Investment Management

Financial Market/Securities Market

Fundamentals
 Objectives
• Explain the fundamentals of
securities/financial market
• Identify the different marketable
securities/financial markets
• Compare and contrast the different fiancial
securities
 Activity 1: Key Terms
Market Futures
Financial Markets Securities Markets
Money Market Options
Transparent Foreign Exchange Market
Bond MarketStocks
Primary Market Stock Market
OTC Market Derivatives Market
Private Placement Warrants
 The Philippine Financial Markets
• Money Market

• Capital Market

• Foreign Exchange Market

• Derivatives Market
 Money Market
• The market for highly liquid, short term fixed
income securities

• T-Bills issued by BTr

• Short Term Commercial Papers issued by private
companies (SMC STCP)
• Bank Certificates of Deposits

• Most money market instruments are fixed-income debt instruments

 Bond Market
• T-Notes
• T-Bonds
• Municipal Bonds
• Mortgage Bonds
• Debentures
 Foreign Exchange Market
• Market dealing in foreign currencies
• Trading is done using the Philippine Dealing
System (PDS)
• PDS – is an organized secondary market where
the buying and selling clients of the Bankers
Association of the Philippines meet and where
transactions are mapped or recorded.
• Grey market – money changer stations
 Derivatives Market
• The market for instruments whose value are
derived from other underlying assets.
• Underlying assets – security prices, commodity
prices, interest rates, foreign exchange rates

• Classes: Futures, Options, Swaps, Forward

Rate Contracts
 Organization of Securities Market
Primary Market

• Corporate Equity and Debt Securities (Investment

banker – underwriter – underwriting spread)

• Government Securities (T-bills, t-notes, t-bonds –auction – stop-

out-yield bid)

• Municipal Bonds (issued in three ways: competitive bid*lowest

interest cost bidder, negotiated sale*contractual arrangements LGU-underwriter,
private placement*direct to investors)

• Mutual Funds (close-end IC * like ordinary corporations using

underwriters, open-end IC continuously sell daily thru: dealers, FA, salesmen)
 Secondary Market
• Have already been introduced in the
marketplace

• Stock Exchange – listed

• OTC Market – not listed, not consummated on
an exchange
 3 and 4 Markets
rd th

• 3rd – OTC listed on an exchange, not permitted

in the Philippines

• 4th – direct trading of securities between two

parties without broker intermediation
 Market Participants
• Broker – someone who buys and sells securities
for the account of others.
– Earns commission
Types:
1.Full-service brokers – research, market-making
activities
2.Discount brokers – merely facilitate the securities
transaction (low frills, low commissions)
3.Third Party brokers – low cost trading for large
institutions only
 Market Participants
• Dealer – buys and sells securities for his own
account

• Market Maker – provides liquidity to the

market by posting both bid and asked prices
for certain issues.
 Snapshot of the Philippine Money
Market
• T-Bills
• Small investment program bills
• Cash Management Bills
• Reverse Repurchase Agreements
• Short Term Commercial Papers
• Banker’s Acceptances
• ProNotes
• Time Deposits
 Issuers and Investors of MMI
• Issuers: Government, STCP-Private Co
• Investors: BSP, SSS, GSIS, HDMF
trust funds,
insurance companies
private pension funds
mutual funds
retail investors
 Snapshot of Philippine Capital
Market (Debt)
• 88% Public Debt
• Instruments:
– T-Bonds
– Fixed Rate Notes
– Dollar-Linked Notes
– SIP
– LT Commercial Papers
– Asset-Backed Securities
– Municipal Bonds
– Tier-2 Capital Notes of Banks
– Bonds offered by GOCCs
 Issuers and Investors of CM Debt
Securities
• Issuers: Government, GOCCs, Top Domestic
Companies
• Investors: BSP, Banking Sector, SSS, GSIS, HDMF
trust funds,
insurance companies
private pension funds
mutual funds
retail investors
 Snapshot of Philippine Capital
Market (Equity)
• 96.5% Common Stock
• Instruments:
– Common Stock A
– Common Stock B
– Preferred Stocks
– Convertible Shares
– Warrants
 ISSUERS OF THE PHILIPPINE
EQUITIES MARKET
Financial Issues – this sector includes banks and other
financial institutions.
Prime examples for banks are Banco de Oro and Bank of
the Philippine Islands.
Examples of other financial institutions include:
• ATR KimEng Financial Corporation
• Manulife
• Sun Life Financials, Inc.
Industrial Issues – this sector includes electricity,
power and water (or utilities); food, beverage and
tobacco; construction, infrastructure and allied
services; chemicals; and, diversified industrials.

Examples of the subsectors are:

•Manila Water Company, Inc.
•Pancake House, Inc.
•Republic Cement Corporation
•Euro-Med Laboratories Philippines, Inc.
•Splash Corporation
Holding Firm Issues – this sector includes
companies such as:

•Ayala Companies
•JG Summit Holdings, Inc.
•SM Investment Corporation
Property Issues – this sector includes land
developers, and real estate companies

Included in this sector are:

•Ayala Land, Inc.
•Filinvest Land, Inc.
•Robinson’s Land, Inc.
Services Issues – this sector includes media;
telecommunications; information technology;
transportation services; hotel and leisure; education;
and, diversified services.
Examples of the subsectors are:
•ABS-CBN Network
•GMA Network, Inc.
•Globe Telecom, Inc.
•PhilWeb Corporation
•Lorenzo Shipping Corporation
•Waterfront Philippines, Inc.
Mining and Oil Issues – mining includes companies
engaged in mineral exploration and extraction.

Philex Mining and Lepanto Consolidated are included in

this sector.

Oil sector, on the other hand, includes companies

engaged in oil exploration, extraction, and production.
Companies include Oriental Petroleum and PNOC
Exploration Corporation.
Preferred –
examples include PLDT 10% Cumulative Convertible
Preferred Series;

Ayala Corporation Preferred Class A and B share;

First Philippine Holdings Corporation-Preferred;

San Miguel Pure Foods Company, Inc. Preferred shares.

Warrants, Philippine Deposit Receipts, etc. –

ABS-CBN Holdings Corporation-Philippine Deposit

Receipts

GMA Holdings Inc-Philippine Deposit Receipts;

and, Megaworld Corporation-Warrants.

Small and Medium Enterprises –

Listed under this board are:

Information Capital Technology Ventures, Inc.
Makati Finance Corporation.
 Investors in the Philippines equities market
 During the 1980’s, individual domestic
participants are the majority investors in the
Philippine stock market.
 From 1990’s onwards, trust departments,
insurance firms, and other institutional
investors (both local and foreign) have been
active participants in the stock market.
 More recently, retail investors are investing in
the equities market via mutual funds, affording
them low initial investment outlay, asset
diversification, and professional management.
Market for Equities
The Philippines has a formal market for equities
transaction the Philippine Stock Exchange.

Trading at the Exchange is done in the Makati and

Tektite trading floors of the exchange from 9:00am up
to 12:10pm, Mondays to Fridays.

As of 31 December 2010, there are 150 local and 34

foreign trading participants (200 is the limit)
providing a two way quote for the active trading of
equities in the PSE.
 Snapshot of the Philippine Foreign
Exchange Market
Available Instruments
(Foreign exchange instruments)

Spot transactions – the most common foreign

exchange transactions are done in the spot market.

Transactions in the Philippine Dealing System are

based on prevailing foreign exchange rate, and vary
from time to time
Foreign exchange forward contracts –
a commitment to buy one currency (peso) against
another currency (US dollar) at a future date at a pre-
determined foreign exchange rate

Swap contracts –
like the forward contract, a swap is an agreement
between two or more parties, where the cash flows are
exchanged in two different currencies based on an
agreed notional amount and maturity
 Investors in the FOREX Market
Commercial banks in the Philippines are allowed to
engage in foreign exchange transactions. Most banks
trade for their clients (exporters and importers), and also
for their own banking requirements.

Mutual funds engage in dollar denominated bonds.

Trust departments, and institutional and retail investors

also participate in the fixed income and equities market
likewise access the foreign exchange market.
 Trading In The Forex Market
• Most transactions in foreign currency are done through the
Philippine Dealing System (PDS). The PDS provides a
platform for the buyers and the sellers (banks) to meet with
the provision of real time weighted average rate and volume
of trades for the peso.
• PDS trading starts at 9 a.m. and ends at 4 p.m. Banks can
trade directly among each other by posting their prices in
the PDS System or through money brokers like Prebon
Philippines.
• Transactions are done either directly or through money
brokers who are “mapped” in the PDS System. There are
also instances when the BSP defends the peso from
speculative attacks, either directly or indirectly.
• In the former, the BSP intervenes by buying or selling foreign
exchange in the market while in the latter, the BSP adjusts the
regulation on allowable transaction and amount an individual
may purchase.

• As earlier mentioned, there are also money changers who are

not participants in the PDS System. These outfits trade among
themselves for their foreign exchange requirements. The
money changers also have the option to sell their foreign
exchange to banks.

• Being non-members of the PDS System, the transactions of the

money changers are not captured or “mapped” in the foreign
exchange trading platform
Snapshot Of The Philippines Derivatives Market
• Sanctioned by the BSP

• Instruments:
– Forward Contracts (FOREX)
– Swap Contracts
– Options Contracts
 Issuers/investors of derivatives instruments
In 1995, the BSP started regulating derivative transactions in
the country. It regularly issues circulars and guidelines in
trading derivatives instruments. Moreover, the BSP sets
standards and gives accreditation to financial institutions for
derivative transaction.

The first three derivatives licenses were given to Citibank, Bank

of America, and Hongkong Shanghai Banking Corp. in 1996.
The first local bank granted a derivatives license was equitable
PCI Bank in 1997 (which has since been acquired by Banco De
Oro). Table 2.7 show the list of banks granted additional
derivatives authority under BSP Circular as of June 2010.
 Market for derivatives instruments
With the abolition of the MIFE, the country has no formal
derivatives market.

Derivatives in the country are allowed to be traded over-the-

counter (OTC).

Unlike an organized market such as the Philippines Stock

Exchange, an OTC market for derivatives instruments are done
through telephone transactions amongst licensed banks.

Licensed banks would either act as counter-party or look for a

counter-party who wants to make an exactly opposite position.
 Status Of And Observations On The Philippines
Capital Market
The Philippine capital market lacks the depth and liquidity
observed in the more developed capital markets in the world.
In general, the following are some observations on the
Philippine capital market:

EQUITY
•Trading concentrated on few issues
•Limited number of securities traded
•Law demand for securities
•Lack of financial information/regulation
•Limited institutional participation
•Weak corporate governance
DEBT

•Huge government debts

•Transparency in rate determination
•Limited rating appeal
•Importance of Bank