The Omnibus Law No. 6111 has authorized the CMB for supervision and surveillance of the over the counter leveraged trading activities, the so-called forex transactions, as from August 25, 2011. Based on this authorization, CMB has unveiled the curtain on the draft legislation on leveraged foreign exchange and commodities trading and has invited comments from the market. Draft legislation, preparation of which has been on the agenda since 2009, is subject of hot debate as it fully precludes banks from providing any type of brokerage services in respect of leveraged trading.

The draft should be examined with a view to understand the approach of the CMB to the leveraged foreign exchange and a commodity trading as it is not in effect yet.

Below is a brief highlight of the notable aspects of the draft legislation:

  • As per the announcement;
  1. accepting and/or executing leveraged trading orders submitted by investors (i.e. acting as market maker/utilizing white label structure),
  2. (ii) accepting the orders as a representative of another institution and directing those orders to the same (i.e. acting as introducing broker),
  3. (iii) promoting the services of another institution in respect of leveraged trading and acting as agent of that institution for setting up the contractual arrangement between the institution and investors (i.e. acting as referring broker),

fall under the scope of the draft legislation.

Physical purchase and sale of assets that may be the subject of leveraged trading and on-exchange and off-exchange derivative transactions are excluded from the scope of the draft.

  • The activity stated in (i) here above can only be conducted by brokerage firms whereas the activities stated (ii) and (iii) can be conducted either by brokerage firms or derivative intermediary institutions. The draft does not define banks as authorized institutions and accordingly positions brokerage firms and derivative intermediary institutions as the sole local service providers in the market.
  • Intermediaries which will act as introducing brokers may either represent an authorized local institution or a foreign institution authorized by the regulator of the relevant country whereas intermediaries which will act as referring brokers can only be the agents of authorized local institutions.
  • Brokerage firms which will perform leveraged trading activities by directly accepting and/or executing orders shall have an equity at least ten times higher than the minimum equity amount required for stock trading, whereas brokerage firms and derivative intermediary institutions which will perform leveraged trading activities by accepting orders as a representative of another institution and directing the orders to the same shall have an equity at least three times higher than the minimum equity amount required for stock trading. For the year 2011, the minimum equity amount required for abovementioned service providers will be TL 8,150,000 and TL 2,445,000 respectively.
  • The leverage ratio determining the amount of collateral that should be deposited with the service provider for each transaction is limited to 100:1. The draft grants the CMB the authority to revise the ratio and determine different ratios for different type of assets. In addition, the collateral that shall be deposited with the authorized institution shall be in the form of Turkish Lira or convertible currency.
  • The draft envisages detailed and strict requirements for service providers regarding organizational conditions, IT infrastructure, risk management, internal control, documentation, client relations and advertisements.
  • Institutions currently dealing with leveraged trading activities are required to apply to the CMB within 30 days as from August 25, 2011, in order to obtain leveraged trading licenses. However, since an ordinary institution cannot act as a service provider under the upcoming regulatory regime, such application shall, depending on the type of intended services to be provided, also include an additional filing either for acquisition of a brokerage firm or for establishing a derivatives intermediary institution.

  • The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.