CHAPTER ONE

Overview of Financial Markets

Financial markets refer broadly to any marketplace where securities
trading occurs, including the stock market, bond market, forex market,
and derivatives market. Financial markets are vital to the smooth
operation of capitalist economies.

It can also define as an organized forums in which the suppliers and

users of various types of funds can make transactions directly.

Financial markets exist for several reasons, but the most fundamental
function is to allow for the efficient allocation of capital and assets
in a financial economy. By allowing a free market for the flow of
capital, financial obligations, and money, the financial markets make
the global economy run more smoothly while allowing investors to
participate in capital gains over time.

Types of Financial Markets

1. Money Market - Typically, the money markets trade in products with

highly liquid short-term maturities (less than one year) and are
characterized by a high degree of safety and a relatively lower
interest return than other markets.
2. Capital Market – a financial market in which long-term debt (over a
year) or equity-backed securities are bought and sold.
3. Over the Counter Market or OTC Market - is a decentralized market—
meaning it does not have physical locations, and trading is conducted
electronically—in which market participants trade securities directly
(meaning without a broker). While OTC markets may handle trading in
certain stocks (e.g., smaller or riskier companies that do not meet
the listing criteria of exchanges), most stock trading is done via
exchanges. OTC market is a type of secondary market also referred to
as a Dealer Market.
4. Foreign Exchange Market or Forex Market – facilitate the trading of
foreign exchange. It includes all aspects of buying, selling and
exchanging at current or determined prices. The forex market is the
most liquid market in the world, as cash is the most liquid of
assets.
5. Interbank Market – a network of banks that trade currencies with
each other. The interbank market is “between banks” with each trade
representing an agreement between the banks to exchange the agreed
amounts of currency at the specified rate on a fixed date.
Alternately referred to as the cash market or spot market.

INTRODUCTION OF CAPITAL MARKET

Capital market refer to the venue where savings and instruments are
channeled between the suppliers who have capital and those who are in
need of capital. The entities that have capital include retail and
institutional investors while those who seek capital are businesses,
government, and people.
Capital markets are composed of:
Primary Market – where new equity stock and bonds issues are sold to
investors.
Secondary Market – which trade existing securities.
The most common capital markets are the stock market and the bond
Market.
Stock Market – refer to the market where regular activities of buying,
selling and issuance of shares of publicly held companies take place.
Bond Market – is the market for the trading and issuance of debt
securities.
Capital market seek to improve transactional efficiencies. These markets
bring those who hold capital and those seeking capital together and
provide a place where entities can exchange securities.

UNDERSTANDING CAPITAL MARKET

The term “capital market” broadly defines the place where various
entities trade different financial instruments. This venue may include
the stock market, bond market and the currency and foreign exchange
markets.
Most markets are concentrated in major financial centers including New
York, London, Singapore and Hongkong. In the Philippines we have
Philippine Stock Exchange and financial institutions.

Suppliers and Users of Fund

Capital markets are composed of the suppliers and the users of funds.
Suppliers include households and institutions serving them such as
pension fund, life insurance companies, charitable foundation and non-
financial companies that generate cash beyond their needs.
Users of funds include home and motor vehicle purchasers, non-financial
companies and government financing infrastructure investment and
operating expenses.
Capital markets are used to sell financial products such as equities and
debt securities.
Equities are stocks, which are ownership shares in a company. Debt
Securities such as bonds are interest-bearing IOUs.
Capital Markets are crucial part of a functioning modern economy because
they move money from people who have it to those who need it for
productive use.

Roles of the Capital Markets

 Investment and funding facilitation
  Economic empowerment by meeting capital needs
 Enhancing liquidity and flow of money in the economy
 Building strong foundation for foreign currency inflow
 Determining asset process through market forces: demand and supply
 A platform for settling transactions
 Prosperity through funding for innovation and sustainable
development
 Enhancement of capital decision making
 Capital appreciation and value creation for all stakeholders
 Transparency and information flow
Capital Markets Products
 Equity
 Bonds
 Commercial paper
 Loans stocks & preference shares
 Collective Investment Schemes (CISs)
 Real Estate Investment Trusts (REITs)
 Asset Backed Securities
 Derivative instruments
 Venture capital funds
 Private equity funds
 Exchange Traded Funds (EITFs)
 Depository Receipts (DRs)
 Islamic Finance
 Online Foreign Exchange trading
 Spot commodity contracts

Key Players in the Capital Markets

Primary Markets
In the primary market, there are four key players: corporations,
institutions, investment banks, and public accounting firms.
Institutions invest capital in corporations that seek to expand and grow
their businesses.
1. Corporations

In the capital markets, corporations behave as operating businesses that

require capital to grow and run their operations. These corporations can
vary in industry, size, and geographical location. Careers at
corporations that relate to the markets include corporate
development, investor relations, and financial planning and analysis
(FP&A).

Examples of publicly traded corporations:

 Alphabet
 Amazon
 Apple
 Exxon
  Toyota
2. Institutions (“Buy Side” Fund Managers)

Institutions consist of fund managers, institutional investors, and

retail investors. These investment managers provide capital to
corporations that need the money to grow and operate their businesses.
In return for their capital, corporations issue debt or equity to the
institutions in the forms of bond and shares, respectively. The exchange
of capital and debt or equity completes the cycle of the two key players
in the capital markets.

Examples of top “Buy Side” Firms:

 Bridgewater Associates
 Blackstone
 KKR
 The Carlyle Group
 Apollo Global Management
3. Investment Banks (“Sell Side”)

Acting as an intermediary, investment banks are hired to facilitate

deals between corporations and institutions. The job of investment banks
is to connect institutional investors with corporionss, based on risk
and return expectations, and investment styles. Careers in investment
banking involve extensive financial modeling and valuation analysis.

Examples of top investment banks:

 Goldman Sachs
 JP Morgan
 Credit Suisse
 HSBC
 Morgan Stanley
 See a full list of investment banks
4. Public Accounting Firms

Depending on their divisions, public accounting firms can engage in

multiple roles in the primary market. These roles include financial
reporting, auditing financial statements, taxes, consulting on
accounting systems, M&A advisory, and capital raising. Therefore, public
accounting firms are usually hired by corporations for their accounting
and advisory services.

Examples of top public accounting firms:

 Deloitte
 PwC - PricewaterhouseCoopers
 Ernst & Young
 KPMG – Klyneld Peat Marwick Goerdeler
 Grant Thornton

Accounting firms in the Philippines

SGV & Co. (SyCip Gorres Velayo & Co. – the leading and largest
professional services firm in the Philippines that provides assurance,
consulting, tax, strategy and transactions services. A member of Ernst &
Young.

Punongbayan & Araullo – one of the top accounting firms in the

Philippines. A member of Grant Thornton.

Reyes Tacandong & Co. (RT&Co.) – leading Filipino accounting firm that
provides audit, tax, advisory, due diligence.

Key Players in the Secondary Market

Unlike the primary market, where there is an initial issuance of debt or

equity in exchange for capital, the secondary market allows for the sale
and trade of issued bonds and shares. The secondary market allows
players to enter and exit securities easily, making the market liquid.

1. Buyers and Sellers

In the secondary market, fund managers or any investors who wish to

purchase securities or debts will have to locate a seller. Transactions
are facilitated through a central marketplace, including a stock
exchange or over the counter (OTC).

2. Investment Banks

While investment banks facilitate the issuance of bonds and shares in

the primary market, they expedite the sales and trading of issued debts
and equities between buyers and sellers in the secondary market.

Investment banks provide equity research coverage on each stock’s upside

potential, downside risk, and rationale to help buyers and sellers make
a judgment. Moreover, investment banks sell and trade securities on
behalf of the clients to maximize their profits.
CHAPTER TWO
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.

The Philippine Stock Exchange began 97 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 Makita 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.

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.

In 2018, the PSE moved its headquarters to Bonifacio Global City (BGC)
in Taguig. The fast-paced environment in the Taguig business district is
well-suited for the Exchange as it aims to fast track the introduction
of new products and services to boost investor participation and
liquidity in the Philippine stock market.
The Philippine Stock Exchange, Inc. (PSE) was incorporated on July 14,
1992 as a non-stock corporation with the primary objective of providing
and maintaining a convenient and suitable market for the exchange,
purchase and sale of all types of securities and other instruments. The
Company eventually became a stock corporation on August 3, 2001.
PSE managed by 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.

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.
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.

PSE Organizational Structure

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.

The functional responsibilities of each department are as follows:

Listings and Disclosure Group This group is composed of

the following departments: Listing Processing, Legal Advisory and
Corporate Disclosure. It processes and evaluates listing applications,
conducts legal due diligence, and monitors compliance to continuing
listing requirements including disclosure of listed companies. It also
coordinates IPO (initial public offering) distribution.

Compliance and Surveillance Group This group acts as the police

of the Exchange. It is composed of the Compliance Audit Department,
Special Investigation Department, Market Surveillance Department and
Legal Section. Te group conducts legal audit and review aside from
auditing of member-brokers books and operations. It also monitors the
member’s compliance to set rules and regulations and enforces
appropriate sanctions to violators or erring member-brokers. It takes
responsibility in the operation of the surveillance activity, to
ascertain that there are no illegal postings and dealings made in any
of the issues listed in the Exchange.
Operations/Automated Trading Group Placed under this
group are the Computer Operations Unit, Systems Development Unit and
Systems Integration and technical Support Unit along with the Trading
& Settlement Department, Administration Department and PSE Plaza
Operations Department to function as one group. It is considered as
one of the most critical responsibility areas in the organization
since it handles the operation of the automated trading and clearing
and settlement activities for stock operations.

The Automated Trading Group examines and controls the monitoring,

logging and analysis of computer system resource utilization; the
maintenance of network connections of all workstations at the trading
floor and remote offices; managing of database of off-floor installed
sites; and the implementation and integration of the different
components of the trading and office systems.

On the other hand, the Trading and Settlement Department monitors

compliance of member-brokers to the clearing and settlement
requirements of the settlement banks and central depository. It
coordinates with these agencies and the custodian banks, both local
and foreign, any trading discrepancies, irregularities or settlement
concerns of the member-brokers and investing public.

The Administration Department and the PSE Plaza Operations Department

handles the building maintenance, security and administration as well
as the procurement management and utilization of supplies and
equipment including the daily administrative requirements of the
Exchange. It is also responsible for the daily dissemination of all
the listed companies’ corporate announcements along with the foreign
quotation report.

Finance and Investment Group The group is responsible

for the management of the company’s financial resources. It is
composed of the Accounting Department, Treasury Department, Payroll
and Budget Section and Investments Monitoring Section which handles
the maintenance of book of accounts, preparation of financial
statements and budget, management and placement of PSE funds,
monitoring of accounts receivables and billing of accounts.

Business Development and Information Group This group is

comprised of the following: Product Development Department, Market
Development Department, Research and Public Information Department,
Corporate communications Department, PSE Training Institute and PSE
Rule Book/Task Force Quality Unit.

The Product Development Department is in charge of the expansion,

development and packaging of domestic and foreign financial products,
equity-related securities, debt-related securities and other forms of
securities and derivatives. It coordinates with private businesses,
government agencies and associations in the overall development and
packaging of the securities, derivatives and trading facilities.

The Market Development Department handles the expansion, development

and monitoring of the investor base for both domestic and foreign
market on an individual and institutional level. It looks at the PSE
trading operation’s presence and positioning in the domestic,
regional, and international markets including the expansion and
development of market intermediation services and facilities covering
secondary, over-the-counter (OTC) and third markets.

The research and Public Information Department is composed of the

Research Services Sections, Information and Publications Section and
the Public Information and Assistance Center (PIAC). It
conceptualizes, processes, consolidates and handles multi-media
dissemination of statistical and analytical information and studies
related to the business requirements of members. It conducts research
and provides information support to the expansion and development of
the Exchange trading operations and its markets. It also maintains,
develops and disseminates information through manual or electronic
libraries and documentation. The department produces regular
publications – Weekly Report, Monthly Reports, and Fact Book – that
provide market users with a review of the market’s performance along
with historical and current data on stock trading activities and
listed companies. The Department also acts as the liaison of the
Exchange through the sharing of data and information with foreign
individuals, organizations and institutions.

Under the Research and Public Information Department is PIAC which

implement the Exchange’s continual public assistance program by
covering information promotion and facilitation along with complaints
mediation in the physical center at the principal offices of the PSE.
It also manages the operation of the PSE Souvenir Shop.

The Corporate Communications Department manages all forms of media and

public relation through press releases, information and educational
campaigns. It is in charge of managing and developing business
promotional and marketing exposure requirements of the PSE including
the production and dissemination of corporate internal bulletin and
other forms of information materials.

The PSE Training Institute is responsible for the development of

programs/curricula along with providing lectures, trainings and
seminars about securities market participants. Aside from in-house
seminars, it conducts road shows to investors in the provinces. The
Institute also provides logistics support to all training-related
activities of the departments in the PSE. In the future, the Institute
plans to conduct activities such as the Certified Securities
Representative (CSR) seminars and the technical and fundamental
analysis seminars in the coordination with other intuitions.

The PSE Rile Book/Task Force Quality is responsible for the

codification and the manualization of the PSE’s rules, guidelines,
procedures and other legislative materials coming from government
agencies, into a consolidated and comprehensive Manual of Rules of the
Exchange.

The PSE Rule Book consists of five (5) volumes which are: (1)
Corporate Rules, (2) Membership Rules, (3) Listing and Disclosure
Rules, (4) Trading and Settlement Rules, and (5) Compliance and
Surveillance Rules.

Membership Department This department manages, implements and

coordinates members’ requirements, planned activities and projects
with the end in view of assisting PSE management in the expansion,
consolidation and development of its membership. It also processes
membership applications and various corporate changes of member-
brokers for approval by the Membership Committee. It is in charge of
circular preparations concerning membership, and the monitoring of
financial statements of brokers and SEC licenses of its stock traders.
In coordination with the Membership Committee, it facilitates
memberships arbitration. Further, the Membership Department organizes
and prepares social activities for all members.

Human Resources Management Department This department, under the

Office of the President, handles employee career management,
administration of employee compensation and benefits, management of
corporate culture and organization development, implementation of the
company’s performance management system and formulation and
enforcement of company policies. To ensure continuing organization and
employee development, this department integrates the organizational
 structure/processes and workforce issues into the business equation
and evaluates group processes and dynamics to tailor-fit results with
a corporate staff training and management development program.

Office of the General Counsel The Office of the General

Counsel renders corporate legal services and serves as the primary
legal advisor to the Board of Governors, the President, the Chief
Operating Officer, the various departments, officers and employees of
the Exchange. It also coordinates with the external legal consultants
on matters referred by the exchange; represents the Exchange before
judicial and administrative/quasi-judicial bodies; and, attend
legislative and administrative hearings or meeting as well as draft
position papers and/or comments to pending legislation and
administrative issuances.

PSE location

The PSE has two trading centers located at the PSE Centre in Ortigas,
Pasig – where its executive officers are situated – and at the PSE
Plaza in Makati City.

The Securities and Exchange Commission (SEC) or the Commission is

the national government regulatory agency charged with
supervision over the corporate sector, the capital market
participants, and the securities and investment instruments
market, and the protection of the investing public. Created on
October 26, 1936 by Commonwealth Act (CA) 83 also known as The
Securities Act, the Commission was tasked to regulate the sale
and registration of securities, exchanges, brokers, dealers and
salesmen. Subsequent laws were enacted to encourage investments
and more active public participation in the affairs of private
corporations and enterprises, and to broaden the Commission’s
mandates. Recently enacted laws gave greater focus on the
Commission’s role to develop and regulate the corporate and
capital market toward good corporate governance, protection of
investors, widest participation of ownership and democratization
of wealth.
SEC is the registrar and overseer of the Philippine corporate
sector; it supervises more than 600,000 active corporations and
evaluates the financial statements (FS) filed by all corporations
registered with it. SEC also develops and regulates the capital
market, a crucial component of the Philippine financial system
and economy. As it carries out its mandate, SEC contributes
significantly to government revenues.
With the growing number of corporations and other forms of
associations that SEC supervises and monitors, and given the
evolving nature of transactions where the corporate vehicle is
being used to defraud the investing public, as well as the ever
dynamic character of the capital market, SEC must progressively
perform its critical role as the prudent registrar and supervisor
of the corporate sector and the independent guardian of the
capital market
Power and Functions

The Commission shall have the powers and functions provided by

the Securities Regulation Code, Presidential Decree No. 902-A, as
amended, the Corporation Code, the Investment Houses Law, the
Financing Company Act, and other existing laws.
Under Section 5 of the Securities Regulation Code, Rep. Act.
8799, the Commission shall have, among others, the following
powers and functions:
(a) Have jurisdiction and supervision over all corporations,
partnerships or associations who are the grantees of primary
franchises and/or a license or permit issued by the Government;
(b) Formulate policies and recommendations on issues concerning
the securities market, advise Congress and other government
agencies on all aspects of the securities market and propose
legislation and amendments thereto;
(c) Approve, reject, suspend, revoke or require amendments to
registration statements, and registration and licensing
applications;
(d) Regulate, investigate or supervise the activities of persons
to ensure compliance;
(e) Supervise, monitor, suspend or take over the activities of
exchanges, clearing agencies and other SROs;
(f) Impose sanctions for the violation of laws and the rules,
regulations and orders issued pursuant thereto;
(g) Prepare, approve, amend or repeal rules, regulations and
orders, and issue opinions and provide guidance on and supervise
compliance with such rules, regulations and orders;
(h) Enlist the aid and support of and/or deputize any and all
enforcement agencies of the Government, civil or military as well
as any private institution, corporation, firm, association or
person in the implementation of its powers and functions under
this Code;
(i) Issue cease and desist orders to prevent fraud or injury to
the investing public;
(j) Punish for contempt of the Commission, both direct and
indirect, in accordance with the pertinent provisions of and
penalties prescribed by the Rules of Court;
(k) Compel the officers of any registered corporation or
association to call meetings of stockholders or members thereof
under its supervision;
(l) Issue subpoena duces tecum and summon witnesses to appear in
any proceedings of the Commission and in appropriate cases, order
the examination, search and seizure of all documents, papers,
files and records, tax returns, and books of accounts of any
entity or person under investigation as may be necessary for the
proper disposition of the cases before it, subject to the
provisions of existing laws;
(m) Suspend, or revoke, after proper notice and hearing the
franchise or certificate of registration of corporations,
partnerships or associations, upon any of the grounds provided by
law; and
(n) Exercise such other powers as may be provided by law as well
as those which may be implied from, or which are necessary or
incidental to the carrying out of, the express powers granted the
Commission to achieve the objectives and purposes of these laws.
Under Section 5.2 of the Securities Regulation Code, the
Commission’s jurisdiction over all cases enumerated under Section
5 of PD 902-A has been transferred to the Courts of general
jurisdiction or the appropriate Regional Trial Court. The
Commission shall retain jurisdiction over pending cases involving
intra-corporate disputes submitted for final resolution which
should be resolved within one (1) year from the enactment of the
Code. The Commission shall retain jurisdiction over pending
suspension of payments/rehabilitation cases filed as of 30 June
2000 until finally disposed.
Considering that only Sections 2, 4, and 8 of PD 902-A, as
amended, have been expressly repealed by the Securities
Regulation Code, the Commission retains the powers enumerated in
Section 6 of said Decree, unless these are inconsistent with any
provision of the Code.

CORE VALUES
INTEGRITY
We are ethical, honest, fair, and sincere in our private and
public lives.
PROFESSIONALISM
We are capable and competent in performing our mandate, we excel
in our fields of expertise, and we possess high ethical
principles and standards which are essential in providing timely,
quality, and committed public service.
ACCOUNTABILITY
We are responsible for our actions and decisions.
TEAMWORK
We collaborate to achieve our common goals and tasks in a
seamless and efficient manner.
INDEPENDENCE
We act without fear or favor, and render sound judgment in the
performance of our duties and responsibilities.