Written by Anıl Abbak: Head of Turkey Operations – Alpari Group
Regulations for Spot FX in Turkey have long been under the radar as the financial regulator embraces new laws on the asset class.
Capital Markets Board the financial regulator has issued its first template on Spot FX officially on its website on 20 July 2011. This hails 1 month before the deadline given by parliament to CMB to finalize rulings on the FX Market, the draft is under immense scrutiny as all market participants are keen to give their feedback.
Daily volumes are reaching in excess of $18 billion in Turkey, the FX Market has been taking much attention due to its sheers size and aggressive and misleading advertising. Retail clients were shedding CMB’s phones with their complaints about their dealings with local FX Brokers. Moreover, non regulated active company had also disinclined the potential clients with cold calling and made them understand the market as a money making ‘machine’. This triggered action by CMB as there are too many complaints from traders who are disappointed in trading terms of their brokers. Unfortunately, advertising is not effective without a clear framework of client-broker. Provided the template, the restrictions on equity capital is affecting vice versa, and make the retail forex brokers, already having a know how on Turkish Market, to think twice about the condition. Regarding the volume of transactions in Turkey, and in fact it’s not regulated, as a professional broker, Alpari takes part in those discussions about ways of regulation of currency trading in Turkey.
On July, 20, the Capital Markets Board of Turkey presented three models of regulating FX of three types of client-broker framework.
First of them is; “To accept and/or execute the orders directly, coming from a client”; second; “To accept the orders coming from a client as a representative and forwarding it to other brokers to execute orders” and third as; “To introduce another company’s services related to leveraged exchange transactions”. The common denominator of those 3 business models can be summarized as; all the company’s has to be a stock broker or a futures exchange broker, a specific percentage of the total number of employees have to pass the exams of CMB and take the necessary license; IT infrastructure has to be secure, transparent etc.
To give detail to those conditions:
1) To accept and/or execute the orders directly, coming from a client :
We can define the business type under this title, as a prime brokerage. Under those circumstances the market making has been permitted, but in template also been that : “the price of the order of the client can only be changed; if the main brokers hedging aimed position on another company’s is subject to a change” which leads to confusion. In this business type it has been stated that the necessary equity capital has to be 10 times than the stock broker, which approximately is $4.8 Million (8.15 Million TL).
2): To accept the orders coming from a client as a representative and forwarding it to other brokers to execute orders :
As another business modal, which can be referred to White Label, it is stated that : An active role can be taken in the market by making a representating agreement with a foreign or local regulated broker company. In this manner, it is needed to show an equity capital of $1.47 Millon (2.5 Million TL), and besides there is again the necessity to be a stock broker company.
3): To introduce another company’s services related to leveraged exchange transactions
In this last condition, described the rules to act as an IB. The necessary equity capital needs to be approximately, $479 K (815K TL) and as stated in the other business models, the responsibility on any complaint or opposition is given to the IB limited by the client agreement.
In those different models of business, the recording and keeping of the ticket numbers of the orders are nearly the same with other regulated markets, but the leverage has been limited to 1:100 and also the margin ratio allowance as 100% differentiating the Turkish Market. The deposits issue has been cleared as it will be only available on Turkish Lira and convertible currencies; but where the funds are going to be kept and under what conditions has not been stated yet. In addition, there isn’t any statement for minimum deposits, but the KYC (Know Your Client) and Risk Disclosure processes have been specified to avoid money laundering and misleading marketing.
After 20 July, CMB gave 9 days to gather a common opinion feedback from market actors. Although most of the comments were on the equity capital limit. The Banking Regulation and Supervision Agency of Turkey (BDDK) has raised its concerns by giving a speech by its undisclosed authorities to the press as “billion dollar market is going to be on the hands of 2 million dollar company s” which can be understood as a sign that they are lobbying to not decrease / increase the minimum capital requirement. Already active companys in the market, not regarding their business model are generally creating feedback on equity capital requirement mostly since it directly creates an opportunity cost with other well known regulations.
As a conclusion we have to emphasize that this is still a template. Although there are still dialogues on how to convert the business directly to increase the futures markets (VOB) volumes, the frame has not been settled yet. Secondly, since CMB’s priority is to increase the volumes on capital markets, to help the development and increase the number of participants in the market, it can be considered that the minimum capital requirements are going to be lowered.
Edited by Adil Siddiqui