Financial-Regulators-and-the-Central-Bank.pptx

Slide on financial markets

1. FINANCIAL REGULATION AND THE CENTRAL BANK CHAPTER 3

2. OUTLINE: FINANCIAL REGULATION REGULATORS OF FINANCIAL ACTIVITIES MONEY SUPPLY AND PAYMENT SYSTEM EFFECTIVE RISK MANAGEMENT

3. REGULATION Designed to set rules and guideline to be followed that is designed to ensure balance among the individuals, firms and/or citizens as the case may be. Also designed to reconcile conflicting interests. A process whereby the designated government authority provides oversight and establishes rules for firm in an industry ( Public Utility Research Center in the University of Florida).

4. REGULATION World bank sets regulatory measures to address certain risks and social factors: Systemic Risk – the probability of a firm to fail its objective that will result to ripple effect. Consumer Protection – a factor to consider that policies enforced assumes that effect to the consumers’ welfare. Efficiency Enhancement – a factor that is considered to ensure the dynamism and agility of the policy to adopt in a fast-changing environment. Social Objectives – alignment of the policy to social objectives.

5. REGULATION

6. FINANCIAL REGULATION A type of regulation whereby rules and standards were set to oversight the ability of the companies to establish and maintain appropriate level of capital to sustain its operation. It also includes setting controls over the market factors that will affect the financial sustainability of the firms and players in the industry.

7. REGULATION Some players or firms failed to survive even they comply with the regulation set. The reason being is that these firms respond to the following market drivers: Competitiveness Market Behavior Consistency Stability Market Drivers Regulated

8. Competitiveness It is the duty of the government to regulate competition in the financial sector. Financial sector has an important roles in shaping the overall economy of a country hence it is a must that this must be regulated. In the financial market, the following are regulated: Access to capital, credit and loan term offerings, support to providers of financing, management of business risk, transaction costs and tariffs.

9. Competitiveness To illustrate, Company A, a brokerage company, imposes 1% brokerage fee to its clients. Company B as a new player imposes a brokerage fee of 0.75% for every transaction it closes. Company C another player enter the market offering brokerage fee of 0.70% for every transaction. Company A kept its price policy.

10. Market Behavior Market behavior can be demonstrated on; (1) integrity of their activities; and (2) integrity on their representation. The government normally sets: Full disclosure of information Prohibition on insider trading Control of new players Setting minimum capital requirement Minimum governance rules

11. Consistency Consistency in the market is normally demonstrated to their information disclosure and policies. The firm must enable themselves to ensure that they provide sufficient information to their customers. Information symmetry is a plus to all customers/clients that enable them to make sound decision. Government role is to set standards to regulate and ensure that information provided in the market are fair, consistent and conservative. Most of the time the degree of risks assumed were based on the information made available.

12. Stability Market stability is an external and fatal factor to be considered by the fimrs in the financial market. The impact of financial risk is something that the regulatory environment should consider. The regulation must be able to protect the interest of the clients as well as the companies to enable their corporate sustainability. Systemic instability is a challenge or threat whereby it arises where a segment or firm was not able to meet its commitment because of their failure to address the risks of the market.

13. Regulators of Financial Activities Financial activities – activities that deals on funding certain transaction or expenditures. In financial markets, the financial activities are focused on trading of securities and financial instruments. Financial Activity Regulation – setting rules to set standards, control and order on the financial activities regardless of the source.

14. Regulators of Financial Activities Banko Sentral ng Pilipinas (BSP) Created under the New Central Bank Act of RA 7653 and an attached agency of the Department of Finance. BSP acts as the central monetary authority which will act as a corporate body that is responsible concerning money, banking and credit. It shall provide direction in these areas, it is also responsible for the supervision of financial institutions and exercise regulatory powers.

15. Functions of BSP: Liquidity Management The BSP formulates and issues monetary aimed at influencing money supply in order to maintain price stability. Currency Issue The sole responsibility to issue notes and coins representing the national security for the Philippines. All issuance made by the BSP are with sovereign guarantee and shall be considered legal tender in exchange for private and public debts.

16. Functions of BSP: Lender of last resort BSP acts as the provider of discounts, advances and financial support to financial institution for them to maintain their liquidity. Financial Supervision BSP regulatory supervises the financial institutions and is empowered to exercise regulatory powers over non-bank institutions conducting quasi-banking functions. Management of foreign currency reserves Manages the financial currency requirement of the Republic by ensuring sufficient international reserves will be made on time. This is to preserve the international stability and position of the Philippine Peso.

17. Functions of BSP: Determination of Exchange Rate Policy BSP sets the policy that will determine the rate of exchange of Philippine Peso over different currency. Currently, BSP subscribes to a market-oriented foreign rate policy hence the rate are dependent in the behavior of the market. Other activities as banker, financial advisor and official depository of the Government and its instrumentalities.

18. BSP shall be governed by the Monetary Board. The Monetary Board is composed of seven members. Chaired by the Governor of the BSP and composed of six members coming from: 1 member –member of the cabinet designated by the President of the republic; 5 member – shall be coming form the private sector ( 3 members shall serve for a term of 6 months while 2 will serve for three months). All members can only be re-appointed once.

19. BSP The governor acts as the Chief Executive Officer of the BSP. Four sectors/functions that supports the governor: Financial Supervision Sector – responsible mainly for the supervision and regulation of banks and other financial institutions under the scope of the BSP. Monetary and Economic Sector – aims to conduct the formulation of monetary policy, ensure its implementation and assess its effectiveness. Currency Management Sector – responsible in the production, distribution, disposal or retirement of currencies in the Philippines including security documents, commemorative medals and medallions. Corporate Services Group – which is the support group of the BSP that conducts the human capital management, financial services, information technology support and other corporate resource management.

20. Insurance Commission (IC) IC mandated by virtue of Executive Order No. 192 s. 2015 to ensure enforcement of the provisions of the Insurance Code or Republic Act 10607, i.e. to regulate and supervise the insurance, pre-need, and health maintenance organization industry. It is governed by Department of Finance that supervises and regulates the operations of life and non-life companies, mutual benefit associations, and trusts for charitable uses. IC issues licenses to insurance agents, general agents, resident agents, underwriters, brokers, adjusters and actuaries. It has also the authority ot suspend or revoke such licenses.

21. Functions of IC Promulgation and implementation of policies, rules and regulations governing the operations of entities engaged in insurance, pre-need, and HMO activities as well as benevolent features. Licensing of insurance, reinsurance companies, its intermediaries, mutual benefit associations, trusts for charitable uses, pre-need companies, pre-need intermediaries, and HMO companies. Conducting insurance agent's examinations, as well as processing of reinsurance treaties and request for investments of insurance companies.

22. Functions of IC Examination/verification of the financial condition and methods of doing business of entities engaged in insurance business, pre-need, mutual benefit associations, trusts for charitable uses, and HMO companies. Evaluation and preparation of statistical reports, studies, researches, annual reports, and position papers relative to insurance, pre-need matters, and HMO m a t t e r s. Review of premium rates imposed by life and non-life companies, mutual benefit associations; statistical reports of adjusters to determine compliance with established standards.

23. Functions of IC Adjudication of claims and complaints involving loss, damage or liability incurred by an insurer under any kind of policy or contract of insurance or suretyship; Review and approval of all life and non-life policies, pre-need, and HMO plans before sale to prospective clients.

24. Philippine Securities and Exchange Commission (SEC) The SEC is the national government regulatory agency to administer oversight on the corporate sector, capital market participants and securities and investment instrument and promote corporate governance over these. Created on October 26, 1936 under the Commonwealth Act No. 83.

25. Philippine Securities and Exchange Commission (SEC) In RA 8799 or the Securities Regulation Code, the responsibilities and scope of the SEC include the following: Have jurisdiction and supervision over all corporations, partnerships or associations who are the grantees of primary franchises and/or a license or permit issues by the government; 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;

26. Philippine Securities and Exchange Commission (SEC) Approve, reject, suspend, revoke or require amendments to registration statements, and registration and licensing applications; Regulate, investigate or supervise the activities of persons to ensure compliance; Supervise, monitor, suspend or take over the activities of exchanges, clearing agencies and other SROs; Impose sanctions for the violation of laws and the rules, regulations and orders issued pursuant thereto; 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;

27. Philippine Securities and Exchange Commission (SEC) 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, firms, association or person in the implementation of its powers and functions under this Code; Issue cease and desist orders to prevent fraud or injury to the investing public; Punish for contempt of the SEC, both direct and indirect, in accordance with the pertinent provisions of and penalties prescribed by the Rules of Court; Compel the officers of any registered corporation or association to call meetings of stockholders or members thereof under its supervision; 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;

28. Philippine Securities and Exchange Commission (SEC) 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 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 SEC to achieve the objectives and purposes of t h e s e laws.

29. Board of Investments (BOI) BOl is the lead agency to promote investment in country and thereby generate local and foreign investment in the country. It is an attached an agency of the Department of Trade and industry. The agency provides advisory, actualization and post services to the investors.

30. Board of Investments (BOI) BOl provides the following services to encourage new investments: Providing information for the knowledge-based research. Incentivize the investors through the provision of tax holidays, tax and duty exemption of imported capital equipment etc. Participate through policy advocacy initiatives to ensure that the laws and regulation are investment friendly.

31. MONEY SUPPLY AND PAYMENT SYSTEM Money supply is the availability of financial resources for deployment in the financial system. It is making the money available for use or for trade or investment. This is, of course, balanced with the monetary demand of the market.

32. MONEY SUPPLY AND PAYMENT SYSTEM Money will take the form of the following: Cash (coins and bills) Demand deposits Other financial instruments

33. MONEY SUPPLY AND PAYMENT SYSTEM Money is expected to be regulated somehow to enable the sovereign to have control to its economy. As mentioned in the earlier chapters, money is an essential factor in the financial system. In order to do this, monetary policies must be enforced with the objective of promoting sustainable output and employment at its peak and stabilize prices. For a monetary policy to be appropriate or effective, the BSP must ensure the following are present: Alignment to the target goals Access to information Responsiveness of the variable set

34. Regulation of Circulation of Notes The central bank, is authorized by the republic under RA 7653 that they have the sole power to issue currency, within the territory of the Philippines. Violators will be facing with imprisonment of no less than five years but not more than 10 years for any unauthorized issuance or reproduction of any document or object for general monetary circulation.

35. Regulation of Circulation of Notes Chapter 4 of BSP circular No. 829 series of 2014 amending consolidated rules and regulations on currency notes and coins in the Philippines for the banks, including their branches, must observe the following for the deposit of their notes: Banks shall classify their cash deposits and sorted by series and by domination. They should classify it according to: Clean or fit notes Dirty or unfit notes

36. Regulation of Circulation of Notes Banks shall provide securely sealed bags or containers separately for the clear or fit notes, and for the dirty or unfit notes accompanied by a deposit slip for each type/category. It must be labeled “UNFIT”. Handling of deposits, bank’s deposits shall be packed in sealed bags or containers in standard quantity of twenty full bundles per denomination. Each bundle containing 1,000 notes in 10 equal straps. Each strap containing 100 notes. Banks located in the provinces may make direct deposits of currency notes, duly identified and sorted, with the nearest BSP regional office/branch. For those without regional offices available, they may arrange it with their respective head offices to be shipped to BSP Quezon City. The cost shall be borne by the bank concerned.

37. Regulation of Circulation of Notes Banks shall incorporate measures on the implementation thereof in their compliance program. For the deposit of their coins, the following were observed: Coins shall be free from adhesive tapes Coins shall be sorted into fit, unfit or mutilated per denomination and per series.

38. Regulation of Circulation of Notes Each bag of coins shall contain the following standard number of pieces and amount per denomination: Denomination Pieces per Bag Amount per Bag Php 10.00 1,200 Php 12,000 Php 5.00 1,500 Php 7,500 Php 1.00 2,000 Php 2,000 Php 0.25 3,000 Php750 Php 0.10 4,500 Php 450 Php 0.05 5,000 Php 250 Php 0.01 5,000 Php 50

39. Regulation of Circulation of Notes Auditors may consider as part of their procedures to validate the authenticity of the currencies, as described by the BSP in its circulars as currency note shall be considered unfit for circulation when: It contains heavy crinkles which break the fiber of the paper and indicate that disintegration of the note has begun; It is badly soiled/contaminated and/or with writings even if it has proper life or sizing; or It presents a limp or rag like appearance and/or it cannot sustain its upright position when held at the mid-portion of one of the shorter borders.

40. Regulation of Circulation of Notes For currency coin shall be considered unfit for circulation when: it is bent or twisted out of shape or defaced or show signs of corrosion, but its genuineness and/or denomination can still be readily and clearly determined/identified; or It has bee considerably reduced in weight by natural abrasions/wear and tear. These currencies which are no longer allowed to be used for circulation but may be presented for exchange to or deposited with any bank.

41. The reason that the BSP will not accept these currencies are as follows: The notes and coins can no longer be identified; The coins have indication of filing, clipping or perforation; or Notes which are split edgewise resulting in the loss of the whole of or part of, either the face or back portion of the banknote paper; or Notes where Embedded Security Thread or Widowed Security Thread placed thereon is completely lost except when the damage appears to be cause by wear and tear, accidental burning, action of water or chemical or bites of insects etc.

42. Purchasing Power Based on consumer price index. Consumer Price Index (CPI) is the weighted average value of the basket of prices of all commodities representing the market. The commodity group on CPI are: food and non-alcoholic beverages; alcoholic beverages and tobacco; clothing and footwear; housing, utilities and other fuels; furnishings and maintenance costs; health; transport; communication; recreation and culture; education; restaurant and miscellaneous.

43. Purchasing Power The degree of movement of the CPI from a period to another is called the inflation rate.

44. Example. The CPI for years 1 and 2 are as follows: Year 1 = 112; Year 2= 116. The inflation is computed as follows: 116 112 112 3.57 Purchasing Power

45. This means that the prices went up by 3.57%. In terms of Purchasing power this signifies that P1.00 can buy lesser than the previous year to about 3.57%. Inflation is an indication of the market risk. hence this also affects the ability of the people to make new purchases or settle obligation. In finance, inflation is a driver of the financing costs. For regulatory purposes, BSP finds its way to control inflation and enable the continuous flow funds in the market. Philippine Statistics Authority (PSA) is the body that determines the current inflation based on the movement of the commodities set as index in the market. Purchasing Power

46. There are two types of Inflation: Core Inflation – used for most economic estimates where it excludes in the equation the movement of the commodities or incidents with very volatile movement of outliers. Headline Inflation– captures the changes of the cost of living based on the movement of the basket of commodities as a whole. Purchasing Power

47. Purchasing Power

48. Payment System The business is not a business if without any trade or exchange. There are different ways to settle an obligation after the delivery of products or render of service. One of the modes of settlement is through payment of the products or services through a payment system. The payment system us set of interrelated processes of settlement of goods or services rendered in exchange for a set of instruments that will undergo either a banking or non-banking procedures.

49. Payment System Characteristics for an Effective Payment System (according to BSP) Standard methods of transmitting payment messages within the system Agreed means of settlement Common operating procedures and rules e.g. admission, fees and operating hours.

50. Payment System Standard methods of transmitting payment messages within the system the conventional ay of transmitting payment is the literal arm’s length exchange of transaction whereby the seller or the obligor deliver the goods or render service while the other party will deliver in the instance.

51. Payment System Agreed means of settlement Cash or cheque payment Online payment (if the supplier of goods or service is an accredited merchant of a bank) Automated Teller Machine Fund Transfer Credit cards Debt Cards or Stored Value Cards Electronic Money Manuel Money transfer Paybox System Cash deposit Assignment

52. Common Operating Procedures and Rules Another key requirement for an effective payment system and must be mutually accepted by both parties. These agreements are normally provided by the payment system facility to provide guidelines and protection for both parties in case of breach as well as the protection of the system that the transaction are cleared from the settling party. In an online banking system, these agreement are provided as a template to all clients or users of the system.

53. Importance of Payment System Safe and Real time transactions Effective Risk Management Cashless payments which minimizes the risk of loss, theft and misappropriation. Risks includes; Credit Risk, Liquidity Risks, Default Risk, Technological Risk, and Legal Risk.