Fin Mark Mod 2 PDF

COLLEGE OF COMMERCE BUSINESS ADMINISTRATION AND ENTREPRENEURSHIP MODULE 2 PACKET FM 312 – FINANCIAL MARKETS & INSTITUTIONS MODULE 2 OVERVIEW: Welcome to Module 2 – The Philippine Stock Exchange and the Bangko Sentral ng Pilipinas The module will let student...

COLLEGE OF COMMERCE BUSINESS ADMINISTRATION AND ENTREPRENEURSHIP MODULE 2 PACKET FM 312 – FINANCIAL MARKETS & INSTITUTIONS MODULE 2 OVERVIEW: Welcome to Module 2 – The Philippine Stock Exchange and the Bangko Sentral ng Pilipinas The module will let students appreciate the roles of the PSE and BSP in the country. Understanding how and why exchange rates and interest rates change will be discussed as well as the regulatory actions done by the aforementioned institutions. This module contains in-lesson activity/quiz/assignment. CONSULTATION HOURS: 11:30-12:00; 4:00-4:30 MTh 10:00-11:00 TF MODULE 2 LEARNING OBJECTIVES: By the end of this module, the students will be able to: 1. Familiarize the roles and functions of PSE and BSP. 2. Understand what foreign exchange and interest rates are. 3. Appreciate why financial institutions are regulated. COURSE CONTENT FOR MODULE 2: The Philippine Stock Exchange and the Bangko Sentral ng Pilipinas ACTIVITY DESCRIPTION TIME TO COMPLETE Lecture discussion The Philippine Stock Exchange, Inc. 30 minutes Lecture discussion Bangko Sentral ng Pilipinas 1 hour Lecture discussion Exchange Rates 30 minutes Lecture discussion Interest Rates 30 minutes Activity ACTIVITY 2 30 minutes Quiz Summative quiz for module 1 30 minutes Deadline for module 2 output: 21 November 2020, at strictly 5:00 in the afternoon 2024-2025 Module Packets for AE 18 (Financial Markets) | College of Commerce | University of San Agustin, Iloilo City, 5000, Philippines Page 8 of 8  COLLEGE OF COMMERCE BUSINESS ADMINISTRATION AND ENTREPRENEURSHIP LECTURE DISCUSSIONS Module 2 – The Philippine Stock Exchange and the Bangko Sentral ng Pilipinas  The Philippine Stock Exchange, Inc. 1. What is the Philippine Stock Exchange, Inc.? The Philippine Stock Exchange, Inc. (PSE or Exchange) is a private non-profit and non-stock organization created to provide and maintain a fair, efficient, transparent and orderly market for the purchase and sale of securities such as stocks, warrants, bonds, options and others. 2. What is the role of the PSE? The PSE bring together companies which aim to raise capital through the issue of new securities. Through the listing of their share in the stock exchange, companies can have easier access to funds. Raising new capital through an additional public offering is easier and less expensive when the company is already listed in the Exchange. Therefore, the PSE plays a vital role in the financing of productive enterprises that use the funds for growth and expansion of new jobs. It is therefore essential to the growth of the Philippine economy. Furthermore, the PSE facilitates the selling and buying of the issued stocks and warrants. It provides a suitable market for the trading of securities to individuals and organizations seeking to invest their saving or excess funds through the purchase of securities. Apart from these functions, the PSE has committed itself to (a) protecting the interest of the investing public; and (b) developing and maintaining an efficient, fair, orderly and transparent market. Efficient. This means that orders are executed and transactions are settled in the fastest possible way. Some reforms have been instituted or are being carried out by the PSE to make the market more efficient, such as: · Installation of fully automated trading system; · Installation of computer trading terminals in cities outside Metro Manila to encourage the entry of provincial investors; and creation of a central cleaning and depository system to mobilized stock certificates and allow transfer of shares and funds by book entry. 2024-2025 Module Packets for AE 18 (Financial Markets) | College of Commerce | University of San Agustin, Iloilo City, 5000, Philippines Page 9 of 9  COLLEGE OF COMMERCE BUSINESS ADMINISTRATION AND ENTREPRENEURSHIP Fair. This means that the PSE assures that no investor will have an undue advantage over another, market player in trading by manipulating prices and engaging into insider trading. Insider trading is the act of buying or selling a particular stock based on certain privileged information which is not available to the public. As such it is considered as illegal and prohibited by the PSE. Market Transparency. Transparency proceeds from the assumption that the investor can only make informed and intelligent information about the particular sock he wants to buy. The PSE requires listed companies to disclose timely, complete and accurate material information to the Exchange and the public on a regular basis. Such information would include stock price information, corporate conditions and developments which tend to affect stock prices like dividend, mergers and joint ventures, and the like. 3. How did the PSE begin? The Philippine Stock Exchange began 70 years ago, on August 8, 1927. Five Manila based businessmen, namely W. Eric Little, Gordon W. Mackay, John J. Russell, Frank W. Wakefield and W.P.G. Elliot felt that increasing trading activity would stimulate the business atmosphere. They got together, put their plan into action and founded the Manila Stock Exchange, the first Stock Exchange in the Philippines and one of the oldest in the Far East. It was originally located in downtown Manila, transferred in1970 to its own three-story building in Binondo, and then moved to Pasig in 1992. On May 27, 1963, the Makati Stock Exchange was organized by five other businessmen. These were Hermenegildo B. Reyes, Bernard Gaberman, Eduardo Ortigas, Aristeo Lat and Miguel Campos. It started it operations on November 16, 1965 and was located in Makati, then emerging center for finance. So, for about thirty years the Philippines had toe stock exchanges, the Manila Stock Exchange (MSE) and the Makati Stock Exchange (MKSE). Although the two exchanges remained as separate entities, they basically were trading the same listed issues. The existence of two stock exchanges in one country caused confusion among (prospective) investors because the two bourses had different policies, different members and, last but not the least, different stock prices for the same listed stocks. The idea to unite the two exchanges and have it managed by a professional group emerged and was attained when the Philippine Stock Exchange, Inc. was incorporated on July 14, 1992. To further consolidate logistics and to hasten the development of a more efficient capital market, the leaders of both bourses agreed to unify on December 23, 1993 under the PSE. 2024-2025 Module Packets for AE 18 (Financial Markets) | College of Commerce | University of San Agustin, Iloilo City, 5000, Philippines Page 10 of 10  COLLEGE OF COMMERCE BUSINESS ADMINISTRATION AND ENTREPRENEURSHIP On March 4, 1994 the Securities and Exchange Commission granted the Philippine Stock Exchange, Inc. its license to operate as a securities exchange in the country stating that “a unified Stock Exchange is vital in developing a strong capital market and a sustainable economic growth.” It simultaneously canceled the licenses of the MSE and the MKSE. The Philippine Stock Exchange is currently the only organized exchange in the Philippines licensed for trading stocks and warrants. 4. How is the PSE managed? One of the non-broker members heads the Exchange, appointed by the Board as the President and Chief Executive Officer (CEO). The President, along with the professional management of the PSE, executes the policy determinations of the Board and ensures that the Exchange is operating efficiently. It carries out for the members, listed companies and exchange system to ensure that stock market operation in the Philippines is kept within the standards of fairness, transparency, professionalism, trust and integrity. Additionally, it sets the rules and regulations of the Exchange, monitors its implementation and ensures that the investing public is given protection in the transaction of their investments. The Exchange also ensures that all legal requirements under the Corporation Code and the Revised Securities Act are met. 5. How is the PSE organized? The PSE”S organizational structure holds five (5) groups, namely: Listings & Disclosure Group, Compliance & Surveillance Group, Operations/Automated Trading Group, Finance and Investment Group and Business Development & Information Group along with the Office of the General Counsel, Membership Department and Human Resources Management Department, which reports directly to the Office of the President.  BSP: OVERVIEW OF FUNCTIONS AND OPERATIONS In the Philippines, the banking sector is pretty wide and many banking and non-banking institutions offer a whole gamut of services. There are 36 commercial banks, 492 rural banks, 57 thrift banks, 40 credit unions, and around 6000 plus non-banking institutions in the Philippines.To control and direct these banks, the Bangko Sentral ng Philipinas was established. In the month of July 1993, this central authority was founded. It was created as per the Philippine Constitution, 1987 and also as per the New Central Bank Act, 1993. The Bangko Sentral ng Philipinas was established to regulate all the banks and also help these banks informing the right policies. 2024-2025 Module Packets for AE 18 (Financial Markets) | College of Commerce | University of San Agustin, Iloilo City, 5000, Philippines Page 11 of 11  COLLEGE OF COMMERCE BUSINESS ADMINISTRATION AND ENTREPRENEURSHIP As per Moody’s Analytics, the Philippines’ banking sector is looking quite positive. The most important factor for which Moody’s Analytics has been very positive about the banking sector of the Philippines is the way the central bank of Philippines has curbed the effect of inflation over the years. The Bangko Sentral ng Pilipinas (BSP) is the central bank (bank of all banks) of the Republic of the Philippines. It was established on 3 July 1993 pursuant to the provisions of the 1987 Philippine Constitution and the New Central Bank Act of 1993. OBJECTIVES The BSP’s primary objective is to maintain price stability conducive to a balanced and sustainable economic growth. The BSP also aims to promote and preserve monetary stability and the convertibility of the national currency. RESPONSIBILITIES The BSP provides policy directions in the areas of money, banking and credit. It supervises operations of banks and exercises regulatory powers over non-bank financial institutions with quasi-banking functions. Under the New Central Bank Act, the BSP performs the following functions, all of which relate to its status as the Republic’s central monetary authority. Liquidity Management. The BSP formulates and implements monetary policy aimed at influencing money supply consistent with its primary objective to maintain price stability. Currency issue. The BSP has the exclusive power to issue the national currency. All notes and coins issued by the BSP are fully guaranteed by the Government and are considered legal tender for all private and public debts. Lender of last resort. The BSP extends discounts, loans and advances to banking institutions for liquidity purposes. Financial Supervision. The BSP supervises banks and exercises regulatory powers over non- bank institutions performing quasi-banking functions. Management of foreign currency reserves. The BSP seeks to maintain sufficient international reserves to meet any foreseeable net demands for foreign currencies in order to preserve the international stability and convertibility of the Philippine peso. Determination of exchange rate policy. The BSP determines the exchange rate policy of the Philippines. Currently, the BSP adheres to a market-oriented foreign exchange rate policy such that the role of Bangko Sentral is principally to ensure orderly conditions in the market. Other activities. The BSP functions as the banker, financial advisor and official depository of the Government, its political subdivisions and instrumentalities and government-owned and - 2024-2025 Module Packets for AE 18 (Financial Markets) | College of Commerce | University of San Agustin, Iloilo City, 5000, Philippines Page 12 of 12  COLLEGE OF COMMERCE BUSINESS ADMINISTRATION AND ENTREPRENEURSHIP controlled corporations.  EXCHANGE RATE How is the exchange rate defined? The exchange rate is the price of a unit of foreign currency in terms of the domestic currency. In the Philippines, for instance, the exchange rate is conventionally expressed as the value of one US dollar in peso equivalent. For example, US$1 = P50.00. In every exchange rate quotation, therefore, there are always two currencies involved. Why is the exchange rate important? The exchange rate is important for several reasons:  It serves as the basic link between the local and the overseas market for various goods, services and financial assets. Using the exchange rate, we are able to compare prices of goods, services, and assets quoted in different currencies.  Exchange rate movements can affect actual inflation as well as expectations about future price movements. Changes in the exchange rate tend to directly affect domestic prices of imported goods and services. A stronger peso lowers the peso prices of imported goods as well as import‐intensive services such as transport, thereby lowering the rate of inflation. For instance, an increase in the value of the peso from US$1:P50 to US$1:P40 will lower the price of a $1 per liter gasoline from P50.00 (P50 X $1) to P40.00 (P40X $1).  Exchange rate movements can affect the country’s external sector through its impact on foreign trade. An appreciation of the peso, for instance, could lower the price competitiveness of our exports versus the products of those competitor countries whose currencies have not changed in value.  The exchange rate affects the cost of servicing (principal and interest payments) on the country’s foreign debt. A peso appreciation reduces the amount of pesos needed to buy foreign exchange to pay interest and maturing obligations. How is the exchange rate determined? Under the system of freely floating exchange rates, the value of the dollar in terms of the peso is determined in the interbank foreign exchange market (by the forces of supply and demand just like any commodity or service being sold in the market). Under a fixed exchange rate system, a par value rate is set between the peso and the dollar by the central bank. 2024-2025 Module Packets for AE 18 (Financial Markets) | College of Commerce | University of San Agustin, Iloilo City, 5000, Philippines Page 13 of 13  COLLEGE OF COMMERCE BUSINESS ADMINISTRATION AND ENTREPRENEURSHIP The par value may be adjusted from time to time. (Exchange Rate, March 2020, Department of Economic Research 2, Bangko Sentral ng Pilipinas) How does the exchange rate change? Under a floating exchange rate system, if more dollars are demanded than are offered, the price of the dollar in terms of the peso will tend to increase; that is, it will cost more pesos to acquire one dollar. If, on the other hand, more dollars are offered than are demanded, the value of the dollar in terms of the peso will tend to decrease; that is, it will cost less pesos to acquire one dollar. In contrast, under a fixed rate system, a change in the exchange rate is effected through an official announcement by the central bank. What is the country’s foreign exchange policy? At present, the country's exchange rate policy supports a freely floating exchange rate system whereby the Bangko Sentral ng Pilipinas (BSP) leaves the determination of the exchange rate to market forces. Under a market‐determined exchange rate framework, the BSP does not set the foreign exchange rate but instead allows the value of the peso to be determined by the supply of and demand for foreign exchange. Thus, the BSP’s participation in the foreign exchange market is limited to tempering sharp fluctuations in the exchange rate. On such occasions of excessive movements, the BSP enters the market mainly to maintain order and stability. When warranted, the BSP also stands ready to provide some liquidity and ensure that legitimate demands for foreign currency are satisfied.  INTEREST RATES What are interest rates? Generally, interest rates are prices. These are the price paid for the use of money for a period of time and are expressed as a percentage of the total outstanding balance that is either fixed or variable. There are two ways by which interest rate can be defined: first, from the point of view of a borrower, it is the cost of borrowing money (borrowing rate); and second, from a lender’s point of view, it is the fee charged for lending money (lending rate). How are interest rates classified? 2024-2025 Module Packets for AE 18 (Financial Markets) | College of Commerce | University of San Agustin, Iloilo City, 5000, Philippines Page 14 of 14  COLLEGE OF COMMERCE BUSINESS ADMINISTRATION AND ENTREPRENEURSHIP The interest rates charged on borrowed funds are generally classified according to the tenor or the maturity period: short‐term (less than one year); medium‐term (more than one year but less than five years); and long‐term (more than five years). Interest rates differ, depending on the type of instruments (e.g., traditional deposit instruments like savings deposit, time deposit, and some demand or current accounts, and investment instruments like bonds, securities) and on the tenor of investment. What are real interest rates? Real interest rates are interest rates adjusted for the expected erosion of purchasing power resulting from inflation. Real interest rates are what matter to households’ consumption and firms’ investment decisions, which collectively constitute aggregate demand. Demand for goods and services cannot be directly controlled by nominal interest rate. Instead, demand is also affected by expected inflation. Being the main supplier of bank reserves, a central bank can only set the short‐run nominal policy rate, which serves as the benchmark for market interest rates. A central bank cannot set the real interest rates because it cannot set inflation expectations. One may therefore wonder how an adjustment in short‐run nominal interest rate can affect consumption and investment decisions, which are carried out over a longer horizon. The answer lies in the fact that central bank’s policy action can influence not only the market rates but also inflation expectations. Thus, by signaling its policy intent through nominal policy rate adjustment, the central bank can affect the real return on funds faced by households and firms. For example, a P1,000,000 investment with nominal 10 percent annual return will give the investor at the end of the year P1,100,000, i.e., 1,000,000(1+.10). With 5 percent annual inflation, the real value of the investment is P1,047,619, i.e., 1,100,000/(1+0.05). The real return is therefore 4.8 percent. This is given by r = (i‐π)/(1+π) (where r is real interest rate, i is nominal interest rate and π is inflation rate). At low rates of inflation, this can be approximated by r=i‐π. (Interest Rates, March 2020, Department of Economic Research/Department of Economic Statistics 2, Bangko Sentral ng Pilipinas) Can the BSP intervene so that banks will not charge very high lending rates? 2024-2025 Module Packets for AE 18 (Financial Markets) | College of Commerce | University of San Agustin, Iloilo City, 5000, Philippines Page 15 of 15  COLLEGE OF COMMERCE BUSINESS ADMINISTRATION AND ENTREPRENEURSHIP The BSP’s past experience with rate‐setting made apparent the limitations of an administratively fixed interest rate. For this reason, the BSP shifted to a market‐oriented interest rate policy in 1983. The re‐imposition of rate ceilings or limits on the spread between the T‐bill rate and lending rate will only introduce distortions in the credit market, including: a) the pricing of credit outside of the fundamental issue of risk; b) the exclusion of certain segments of the economy from the market; c) the need to also regulate other banking products and services; and d) the increased burden on bank supervision. After the Asian crisis, however, the Banker’s Association of the Philippines (BAP) decided to implement a gentleman’s agreement to maintain a cap on the spread of bank lending rate of up to a maximum of five (5) percent over the 91‐day T‐bill rate in the secondary market. A review of the spread between the average monthly bank lending rate charged by commercial banks (both high‐ and low‐end) and the 91‐day T‐bill rate showed that banks are generally in compliance with the 500‐basis point cap. Can the BSP set interest rate levels? Yes, by law, the BSP can effectively set interest rates. Under the Usury Law (Act No. 2655, as amended by P.D. 116), the Monetary Board can prescribe the maximum interest rates for loans made by banks, pawnshops, finance companies and similar credit institutions, and to change such rates whenever warranted by prevailing economic conditions. Moreover, the BSP charter (R.A. No. 7653) allows the Monetary Board to take appropriate remedial measures whenever abnormal movements in monetary aggregates, in credit or in prices endanger the stability of the Philippine economy. Nevertheless, since 1983, the BSP has followed a market‐oriented interest rate policy. (Interest Rates, March 2020, Department of Economic Research/Department of Economic Statistics 4, Bangko Sentral ng Pilipinas) What factors influence the rise and fall in interest rates? Interest rate movements in the Philippines are affected generally by the price level or inflation rate, fiscal policy stance, and intermediation cost which could impact the demand and supply for money. Inflation rate. The BSP’s policy direction to achieve its mandate of maintaining price stability has a marked influence on the interest rate level. When there is too much liquidity in the system, there is more pressure for inflation to rise. To curb inflationary pressures arising from excess liquidity in the system, the BSP will have to increase its key policy rates, i.e., overnight borrowing rate or reverse repurchase rate (RRP) and overnight lending rate or repurchase 2024-2025 Module Packets for AE 18 (Financial Markets) | College of Commerce | University of San Agustin, Iloilo City, 5000, Philippines Page 16 of 16  COLLEGE OF COMMERCE BUSINESS ADMINISTRATION AND ENTREPRENEURSHIP rate (RP). By increasing its key policy rates, the BSP is sending a signal to the market that the general level of interest rates will be on an uptrend. In mirroring the movement of the BSP’s policy rates, the benchmark 91‐day T‐bill rate also sets the direction for other rates, specifically, bank lending rates. Fiscal policy stance. The fiscal policy stance may also influence the direction of interest rates. A government that incurs a fiscal deficit needs to finance its existing budgetary requirements by borrowing from the domestic market or from abroad. The higher is the fiscal deficit, the stronger the demand to borrow to finance the gap. This exerts upward pressure on domestic interest rates, particularly if the government borrows from a relatively less liquid domestic market. Intermediation cost. Financial institutions incur costs in extending their services. Interest rates will tend to be high when intermediation cost is high. Included in the intermediation costs are administrative costs and the BSP’s reserve requirements. Other factors that could influence the interest rates include the maturity period of the financial instrument and the perception of risks associated with the instrument. Those with longer‐term maturity and with higher probability of incurring loss carry higher interest rates. The lack of intermediation could also affect interest rate movement. For instance, with their larger holdings of non‐performing assets (NPAs), banks are more cautious in their lending activities. This would tend to induce an increase in interest rate. 2024-2025 Module Packets for AE 18 (Financial Markets) | College of Commerce | University of San Agustin, Iloilo City, 5000, Philippines Page 17 of 17