Turkey 2005 - Poised for growth
The Capital Markets Board of Turkey has the job of regulating financial markets, plus a remit that extends to issues like mortgages. As the government bids to introduce a series of new laws, make tax changes and maintain low inflation, with a resulting expansion in the range of financial instruments, the CMB’s role looks set to increase. Paul Farrow reports.
The Capital Markets Board of Turkey (CMB) was created in 1982 under the Capital Markets Law (CML) passed the previous year. It was given responsibility for regulating and organising the markets, and developing capital markets instruments and institutions. Its remit includes not only listed companies but also all private joint stock companies with more than 250 shareholders. Currently just under half the companies being regulated are listed.
The CMB’s responsibilities include checking compliance with disclosure requirements and supervising public offerings and private placements in the capital markets, but also extend to preparation of a new mortgage law, supervision of mutual funds and some matters relating to banking, where it co-regulates along with the Banking Regulation Supervisory Agency (BRSA) and the Treasury.
“Since the creation of the modern republic, in modernising its institutions, Turkey has regularly looked to best practice models elsewhere,” said Erkan Uysal, head of research at the Board. “So the Commercial Code of 1955 was modelled on Swiss and German law, while the CML was developed along Anglo-American lines. This difference in the underlying legal approach of the two laws has led to some conflicts that a revision of the Commercial Code now in progress is in part intended to resolve.”
The CMB has a lot on its plate at the moment. Drafting of the new Mortgage Law, which will formalise and define mortgage lending in Turkey, is about to be finished, and the law is likely to come into force in early 2006. The CMB has been studying foreign models for a secondary mortgage market, including the US approach, but Uysal stresses that the final version will reflect Turkish conditions.
Some bankers are frustrated that this role has fallen to the CMB. They would have liked to see the banking regulator, the BRSA, more involved in the mortgage law. (See the separate article on the banking sector.)
Drafting of a new Banking Law is also close to completion, after which – like the Mortgage Law – it will require parliamentary approval. The banking legislation is intended to incorporate the revisions made since the last Banking Law, but the legislation seems to have encountered some political problems that have slowed it down.
The Commercial Code is itself under review. This will take some time to work through the system, but bankers hope that it may deal with current problems such as the inability of Turkish companies to hold treasury stock.
In its regulatory role, the CMB has the job of reviewing all equity placings. Bahsayis Temir-Firatoglu, deputy head of research at the CMB, explained that in the past the Board had followed a merit system and gave or withheld approval for deals, but since 1992 its role has been to ensure sufficient disclosure rather than to give permission for an issue per se.
The CMB has less to do with bonds. The unequal tax treatment of corporate debt compared with government securities is one reason for the lack of domestic corporate issues. Another factor, traditionally, has been that heavy government borrowing crowded out other potential borrowers. A change to the tax situation will come into force from 2006, with the introduction of a 15% capital gains tax across the board. Assuming that lower interest rates can be achieved and maintained, this change may finally encourage corporate bonds to emerge. (See the article on international bond issuance in this report.)
Existing laws already provide for domestic asset-backed securities and convertible bonds, although there have not been any issues recently. ABS deals were common in the early 1990s, but caused the Central Bank problems and became subject to reserve requirements, said Temir-Firatoglu.
The CMB has a list of corporate governance rules, and the requirement for companies is to either comply or to explain their non-compliance. According to Uysal, some of these rules – for example regarding the treatment of minority investors – will be made compulsory. That would go some way to meeting criticism by some bankers and lawyers that the CMB bark lacks sufficient bite, and that while it investigates alleged rule-breaks, it does not punish the culprits enough. Temir-Firatoglu accepts that while the CMB has sanctions, they are limited in comparison with, say those available to the US’s SEC.
Meanwhile the CMB’s role is expanding into derivatives. In February Turkish derivatives markets started operation, initially in futures, with options to follow. The first contracts are in euros and US dollars against the TL; in interest rates; cotton and wheat commodities; and a share index.