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Turkey: New OTC oversight

The Capital Markets Law 6362 (CML) was adopted on December 30 2013. Since then, the Capital Markets Board of Turkey (CMB) has been revising and updating the relevant secondary legislation in line with the CML, and the demands, practices and necessities in the capital markets. Within this framework, the CMB has issued and changed major communiques governing capital markets activities, one of which is the enactment of Communiqué III/37.1 on the Principles of Investment Services and Ancillary Services (Communique). The Communique clarifies rules and principles applicable to different types of investment services that can be conducted by licensed intermediary institutions and, contrary to previous legislation, it regulates over-the-counter (OTC) derivatives transactions as licensed activities. Having said that, an exception is provided for activities of foreign financial institutions which are conducted on a reverse enquiry basis.

According to article 9 of the Communique, investment services obtained by Turkish investors on their own initiative from foreign financial institutions and any accounts opened with such institutions, any cash or securities deposited to such accounts and any transactions conducted over those accounts, will not be considered as falling under the Communique, provided that they are not solicited directly or indirectly by the foreign financial institutions to Turkish investors.

Therefore, the financial institution is not required to be a CMB-licensed entity, nor is involvement of intermediary institutions necessary for the OTC derivative transactions conducted with foreign financial institutions chosen by the respective Turkish investor.

The following activities would constitute solicitation: (i) fulfilling any marketing or advertisement activities relating to investment services and activities provided by them, either directly or via persons or institutions resident in Turkey whilst providing the investment services; (ii) opening an office in Turkey; and, (ii) building a website in Turkish. This list is not exhaustive; additional criteria may be introduced by the CMB.

If the aforesaid criteria are not met, entry into OTC derivatives transactions by foreign financial institutions with Turkish investors will be considered as an unlicensed and unauthorised capital market activity and will trigger an imposition of sanctions by the CMB.

Last but not least, as per the article 6(8) of Decree 32 on the Protection of Turkish Currency, the payment arising from the OTC derivative transactions between Turkish investors and foreign financial institutions must be routed and channelled through the banks to ensure compliance with foreign exchange requirements.

Muharrem Küçük and Ferda Dumrul

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