In an effort to consolidate the brokerage firm market and improve supervision of over-the-counter ("OTC") derivatives products and leveraged transactions, on January 14, 2016, the Capital Markets Board ("CMB") introduced incentives to encourage investment and development banks to acquire brokerage firms by allowing the banks to act as intermediaries in share transactions, and implemented strict investor protection rules and reporting requirements for engaging in OTC derivatives products and leveraged transactions.
What the communiqués say
The CMB amended its Communiqué on Principles Regarding Investment Services Activities and Ancillary Services No. III-37.1and Communiqué on Principles of Establishment and Operation of the Investment Firms No. III-39.1. Under the revised communiqués, the CMB introduced new rules for investment firms:
- Upon acquiring a privately held brokerage firm and applying to cancel the brokerage firm's license, investment and development banks are now permitted to intermediate share transactions. In line with the previous rules, deposit and participation banks are still not permitted to intermediate share transactions.
- Investment firms can now intermediate transactions that could result in institutional clients suffering a loss in excess of the collateral provided. Investment firms, however, still cannot intermediate this type of transaction for retail clients. Retail clients with significant experience and/or investments who later become professional clients can in some instances engage in these transactions.
- Investment firms are now required to publish on their website information on OTC instruments and their underlying assets, and submit this information to the Turkish Capital Markets Association ("TCMA"). Any changes must be published on the investment firm's website and submitted to TCMA.
- Under the Investment Activities Communiqué, contracts-for-difference (CFDs), covered warrants and corporate warrants are deemed to be derivatives. The rules applicable to leveraged transactions also apply to OTC transactions relating to CFDs.
- Brokerage firms are required to obtain collateral from clients wishing to engage in OTC derivatives transactions. The amount of initial collateral and transaction collateral are determined based on the risk of the transaction to the client.
- The leverage ratio for leveraged transactions cannot exceed: (i) 1:100 for leveraged transactions where trading is based on gold or the parity between USD, EUR and TRY, and (ii) 1:50 if the client's initial collateral is less than TRY 20,000 or the equivalent. The leverage ratio is limited to (i) 1:50 for other leveraged transactions where trading is based on assets other than gold or the parity between currencies other than USD, EUR and TRY and other assets, and (ii) 1:25 if the client's initial collateral is less than TRY 20,000 or the equivalent.
- To minimize the potential conflict of interest between brokerage firms and clients, brokerage firms can no longer provide personal asset management and investment advisory services to clients. This prohibition is limited to services provided in relation to leveraged transactions provided by brokerage firms.
- Retail clients must now complete a trial period of at least six business days during which they enter into at least 50 real-time leveraged transactions on a trial platform, before a brokerage firm can allow a retail client to engage in leveraged transactions.
- Brokerage firms are now required to report to TCMA on disruptions in derivatives markets, such as malfunctions in the brokerage firm's order routing system and extraordinary price fluctuations. Brokerage firms must also submit their software, modules and any other transaction medium for OTC derivative transactions to TCMA, which will assign independent auditors to conduct on-site audits at least twice each year.
- Brokerage firms' best-efforts intermediation for leveraged transactions now includes the obligation to execute clients' transactions at more advantageous prices if the investment firm is entitled to apply a disadvantageous price unilaterally after it receives an order.
- When dealing on their own account (i.e., sale and purchase of financial instruments where an investment firm acts as the counterparty), investment firms are entitled to set fixed or variable purchase and sales prices for all capital markets instruments in accordance with market conditions.
- Brokerage firms are required to report to TCMA on announced prices and the spreads of leveraged transactions. TCMA will keep a record of prices and spreads for leveraged transactions and publish the names of brokerage firms whose price deviation is above a certain threshold.
- Investment firms are now required to publish (i) client complaints and the ratio of complaints to number of clients, (ii) information on extraordinary market conditions, (iii) ratio of denied orders, (iv) market makers and the shareholding relationship with the investment firm, (v) deviations in asset price and spread series, and (vi) leveraged transaction data broken down by client in profit and loss.
- Brokerage firms' advertising and marketing of leveraged transactions is now subject to strict rules, such as the prohibition on emphasizing only potential profits without disclosing the risks associated with leveraged transactions and targeting certain audiences (e.g., professions, students).
To promote consolidation of the brokerage firm market, Turkey is creating a regulatory environment to encourage investment and development banks to purchase brokerage firms, permitting them to engage in a wider range of transactions. With the rise of "forex" transactions, the CMB is implementing stronger investor protections through robust transaction limitations and reporting requirements. Additionally, the CMB has expanded the role of TCMA in the regulation of capital markets.