Derivatives act a key role in global capital markets through their functionality on hedging the risk. Notwithstanding a stock exchange, OTC (” Over The Counter”) market derivatives’ transactions are directly substantiated between two parties which do not entail any standardized terms. However, since financial stability is one of the most projected indicator for an emerging market as Turkey, new amendments on law will indirectly convert OTC derivatives market to regulated platform under the rules of Capital Markets Board of Turkey (“CMB”) by force of the Communiqué III-37.1 on Principles Regarding Investment Services, Investment Activities and Ancillary Services (Communiqué III-37.1) on 11 July 2013.
Uncertainties on Turkish Legislation
According the Decree No. 32 which is related to protection of the value of Turkish currency, buying or selling any sort of derivatives products shall be carried out by financial institutions which are licensed by Capital Markets Board. The interpretation of this legislation varies amongst legal experts in Turkey. According to some, this regulation comprises all kind of derivatives’ transactions which are accrued by brokerage firms abroad whereas opponents claimed that intermediation services is for only exchange traded derivative contracts which are not subject to bilateral transactions between two counterparties thus OTC derivatives are not required to operate by licensed bodies. Thereby, new Communiqué is expected to abate all the ambiguities about OTC derivatives market particularly connected to reporting and supervision of this market.
New regulations on these investment activities will come into force as of July 2014 and OTC market derivatives will be accepted as capital market instruments’ which is explicitly clarified under the regulatory authority. Hence, any OTC derivatives’ purchase and sale executions are subject to Capital Markets Law (“CML”) will be required to obtain operation license from Capital Markets Board of Turkey (“CMB”). On the other hand, in line with the new Communiqué, the OTC market derivatives execution between real persons and/or legal persons will be exempted from the regulations. Additionally, the mandatory licensing for financial institutions which are located abroad is not applicable provided that they do not proceed any marketing activities in Turkey. In case Turkish residents make an investment decision upon their own initiative, any kind of investment activities or services through OTC derivatives is not under the scope of Communiqué. In substance, Turkey must comply with US and EU regulations applying after global financial crisis in 2008.
Comparable Analysis of Regulatory Framework: US and EU Outcomes
In accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”)which was came into force on July 2010, a new legal framework was applied for the purpose of regulation and the supervision of OTC market derivatives in US. Hereunder Regulation of Over-the-Counter Derivatives (Title VII.);
- OTC derivatives market is under monitoring and supervision of The Commodity Futures Trading Commission (“CFTC”) together with Securities and Exchange Commission (“SEC”).
- Obligatory reporting for cleared and uncleared swaps to a trade repository or the CFTC or SEC.
- Transparency on any swap transactions through public access to transaction volume and price data.
- Inter-dictum for insured depository institutions on swap transactions.
In comparison to US regulatory framework ,different relevant legal arrangements including European Market Infrastructure Regulation (EMIR), the Capital Requirements Directive (CRD), the Markets in Financial Instruments Directive (MiFID) and the Market Abuse Directive (MAD) are pertaining to OTC derivatives market. However, there are blatant similarities between two jurisdictions in the scope of reporting, capital requirements, trading records and mandatory trade execution. In depth analysis, counterparties shall report all derivative transaction details to the regulatory bodies as distinguished from trading repository. In consideration of capital requirements, both EU and US implementations are driven by Basel III standards principally concentrating on minimum own funds requirement, leverage ratio and liquidity criteria. Furthermore, trading confirmation is very strict that brings approval of trading terms by both counterparties.