What’s complicating Borsa Istanbul’s tie-up plans

Author: Danielle Myles | Published: 27 Jun 2013
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  • Anti-government protests’ effect on Turkish stocks is a reality check for Borsa Istanbul as it seeks to sign a leading global exchange as a strategic partner;
  • Among the Borsa’s top picks, Deutsche Börsehas shown the most interest in Turkey;
  • The strategic partner should be announced in August;
  • The value derived from any partnership depends on Borsa Istanbul’s successful privatisation and integration of the country’s exchanges;
  • The Borsa has pursued looser alliances with exchanges and brokerages with its neighbours and throughout Asia;
  • IFLR is speaking exclusively with Borsa Istanbul’s CEO next month for more details.

Anti-government protests have rocked Turkey’s fledgling bourse as it finalises its search for a world-leading exchange to become a strategic partner.

The unrest acts as a warning, or reality check, for Borsa Istanbul (BIST) to reconsider its bargaining power and position in securing a strategic partner, local lawyers have said.

BIST indexes have fallen sharply in the wake of rioting across the country. It’s caused local capital market players to reflect on what can and can’t be achieved by BIST’s proposed tie-up with a major exchange, which is set to be decided by August.

"Anyone would be naive to think that a strategic partner is a silver bullet. And BIST is still a part of a developing market in the end," said one source who has worked closely with the Capital Markets Board of Turkey.

"But it will be of value in showing that Turkey is part of the global market and plays at that level," the source added.

Sources were non-committal when asked if the backing of developed exchange technology and infrastructure would have helped BIST’s performance during the month of unrest.

But they agree that June’s exchange volatility is a stark reminder to BIST’ proposed suitors – rumoured as London Stock Exchange (LSE), Nasdaq and Deutsche Börse – that Turkey’s capital markets have been the weakest link in the country’s growth story, and need significant improvement.

What a partnership would achieve

While a strategic partner is no panacea for a struggling capital market, exactly what it will achieve is the subject of much speculation.

The only details BIST has provided on the structure of, and rights to be conferred under the alliance have been provided in interviews. There has been no formal announcement.

IFLR is speaking exclusively to its chairman Ibrahim Turhan next month, to learn his plans.

In the meantime, lawyers working on Turkey’s broader capital market reforms have explained the key benefits they expect to flow from the relationship.

According to Umut Kolcuoglu, partner at Kolcuoglu Demirkan, these include know-how, international prestige and awareness, liquidity, and technology.

Know-how could be achieved by seconding BIST executives to the partner exchange. Financial technology would take the form of pricing methodologies, new indexes, exchange techniques, and exchange technology.

Akol Avukatlik Bürosu’s Derin Altan understands that aside from a partner that can help improve the exchange’s technology and infrastructure, BIST is also looking for liquidity providers and opinion leaders.

While these functions could be provided by a single entity, it's also possible BIST may set up a number of key strategic partnerships.

Deutsche Börse, Japan, then China

Among the major exchanges Turkish authorities have expressed interest in, the German exchange is tipped to be the most likely to strike an agreement with BIST.

"Among the foreign exchanges, Deutsche Börse has been the most active in the country," said Kolcuoglu. This is based on the Börse’s discussions, joint meetings and marketing compared to LSE, Nasdaq and NYSE Euronext.

A spokesperson from the German exchange said: "Deutsche Börse has pointed out its understanding of a strategic partnership for a successive build-up of an integrated exchange organisation in Istanbul."

For there are some obvious advantages for partnering with BIST. "LSE is the main market for foreign issuers, and Germany wants to become an alternative," said Kolcuoglu.

Discussions between the countries’ exchanges date back to 2011 and there are synergies between the two countries. Germany’s Turkish population, in the range of 3 million, is the largest in western Europe.

A Deutsche Börse spokesperson refused to comment on any proposed tie-up between the exchanges. But he did said the Börse gave BIST the idea to establish an integrated exchange, brining trading, clearing, settlement, custody, network and indices under one roof.

According to other media reports, BIST’s CEO has said that a memorandum of understanding (MoU) with the strategic partner will be signed by August.

But this official tie-up should not overshadow BIST’s pursuit of a string of other MoUs over the past year, to internationalise its operations.

The latest of these loose alliances to develop inter-exchange cooperation was signed last month with Albania’s exchange, and prior to that with the European Bank of Reconstruction and Development.

In recent months BIST has toured Asia and met with exchange participants, hoping to attract the businesses needed to support more vibrant capital markets. Discussions in Malaysia were an attempt to leverage off the country’s Islamic finance capabilities, and those in Singapore have focused on luring portfolio investments.

Last year BIST signed an MoU with the Tokyo Stock Exchange to facilitate cross-listing of exchange traded funds. It’s these arrangements that foreshadow its intentions for more formal relationships.

"Recently we have seen great interest from Japanese companies. I expect Japan will be the next target of Borsa Istanbul, and then China," said Kolcuoglu.

What will determine its success

BIST’s search for a strategic partner has occurred against the backdrop of last year’s overhaul of the Capital Markets Law.

"The new Capital Markets Law certainly seems to be a natural turning point – an inflection point – for the acceleration of these [partnership] initiatives," said Kolcuoglu.

Aside from introducing new fund structures, products and listing procedures, the revised Law redesigned the country’s exchanges. It transformed the government-run Istanbul Stock Exchange into BIST, which will be privatised via an initial public offering within the next three years.

The Law also mandated the integration of the gold, derivatives and stock exchange into a single platform.

These two steps are crucial to the government’s goal to make Istanbul a regional financial centre.

"It was a highly inefficient environment, in terms of exchanges’ ability to compete with international peers," said the anonymous source. "So the idea to bring them under the same framework, and part privatisiaton, will improve the effectiveness of exchange operations in Turkey."

The removal of bureaucracy and seamless integration will play a large role in the success of any partnership.

"If what BIST has inherited does not carry the fundamental qualities it needs to flourish, it is hard to see how a strategic partner would be able to valuably contribute," said the anonymous source.

See also

The 2013 Guide to Turkey

How to establish Turkish MTNs

Turkey: how to invest in the new BRIC

Turkey’s first non-ijara sukuk dissected