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Emerging Markets

Turkey has the legal and regulatory framework in place for a range of derivatives contracts to be offered, although currently the country does not enjoy a broad range of derivatives offerings when compared to Greece, the other big economy in the South East Europe (SEE) region. The use of OTC derivatives is relatively common among banks and corporates in Turkey, but demand is also less than in Greece – though significantly bigger, and with much greater potential, than in other countries in the region.

Considering the level of development over a relatively short period of time there is a good range of products, maturities and sizes available, and it is telling the growth has come at a time of unusual levels of political and economic stability in Turkey. Today there is a daily OTC turnover of around US$3bn–$4bn, making it bigger than other EMEA emerging markets, and there are several players developing products for Turkish institutions.

Hedging is becoming more common among Turkish corporates and Mehmet Mazi, head of HSBC’s emerging markets group for EMEA, said the derivatives market in Turkey has become quite sophisticated. Derivatives represent a real success story for the Turkish financial markets.

“In 2005 there was nothing in this market, so in three years the growth has been huge,” said Beat Siegenthaler, chief economic strategist at TD Securities. The lack of an institutional investor base of pension funds, for example, has been an impediment to growth.

The most important element to a burgeoning derivatives market is a strong legal framework and contract enforceability and, according to the International Swaps and Derivatives Association, Turkey has these things. It has good enforceability of its netting agreements, which is the legal infrastructure underpinning the development of the OTC market.

According to ISDA, the most commonly traded OTC instruments in Turkey are straight-forward forwards and options of currencies and interest rates, which tend to be the first types of derivatives to take root in a new market. Derivatives markets that are driven in large part by domestic corporates tend to see greater proliferation in forwards than in swaps, said Peter Werner, policy director at ISDA.

On the corporate side Turkey is seeing a risk build-up in the dollar and euro exposures it is taking on through its loans, which could provide an extra boost to demand for FX derivatives, though Mazi said the relatively benign currency outlook alleviates some of the pressure that might have fed into such FX derivatives demand.

Unlike some countries which have regulatory obstacles to the development of certain aspects of the derivatives market, Turkey has no such specific impediments. Derivatives have already started to emerge in credit, equities and other asset classes, and more will arise as demand grows. Commodity derivatives have also started to gain more traction, in a country that is exposed to commodity risk less as a producer and exporter, than as a consumer and importer.

According to ISDA, Turkey has been on its radar for around eight years as a market to watch, reflecting the high level of interest in this market from its members. It is covered by both netting and collateral opinions which indicate a high level of ISDA member interest in Turkey.

But as with all asset classes in Turkey, the main problems concern the economic instability of the country and its propensity for financial crises. “While several major ISDA members have bought into the Turkish banking sector lately, the local scene was pretty shaky a few years ago and is still prone to crisis,” ISDA said. Greece, which has enjoyed a higher degree of economic stability over the years, has seen commensurately greater development in the range of sophisticated products available.