Asset Management PDF

BY: PROF. MC CRINA O. APODERADO ASSET MANAGEMENT SPECIAL TOPICS IN FINANCIAL MANAGEMENT BY: PROF. MC CRINA O. APODERADO QUESTION: What is the role of investment in country's economic development?  Asset management firms (also called money management or fund...

BY: PROF. MC CRINA O. APODERADO ASSET MANAGEMENT SPECIAL TOPICS IN FINANCIAL MANAGEMENT BY: PROF. MC CRINA O. APODERADO QUESTION: What is the role of investment in country's economic development?  Asset management firms (also called money management or fund management firms) manage the funds of individuals, business, endowments and foundations, and governments. An asset management company (AMC) is a firm that invests pooled funds from clients, putting the capital to work through different investments including stocks, bonds, real estate, master limited partnerships, and more. Along with high-net-worth individual portfolios, AMCs manage hedge funds and pension plans, and—to better serve smaller investors—create pooled structures such as mutual funds, index funds, or exchange-traded funds, which they can manage in a single centralized portfolio. The types of roles in Asset Management Asset management firms are made up of several key individuals who enable the business to attract, manage and act on behalf of clients.  FINANCIAL ANALYST These individuals play an integral role within asset management firms: researching investment options, conducting due diligence on potential opportunities and determining when best to buy and sell assets. ECONOMIST Keeping a watchful eye on the current market situation and outlook is essential for asset management companies. This is why many firms have a dedicated economist. ASSET MANAGERS Armed with insights from financial analysts and economists, asset managers have the final say in asset management decisions. They liaise with clients and ensure their best interests are cared for. QUIZ 1 1-4 ENUMERATE THE FOUR (4) TYPES OF ASSET MANAGERS 5-7 3 TYPES OF ROLES IN ASSET MANAGEMENT 8-10 LIST DOWN 3 FILIPINO ECONOMISTS Course Code and Title : Special Topics in Financial Management Lesson Number : 3-4 Topic : Anti Money Laundering (AML) Professor : Jusffer Alexander De Leon, LPT, MBM, DBA* Soledad Escritor, MBA, MPA, Juris Doctor (J.D) Romualdo Del Agua, MBA INTRODUCTION: What Is Anti Money Laundering (AML)? Anti-money laundering (AML) refers to the laws, regulations and procedures intended to prevent criminals from disguising illegally obtained funds as legitimate income. Though anti-money laundering laws cover a limited range of transactions and criminal behavior, their implications are far-reaching. For example, AML regulations require banks and other financial institutions that issue credit or accept customer deposits to follow rules that ensure they are not aiding money-laundering. LEARNING OBJECTIVES: 1. Understand the concept of Anti Money Laundering 2. Synthesize the importance of Anti Money Laundering 3. Illustrate the process on how the banks mitigate money laundering PRE-ASSESSMENT: Why it is so important to know the customer? LESSON: How Anti Money Laundering Works? AML laws and regulations target criminal activities including market manipulation, trade in illegal goods, corruption of public funds and tax evasion, as well as the methods used to conceal these crimes and the money derived from them. Criminals often "launder" money they obtain through illegal acts such as drug trafficking so the funds cannot be easily traced to them. One common technique is to run the money through a legitimate cash-based business owned by the criminal organization or its confederates. The supposedly legitimate business deposits the money, which the criminals can then withdraw. Money launderers may also sneak cash into foreign countries to deposit, deposit cash in smaller increments to avoid arousing suspicion, or use illicit cash to buy other cash instruments. Launderers will sometimes invest the money, using dishonest brokers willing to ignore the rules in return for large commissions. One rule in place is the AML holding period, which requires deposits to remain in an account for a minimum of five trading days. This holding period is intended to help in anti-money laundering and risk management. AML Awareness: Three stages of money laundering Money laundering has one purpose: to turn the proceeds of crime into cash or property that looks legitimate and can be used without suspicion. Here are some of the most common ways this is achieved. There are usually two or three phases to the laundering: 1. Placement 2. Layering 3. Integration / Extraction Placement Cash businesses – adding the cash gained from crime to the legitimate takings. This works best in business with little or no variable costs, such as car parks, strip clubs, tanning studios, car washes, and casinos. False invoicing – putting through dummy invoices to match cash lodged, making it look like payment in settlement of the false invoice Smurfing – lodging small amounts of money below the AML reporting threshold to bank accounts or credit cards, then using these to pay expenses etc. Trusts and offshore companies – useful for hiding the identity of the real beneficial owners. Foreign bank accounts – physically taking small amounts of cash abroad, below the customs declaration threshold, lodging in foreign bank accounts, then sending back to the country of origin. Aborted transactions – funds are lodged with a lawyer or accountant to hold in their client account to settle a proposed transaction. After a short time, the transaction is aborted. Funds are repaid to the client from an unimpeachable source Layering Layering is essentially the use of placement and extraction over and over again, using varying amounts each time, to make tracing transactions as hard as possible. Integration / Extraction The final stage is getting the money out so it can be used without attracting attention from law enforcement or the tax authorities. In this regard, criminals are often content to pay payroll and other taxes to make the “washing” more legitimate and are often happy with a 50% “shrinkage” in the wash. Fake employees - a way of getting the money back out. Usually paid in cash and collected Loans - to directors or shareholders, which will never be repaid Dividends - paid to shareholders of companies controlled by criminals FIVE WAYS TO HELP COMBAT MONEY LAUNDERING 1. Improve Searches with Technology 2. Have Regular Cross-Communication 3. Use Data Analytics to Find Patterns 4. Standardize Your Systems 5. Structured Training Is Essential Know Your Customer (KYC) is a standard due diligence process used by investment firms i.e., wealth management, broker dealers, private lenders, commercial real estate investment, among others to assess investors they are conducting business with. Apart from being a legal and regulatory requirement, KYC is a good business practice as well to better understand investment objectives and suitability, and reduce risk from suspicious activities. So, what is KYC? In a nutshell, it is the process of identifying who your investors are and their wealth status, verifying the sources of the client's funds (if they are legitimate or not), and requiring detailed anti-money laundering (AML) information from the clients. Getting the detailed information about your customer protects both parties in a business transaction and relationship. KYC serves an important purpose for providing superior service, preventing liability, and avoiding association with money laundering, and types of fraud. The importance of KYC KYC is a standard requirement globally within the investment industry. It’s a process from industry regulatory bodies to protect all stakeholders within the industry and it’s in the best business interest of any investment firm or investor, especially if there is a lot of money at stake. In addition to the KYC process for new investors, it’s also a requirement to conduct KYC on repeat investors or “renew” the KYC profile on file at the firm. Maintaining accurate and updated records firmwide is critical. For companies If a business or issuer complies with KYC policies, they will reduce the financial risks of their business arrangements with particular clients. Knowing the source of a client’s income, gauging their capability of investing in your market, and obtaining their complete financial portfolio and background are important aspects of KYC requirements. Those checks can also be vital risk management strategies to avoid getting entangled in business relationships with potential clients who have participated in illegal activities. KYC procedures also help establish trust in a business relationship and give an organization insight into the nature of customer activities. On top of that, they are a crucial part of the onboarding process and can significantly improve the servicing and management of investors over the course of the relationship. For clients The importance of KYC may not be evident from the investor's point of view, however their own protection is the priority of regulators. These rigorous checks can be a burdensome process for the investor, however they create a secure and trustworthy environment to enable financial or investment activities with the company. Digital technology has allowed for a much smoother, streamlined onboarding experience, that transforms a process that used to take months into an intuitive experience that can be performed in minutes on any device. The technology behind protecting sensitive information has also evolved, with methods such as advanced authentication and encryption giving the client base confidence in every KYC procedure. Seamless KYC workflows will make your clients feel they are working with a legitimate company and more comfortable allocating funds to your firm or not. What is the KYC process? While the exact steps may differ based on KYC laws across different countries, most of the frameworks include the same elements. A KYC process usually consists of verifying the customer’s identity, investment suitability, and due diligence on various documentation such as proof of address and income. Customer identification A critical element to a successful KYC methodology is risk assessment, and it’s up to the individual organization to determine the exact KYC policy to counter any potential issues and ensure compliance. The minimum requirements for customer identification include the following information: Name Date of birth Address Identification number Tax Number Investment Experience Investment Preferences Income and Assets After gathering this information during onboarding, an organization must make sure to verify the identity of the account holder within a reasonable timeframe. This process can include documents, non-documentary methods (depending on information availability), as well as a combination of the two. KYC policies are decided based on the risk assessment strategy within an organization, with factors such as the type of account and services offered, the customer’s geographic location, the organization’s size and others playing a role. Application / Real Life example: CASE STUDY The Money Laundering Case of RCBC: Philippine Experience: The RCBC money-laundering investigation has evidently become a topic of conversation from New York to Singapore; besides major newspapers in both those cities (and elsewhere outside the Philippines). That should come as no surprise given the magnitude of the crime, but unfortunately not many people here seem to have grasped yet just how damaging this is to the country. The sad reality is that the all-too-typical way this scandal is being addressed only serves to camouflage the relatively simple, broad facts of the case, and almost certainly won’t lead to the swift, decisive solutions the country needs to implement to avoid becoming a financial pariah. Imagine how our country involved in one of the biggest bank robberies in the world that sometimes looks to be like in the movie. How $81 million or 3.8 billion was stolen from Bangladesh Central Bank account maintained at the US Federal Reserve Bank of New York was transfer electronically and the stolen money was transferred in several accounts at the RCBC and the rest was moved into different casinos account. It could be argued that casinos shouldn’t have been exempted from the anti-money laundering reporting provisions; Casinos are not really the issue, laundering money through a casino? That’s like money laundering 101, that’s probably the first lesson hey give at the money-laundering seminar. Basically the last step in the process—the real crime has already happened by the time the money reaches that stage, which makes finding a substitute path easier if the casino option isn’t available. GENERALIZATION: Anti Money Laundering (AML) seeks to deter criminals by making it harder for them to hide ill-gotten money. Criminals use money laundering to conceal their crimes and the money derived from them. AML regulations require financial institutions to monitor customers' transactions and report on suspicious financial activity. EVALUATION: What do you think is the role of the banking sector in combating money laundering? Using infographics, illustrate the process or ways how banks combat money laundering. REINFORCEMENT: Read the Republic Act 9160 or Anti-Money Laundering Act (AMLA). REFERENCES: https://www.icas.com/professional-resources/anti-money-laundering-resources/latest- developments/aml-awareness-three-stages-of-money-laundering Course Code and Title : Special Topics in Financial Management Lesson Number : 5-6 Topic : The Global Recession Professor : Jusffer Alexander De Leon,LPT, MBM, DBA* Romualdo Del Agua, MBA LEARNING OBJECTIVES: 1. Discuss the Global Recession and its causes. 2. Analyze how businesses respond to global recession. 3. Propose a solution through infographic on how businesses can cope up with the global recession. PRE-ASSESSMENT: Answer the question below with justification. Does the pandemic bring us to Global Recession? Why? INTRODUCTION: What Is a Global Recession? A global recession is an extended period of economic decline around the world. The International Monetary Fund (IMF) uses a broad set of criteria to identify global recessions, including a decrease in per-capita gross domestic product (GDP) worldwide. According to the IMF’s definition, this drop in global output must coincide with a weakening of other macroeconomic indicators, like trade, capital flows, and employment. LESSON: What Is a Global Recession? A global recession is an extended period of economic decline around the world. A global recession involves more or les synchronized recessions across many national economies, as trade relations and international financial systems transmit economic shocks and the impact of recession from one country to another. The International Monetary Fund (IMF) uses a broad set of criteria to identify global recessions, including a decrease in per capita gross domestic product (GDP) worldwide. According to the IMF’s definition, this drop in global output must coincide with a weakening of other macroeconomic indicators, such as trade, capital flows, and employment. The National Bureau of Economic Research (NBER) declares when we're in a recession. The nonprofit research group tracks the change in business cycles, including recessions. They determine when a recession starts by measuring a variety of indicators such as:  Decline in real GDP Decline in real income Rise in unemployment Stagnation of industrial production and retail sales Decline in consumer spending Fluctuations in just one of these factors aren't enough for the NBER to signal an alarm, which is why Shiskin's two-quarter system isn't the most accurate model. However, these factors are certainly intertwined. For example, if a rising percentage of the workforce finds themselves without jobs, consumer spending is sure to decrease. Recessions and the business cycle A business cycle tracks the up-and-down fluctuations natural to any capitalistic economies. Because the cycle traces the wide-ranging upward and downward comovements of economic indicators, it is often a focal point for monetary and fiscal policy as governments attempt to curtail the effects of these peaks and valleys. In fact, recessions are considered to be a normal part of the business cycle. According to the NBER, there have been 33 recessions in the United States since 1857.  Expansion: This phase represents a period of economic growth, also considered the "normal" phase of the business cycle. It is often characterized by an increase in employment and a swelling of consumer spending and demand, which leads to an increase in the production and cost of goods and services. Peak: The highest point of a business cycle that signifies when an economy has reached its crest of output. Here, there's nowhere to go but down, sending the economy into a contraction phase. This can happen for any number of reasons, either investors get too speculative and create an asset bubble or industrial production starts outpacing demand. This is commonly seen as the turning point into the contraction phase. Contraction: A period that is marked by a decline in economic activity often identified by a rise in unemployment as well as a bear market. Additionally, GDP growth falls under 2%. As growth contracts, the economy enters a recession. Trough: A peak is to an expansion what a trough is to a contraction. A trough marks the bottom of a business cycle's economic activity and marks the start of a new wave of expansion and a new business cycle. This is a turning point that's followed by a new wave of expansion. What causes a recession? Generally speaking, expansion and growth in an economy cannot last forever. A significant decline in economic activity is usually triggered by a complex, interconnected combination of factors, including: Economic shocks. An unpredictable event that causes widespread economic disruption, such as a natural disaster or a terrorist attack. The latest example is the brief recession that occurred as a reaction to the COVID-19 outbreak. Loss of consumer confidence. When consumers worry about the state of the economy, they slow their spending and save whatever money they can. Because close to 70% of GDP depends on consumer spending, the entire economy can drastically slow. High interest rates. High interest rates make it expensive for consumers to borrow money. This means that consumers are less likely to spend, especially on major purchases like houses or cars. Companies will also reduce their spending and growth plans because the cost of financing is too high. Deflation. The opposite of inflation is deflation. This is when product and asset prices fall because of a large drop in demand. As demand falls, so do prices as sellers try to attract buyers. Consumers see this downward trend and wait for those prices to fall, further reducing demand. The downward spiral reduces economic activity and increases unemployment, which causes an ongoing downward spiral or slow economic activity and greater unemployment. Asset bubbles. In an asset bubble, the prices of investments like tech stocks in the dot- com era or real estate before the Great Recession rise rapidly, far beyond their fundamentals. These high prices are supported only by artificially inflated demand, which eventually dissipates, and the bubble bursts. At this point, people lose money and confidence collapses. Consumers and companies cut down on spending and the economy goes into recession. GENERAL CAUSES OF RECESSIONS RECESSION IMPACTS ON LARGE BUSINESS Let's say an unnamed Fortune 1000 manufacturer is suffering from the effects of a recession. What happens to this firm will likely happen to other big businesses as the recession runs its course. As sales revenues and profits decline, the manufacturer will cut back on hiring new employees, or freeze hiring entirely. In an effort to cut costs and improve the bottom line, the manufacturer may stop buying new equipment, curtail research and development, and stop new product rollouts (a factor in the growth of revenue and market share). Expenditures for marketing and advertising may also be reduced. These cost-cutting efforts will impact other businesses, both big and small, which provide the goods and services used by the big manufacturer. THE WORLD ECONOMY TODAY Application: COVID-19 to Plunge Global Economy into Worst Recession since World War II WASHINGTON, June 8, 2020 — The swift and massive shock of the coronavirus pandemic and shutdown measures to contain it have plunged the global economy into a severe contraction. According to World Bank forecasts, the global economy will shrink by 5.2% this year.1 That would represent the deepest recession since the Second World War, with the largest fraction of economies experiencing declines in per capita output since 1870, the World Bank says in its June 2020 Global Economic Prospects. Economic activity among advanced economies is anticipated to shrink 7% in 2020 as domestic demand and supply, trade, and finance have been severely disrupted. Emerging market and developing economies (EMDEs) are expected to shrink by 2.5% this year, their first contraction as a group in at least sixty years. Per capita incomes are expected to decline by 3.6%, which will tip millions of people into extreme poverty this year. The blow is hitting hardest in countries where the pandemic has been the most severe and where there is heavy reliance on global trade, tourism, commodity exports, and external financing. While the magnitude of disruption will vary from region to region, all EMDEs have vulnerabilities that are magnified by external shocks. Moreover, interruptions in schooling and primary healthcare access are likely to have lasting impacts on human capital development. Read and analyze: Risk of Global Recession in 2023 Rises Amid Simultaneous Rate Hikes WASHINGTON, September 15, 2022—As central banks across the world simultaneously hike interest rates in response to inflation, the world may be edging toward a global recession in 2023 and a string of financial crises in emerging market and developing economies that would do them lasting harm, according to a comprehensive new study by the World Bank. Central banks around the world have been raising interest rates this year with a degree of synchronicity not seen over the past five decades—a trend that is likely to continue well into next year, according to the report. Yet the currently expected trajectory of interest-rate increases and other policy actions may not be sufficient to bring global inflation back down to levels seen before the pandemic. Investors expect central banks to raise global monetary-policy rates to almost 4 percent through 2023—an increase of more than 2 percentage points over their 2021 average. Unless supply disruptions and labor-market pressures subside, those interest-rate increases could leave the global core inflation rate (excluding energy) at about 5 percent in 2023—nearly double the five-year average before the pandemic, the study finds. To cut global inflation to a rate consistent with their targets, central banks may need to raise interest rates by an additional 2 percentage points, according to the report’s model. If this were accompanied by financial-market stress, global GDP growth would slow to 0.5 percent in 2023—a 0.4 percent contraction in per–capita terms that would meet the technical definition of a global recession. “Global growth is slowing sharply, with further slowing likely as more countries fall into recession. My deep concern is that these trends will persist, with long-lasting consequences that are devastating for people in emerging market and developing economies,” said World Bank Group President David Malpass. “To achieve low inflation rates, currency stability and faster growth, policymakers could shift their focus from reducing consumption to boosting production. Policies should seek to generate additional investment and improve productivity and capital allocation, which are critical for growth and poverty reduction.” The study highlights the unusually fraught circumstances under which central banks are fighting inflation today. Several historical indicators of global recessions are already flashing warnings. The global economy is now in its steepest slowdown following a post-recession recovery since 1970. Global consumer confidence has already suffered a much sharper decline than in the run-up to previous global recessions. The world’s three largest economies—the United States, China, and the euro area—have been slowing sharply. Under the circumstances, even a moderate hit to the global economy over the next year could tip it into recession. The study relies on insights from previous global recessions to analyze the recent evolution of economic activity and presents scenarios for 2022–24. A slowdown—such that the one now underway—typically calls for countercyclical policy to support activity. However, the threat of inflation and limited fiscal space are spurring policymakers in many countries to withdraw policy support even as the global economy slows sharply. The experience of the 1970s, the policy responses to the 1975 global recession, the subsequent period of stagflation, and the global recession of 1982 illustrate the risk of allowing inflation to remain elevated for long while growth is weak. The 1982 global recession coincided with the second-lowest growth rate in developing economies over the past five decades, second only to 2020. It triggered more than 40 debt crises] and was followed by a decade of lost growth in many developing economies. “Recent tightening of monetary and fiscal policies will likely prove helpful in reducing inflation,” said Ayhan Kose, the World Bank’s Acting Vice President for Equitable Growth, Finance, and Institutions. “But because they are highly synchronous across countries, they could be mutually compounding in tightening financial conditions and steepening the global growth slowdown. Policymakers in emerging market and developing economies need to stand ready to manage the potential spillovers from globally synchronous tightening of policies.” Central banks should persist in their efforts to control inflation—and it can be done without touching off a global recession, the study finds. But it will require concerted action by a variety of policymakers: Central banks must communicate policy decisions clearly while safeguarding their independence. This could help anchor inflation expectations and reduce the degree of tightening needed. In advanced economies, central banks should keep in mind the cross-border spillover effects of monetary tightening. In emerging market and developing economies, they should strengthen macroprudential regulations and build foreign-exchange reserves. Fiscal authorities will need to carefully calibrate the withdrawal of fiscal support measures while ensuring consistency with monetary-policy objectives. The fraction of countries tightening fiscal policies next year is expected to reach its highest level since the early 1990s. This could amplify the effects of monetary policy on growth. Policymakers should also put in place credible medium-term fiscal plans and provide targeted relief to vulnerable households.  Other economic policymakers will need to join in the fight against inflation— particularly by taking strong steps to boost global supply. These include: Easing labor-market constraints. Policy measures need to help increase labor- force participation and reduce price pressures. Labor-market policies can facilitate the reallocation of displaced workers. Boosting the global supply of commodities. Global coordination can go a long way in increasing food and energy supply. For energy commodities, policymakers should accelerate the transition to low–carbon energy sources and introduce measures to reduce energy consumption. Strengthening global trade networks. Policymakers should cooperate to alleviate global supply bottlenecks. They should support a rules-based international economic order, one that guards against the threat of protectionism and fragmentation that could further disrupt trade networks. REFERENCES: https://www.worldbank.org/en/news/press-release/2020/06/08/covid-19-to-plunge-global- economy-into-worst-recession-since-world-war-ii https://www.worldbank.org/en/news/press-release/2022/09/15/risk-of-global-recession-in-2023- rises-amid-simultaneous-rate-hikes https://www.businessinsider.com/personal-finance/what-is-a-recession Course Code and Title : Special Topics in Financial Management Lesson Number : 7-8 Topic : Classification of Financial Markets Professor : Jusffer Alexander De Leon, LPT, MBM, DBA* Romualdo Del Agua, MBA LEARNING OBJECTIVES: 1. Distinguish different classifications of financial markets. 2. Differentiate primary and secondary market. 3. Explain the Globalization of Financial Markets PRE-ASSESSMENT: Answer the question below with justification. How do you interpret the functions of the financial markets? INTRODUCTION: Financial Markets is a marketplace where creation and trading of financial assets including shares, bonds, debentures, commodities, etc take place is known as Financial Markets. Financial markets act as an intermediary between the fund seekers (generally businesses, government, etc.) and fund providers (generally investors, households, etc.). It mobilizes funds between them, helping in the allocation of the country’s limited resources. There are different ways of classifying financial markets. One way is to classify financial markets by the type of financial claim. The debt market is the financial market for fixed claims (debt instruments) and the equity market is the financial market for residual claims (equity instruments). 1. By: Nature of Claim Debt Market Debt market refers to the market where debt instruments such as debentures, bonds, etc. are traded between investors. Such instruments have fixed claims, i.e. their claim in the assets of the entity is restricted to a certain amount. These instruments generally carry a coupon rate, commonly known as interest, which remains fixed over a period of time. Equity Market In this market, equity instruments are traded, as the name suggests equity refers to the owner’s capital in the business and thus, have a residual claim, implying, whatever is left in the business after paying off the fixed liabilities belongs to the equity shareholders, irrespective of the face value of shares held by them While making an investment, the time period plays an important role as the amount of investment depends on the time horizon of the investment, the time period also affects the risk profile of an investment. An investment with a lower time period carried lower risk as compared to an investment with a higher time period. By: Maturity Claim 2. Money Market Money market is for short term funds, where the investors who intend to invest for not longer than a year enter into a transaction. This market deals with Monetary assets such as treasury bills, commercial paper, and certificates of deposits. The maturity period for all these instruments doesn’t exceed a year. Since these instruments have a low maturity period, they carry a lower risk and a reasonable rate of return for the investors, generally in the form of interest. Capital Market Capital market refers to the market where instruments with medium- and long-term maturity are traded. This is the market where the maximum interchange of money happens, it helps companies get access to money through equity capital, preference share capital, etc. and it also provides investors access to invest in the equity share capital of the company and be a party to the profits earned by the company. This market has two verticals: Primary Market – Primary Market refers to the market, where the company lists security for the first time or where the already listed company issues fresh security. This market involves the company and the shareholders to transact with each other. The amount paid by shareholders for the primary issue is received by the company. There are two major types of products for the primary market, viz. Initial Public Offer (IPO) or Further Public Offer (FPO). Secondary Market – Once a company gets the security listed, the security becomes available to be traded over the exchange between the investors. The market that facilitates such trading is known as the secondary market or the stock market. In other words, it is an organized market, where trading of securities takes place between investors. Investors could be individuals, merchant bankers, etc. Transactions of the secondary market don’t impact the cash flow position of the company, as such, as the receipts or payments for such exchanges are settled amongst investors, without the company being involved. 3. By Time of Delivery In addition to the above-discussed factors, such as time horizon, nature of the claim, etc, there is another factor that has distinguished the markets into two parts, i.e. timing of delivery of the security. This concept generally prevails in the secondary market or stock market. Based on the timing of delivery, there are two types of market: Cash Market In this market, transactions are settled in real-time and it requires the total amount of investment to be paid by the investors, either through their own funds or through borrowed capital, generally known as margin, which is allowed on the present holdings in the account. Futures Market In this market, the settlement or delivery of security or commodity takes place at a future date. Transactions in such markets are generally cash-settled instead of delivery settled. In order to trade in the futures market, the total amount of assets is not required to be paid, rather, a margin going up to a certain % of the asset amount is sufficient to trade in the asset. 4. By Organizational Structure Markets are also categorized based on the structure of the market, i.e. the manner in which transactions are conducted in the market. There are two types of market, based on organizational structure: Exchange-Traded Market Exchange-Traded Market is a centralized market, that works on pre-established and standardized procedures. In this market, the buyer and seller don’t know each other. Transactions are entered into with the help of intermediaries, who are required to ensure the settlement of the transactions between buyers and sellers. There are standard products that are traded in such a market, there cannot need specific or customized products. Over-the-Counter Market This market is decentralized, allowing customers to trade in customized products based on the requirement. In these cases, buyers and sellers interact with each other. Generally, Over-the- counter market transactions involve transactions for hedging of foreign currency exposure, exposure to commodities, etc. These transactions occur over-the-counter as different companies have different maturity dates for debt, which generally doesn’t coincide with the settlement dates of exchange-traded contracts. Over a period of time, financial markets have gained importance in fulfilling the capital requirements for companies and also providing investment avenues to the investors in the country. Financial markets provide transparent pricing, high liquidity, and investor protection, from frauds and malpractices. DIFFERENTIATE PRIMARY AND SECONDARY MARKET. Primary Market The primary market is where securities are created. It's in this market that firms sell (float) new stocks and bonds to the public for the first time. An initial public offering, or IPO, is an example of a primary market. These trades provide an opportunity for investors to buy securities from the bank that did the initial underwriting for a particular stock. An IPO occurs when a private company issues stock to the public for the first time. For example, company ABCWXYZ Inc. hires five underwriting firms to determine the financial details of its IPO. The underwriters detail that the issue price of the stock will be $15. Investors can then buy the IPO at this price directly from the issuing company. This is the first opportunity that investors have to contribute capital to a company through the purchase of its stock. A company's equity capital is comprised of the funds generated by the sale of stock on the primary market. A rights offering (issue) permits companies to raise additional equity through the primary market after already having securities enter the secondary market. Current investors are offered prorated rights based on the shares they currently own, and others can invest anew in newly minted shares. Other types of primary market offerings for stocks include private placement and preferential allotment. Private placement allows companies to sell directly to more significant investors such as hedge funds and banks without making shares publicly available. While preferential allotment offers shares to select investors (usually hedge funds, banks, and mutual funds) at a special price not available to the general public. Similarly, businesses and governments that want to generate debt capital can choose to issue new short- and long-term bonds on the primary market. New bonds are issued with coupon rates that correspond to the current interest rates at the time of issuance, which may be higher or lower than pre-existing bonds. The important thing to understand about the primary market is that securities are purchased directly from an issuer. Secondary Market For buying equities, the secondary market is commonly referred to as the "stock market." This includes the New York Stock Exchange (NYSE), Nasdaq, and all major exchanges around the world. The defining characteristic of the secondary market is that investors trade among themselves. That is, in the secondary market, investors trade previously issued securities without the issuing companies' involvement. For example, if you go to buy Amazon (AMZN) stock, you are dealing only with another investor who owns shares in Amazon. Amazon is not directly involved with the transaction. In the debt markets, while a bond is guaranteed to pay its owner the full par value at maturity, this date is often many years down the road. Instead, bondholders can sell bonds on the secondary market for a tidy profit if interest rates have decreased since the issuance of their bond, making it more valuable to other investors due to its relatively higher coupon rate. The secondary market can be further broken down into two specialized categories: Auction Market In the auction market, all individuals and institutions that want to trade securities congregate in one area and announce the prices at which they are willing to buy and sell. These are referred to as bid and ask prices. The idea is that an efficient market should prevail by bringing together all parties and having them publicly declare their prices. Thus, theoretically, the best price of a good need not be sought out because the convergence of buyers and sellers will cause mutually agreeable prices to emerge. The best example of an auction market is the New York Stock Exchange (NYSE). Dealer Market In contrast, a dealer market does not require parties to converge in a central location. Rather, participants in the market are joined through electronic networks. The dealers hold an inventory of security, then stand ready to buy or sell with market participants. These dealers earn profits through the spread between the prices at which they buy and sell securities. An example of a dealer market is the Nasdaq, in which the dealers, who are known as market makers, provide firm bid and ask prices at which they are willing to buy and sell a security. The theory is that competition between dealers will provide the best possible price for investors. Explain the Globalization of Financial Markets Globalization It refers to the integration of financial markets throughout the world into an international financial markets. Because of the globalization of financial markets, entities in any country seeking to raise funds need not be limited to their domestic financial market. The factors contributing to the integration of financial market include: 1. Deregulation or liberalization of markets and the activities of market participants in key financial centers of the world. 2. Technological advances for monitoring world markets, executing orders, and analyzing financial opportunities 3. Increase institutionalization of financial markets. Classification of Global Financial Markets Global Financial Markets Internal External Market Market Domestic Foreign Market Market Functions of Financial Market The functions of the financial market are explained with the help of points below: It facilitates mobilization of savings and puts it to the most productive uses. It helps in determining the price of the securities. The frequent interaction between investors helps in fixing the price of securities, on the basis of their demand and supply in the market. It provides liquidity to tradable assets, by facilitating the exchange, as the investors can readily sell their securities and convert assets into cash. It saves the time, money and efforts of the parties, as they don’t have to waste resources to find probable buyers or sellers of securities. Further, it reduces cost by providing valuable information, regarding the securities traded in the financial market. The financial market may or may not have a physical location, i.e. the exchange of asset between the parties can also take place over the internet or phone also. GENERALIZATION: In this chapter we explained classifications of financial markets: Nature of claim, Maturity of claim, Timing of delivery, Organizational structure. Differentiation of Primary and Secondary market was also explained clearly. The reason for Globalization of Financial Market was stated. REINFORCEMENT: Visit this page for more information https://www.investopedia.com/investing/primary-and-secondary- markets/ REFERENCES: https://www.wallstreetmojo.com/classification-of-financial-markets/  Liceria & Co. ANTI MONEY LAUNDERING SPECIAL TOPICS FOR FINANCE BY: PROF. MC CRINA O. APODERADO, MBA What is Anti Money Laundering (AML)? Anti-money laundering (AML) refers to the laws, regulations and procedures intended to prevent criminals from disguising illegally obtained funds as legitimate next slide income. Objectives 1. Understand the concept of Anti Money Laundering 2. Synthesize the importance of Anti Money Laundering 3. Illustrate the process on how the banks mitigate money laundering next slide  Pre-assessment Why it is so important to know the customer? next slide How Anti Money Laundering Works? AML laws and regulations target criminal activities including market manipulation, trade in illegal goods, corruption of public funds and tax evasion, as well as the methods used to conceal these crimes and the money derived from them. next slide How Anti Money Laundering Works? Criminals often "launder" money they obtain through illegal acts such as drug trafficking so the funds cannot be easily traced to them. next slide How Anti Money Laundering Works? Money launderers may also sneak cash into foreign countries to deposit, deposit cash in smaller increments to avoid arousing suspicion, or use illicit cash to buy other cash instruments. next slide How Anti Money Laundering Works? One rule in place is the AML holding period, which requires deposits to remain in an account for a minimum of five trading days. This holding period is intended to help in anti-money next slide laundering and risk management. Three stages of money laundering There are usually two or three phases to the laundering: 1. Placement 2. Layering 3. Integration / Extraction next slide  CASH BUSINESS FALSE INVOIVING SMURFING PLACEMENT TRUST & OFFSHORE COMPANIES FOREIGN BANK ACCOUNTS ABORTED TRANSACTIONS  CASH BUSINESS FALSE INVOICING SMURFING PLACEMENT TRUST & OFFSHORE COMPANIES FOREIGN BANK ACCOUNTS ABORTED TRANSACTIONS  CASH BUSINESS FALSE INVOICING SMURFING PLACEMENT TRUST & OFFSHORE COMPANIES FOREIGN BANK ACCOUNTS ABORTED TRANSACTIONS  CASH BUSINESS FALSE INVOICING SMURFING PLACEMENT TRUST & OFFSHORE COMPANIES FOREIGN BANK ACCOUNTS ABORTED TRANSACTIONS  CASH BUSINESS FALSE INVOICING SMURFING PLACEMENT TRUST & OFFSHORE COMPANIES FOREIGN BANK ACCOUNTS ABORTED TRANSACTIONS  CASH BUSINESS FALSE INVOICING SMURFING PLACEMENT TRUST & OFFSHORE COMPANIES FOREIGN BANK ACCOUNTS ABORTED TRANSACTIONS  CASH BUSINESS FALSE INVOICING SMURFING PLACEMENT TRUST & OFFSHORE COMPANIES FOREIGN BANK ACCOUNTS ABORTED TRANSACTIONS LAYERING Layering is essentially the use of placement and extraction over and over again, using varying amounts each time, to make tracing transactions as hard as possible. next slide  INTEGRATION/ EXTRACTION The final stage is getting the money out so it can be used without attracting attention from law enforcement or the tax authorities. In this regard, criminals are often content to pay payroll and other taxes to make the “washing” more legitimate and are often happy with a 50% “shrinkage” in the wash. next slide Integration/Extraction 1. Fake employees - a way of getting the money back out. Usually paid in cash and collected 2.Loans - to directors or shareholders, which will never be repaid 3.Dividends - paid to shareholders of companies controlled by criminals  1. Improve Searches with Technology WAYS TO 2. Have Regular Cross-Communication COMBAT 3. Use Data Analytics to Find Patterns MONEY LAUNDERING 4. Standardize Your Systems 5. Structured Training Is Essential  A standard due diligence process used by investment firms i.e., wealth management, broker dealers, private lenders, commercial real estate investment, among others to assess investors they are conducting business with. Summary Anti Money Laundering (AML) seeks to deter criminals by making it harder for them to hide ill-gotten money. Criminals use money laundering to conceal their crimes and the money derived from them. AML regulations require financial institutions to monitor customers' transactions and report on suspicious financial activity. Thank you.