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Turkey: A boost to covered bonds

Isil ÖktenAslihan Özbey
The Capital Markets Board of Turkey (CMB) published the Communiqué Serial: III 59.1 on Covered Bonds (new Communiqué) in the Official Gazette on January 21 2014. The New Communiqué is part of regulatory improvements to Turkey's bonds and securitisation market. It introduces a consolidated legal framework regulating asset-covered bonds and mortgage-covered bonds.

In order to clarify certain issues under the new Communiqué and to make the issuance of covered bonds more effective in Turkey, the CMB recently published an amendment to the new Communiqué (amended Communiqué). According to the new Communiqué, if any cash collection is made from the assets in the pool, the issuer must either: (i) record the proceeds to the cover registry; (ii) remove the cash from the cover registry for the payments of the covered bonds; or (iii) replace the cash with the new security assets. One of the major amendments to the new Communiqué introduced by the amended Communiqué is that now the issuer is free to use the cash proceeds provided that it complies with the statutory tests and all other liabilities.

The receivables, assets and derivative financial instruments which can be included in the cover pool for the covered bonds are identified in detail under the new Communiqué.

According to the new Communiqué, to distinguish cover assets from the other assets of the issuer, it is necessary to maintain a cover registry, which can be either in physical or electronic form

Until the redemption of the covered bonds, the assets making up the cover pool cannot be used for any other purpose than securing these securities. One of the requirements introduced by the CMB for the protection of investors' rights is that covered bond issuers must appoint a cover pool monitor (teminat sorumlusu) by written agreement.

According to the new Communiqué the provisions regarding the electronic registration of debt instruments with the Central Registry Agency (CRA) under the Communiqué on Debt Instruments Serial: II 31.1 are also applicable to covered bonds. Accordingly, although covered bonds must be issued in an electronically registered form at the CRA, for the issuance of bonds by a Turkish issuer outside Turkey, the CMB may exempt the issuer from registration with the CRA upon the issuer's application.

It is expected that the new Communiqué will boost the covered bond market in Turkey.

Isil Ökten and Aslihan Özbey

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