need and HMO activities
as well as benevolent features.
2. Licensing of insurance, reinsurance
companies, its intermediaries, mutual
benefit
3. Conducting insurance agent’s
examinations; reinsurance treaties and
request for investments of insurance
companies
4. Examination/verification of the financial
condition and methods of doing
business entities engaged in insurance
business
5. Evaluation and preparation
6. Review of premium rates imposed by
life and non-life companies
7. Adjudication and complaints involving
loss
8. Review and approval of all life and non-
life policies
Philippine Securities and Exchange
Commission (SEC)
 - National government regulatory agency
to administer oversight on the corporate
sector
- It was created on October 26, 1936
under Commonwealth Act No. 83
Board of Investments (BOI)
- Lead agency to promote investment in
the country; generate local and foreign
investments in the country. It is an
attached an agency of the Department
of Trade and Industry; provides
advisory, actualization and post services
to the investors.
 BOI provides the following services to
encourage new investments:
- Providing information for the knowledge-
based research.
- Incentivize the investors
- Participate through policy advocacy
initiatives
Money Supply and Payment System
 Money supply is the availability of financial
resources for deployment in the financial
system; balanced with the monetary
demand of the market
 Money will take the form of the following:
- Cash (coins and bills)
- Demand deposits
- Other financial instruments
 For a monetary policy to be appropriate or
effective, the BSP must ensure the following
are present:
- Alignment to the target goals
- Access to information
- Responsiveness of the variable set
Regulation of Circulation of Notes
R. A. 7653 – sole power to issue currency within
the PHILIPPINES
- Faking of money results to 5-10 years
imprisonment
Chapter 4 of the BSP Circular No. 829, series of
2014 – must follow in depositing the amount
1. Classify cash into
 Clean and fit
 Dirty and unfit
2. Banks provide secured sealed bags and
label “unfit”
3. Packed in sealed packs/standard quantity of
(20) full bundles per denomination
 1000 notes = 10 equal straps per
bundle
 Each strap = 100 notes
4. Direct deposit to BSP or nearest BSP
branch
5. Coins are free from adhesive tapes
Purchasing Power practically based on the
consumer price index
 Inflation rate – the degree of movement of
the CPI from a period to another
 Inflation – is an indication of the market
risk; driver of financing costs.
 Philippine Statistics Authority – body that
determines the current inflation based on
the current movement of the commodities
set as index in the market.
 Core Inflation – used for most of the
economic estimates where it excludes in the
equation the movement of the commodities
or incidents with very volatile movement or
outliers.
 Head Inflation – captures the changes of
the cost of living based on the movement of
the basket of commodities as a whole.
RELATIONSHIP OF THE HEADLINE TO
CORE IS NOT CONSISTENT OVER THE
YEARS WHERE THE HEADLINE IS NOT
ALWAYS HIGHER THAN THE CORE
INFLATION.
Payment System
 Set of interrelated processes of settlement
of goods or services rendered in exchange
for a set of instruments
 Characteristics for an Effective Payment
System: amenable, convenient and
acceptable
 According to BSP, a payment system
normally requires the following:
 o Standard methods of transmitting 2. Effective Risk Management
payment
o Agreed means of settlement Risks of Payment Systems
o Common operating procedures
and rules 1. Credit Risk – ability of the payor to meet
1. Standard Methods of Transmitting the full value of its obligation
Payment 2. Liquidity Risk – timing difference on
o E-banking with other features posting may affect the visibility of the user
allows payment and money or a party
transfers. 3. Default Risk – payment will be made on
2. Agreed Means of Settlement time
- Exchange is contract between the 4. Technological Risk – system downtime
parties and system “bugs”
The normal means of settlement are as 5. Legal Risk – changes in rules and
follows: regulations
- Cash or cheque Payment
- Online Payment 3. Facilities Financial Market Transactions
- Automated Teller Machine - Facilitate the settlement of the financial
- Fund Transfer market transaction; validate the
- Credit Cards personality or credit rating of certain
- Debit Cards & Stored Value Cards instruments before completed the trade.
- Electronic Money 1. Facilitate opening an account
- Manual Money transfer 2. Facilitate purchase or sale of the
- Paybox System transactions
- Cash Deposit 3. Reduce human intervention provides
- Assignment objective approach to manage
3. Common Operating Procedures and financial market transactions
rules
Importance of Payment System
- Payment System essential facility to
enable the complete course of the
transaction
 Safe and Real Time
Transactions
 Effective risk management
 Facilities Financial Market
Transactions
1. Safe and Real Time Transactions
- Designed to safeguard the identity and
transaction as a whole especially on
electronic payment system facilities;
deemed safe given that the
characteristics are mutually agreed by
the parties including the manner of
payment which is convenient for both.
Real time – normally applicable for
electronic / internet-based system; can be
applicable to manual payment system.