Turkish Delight!

An Interview with Yakup Ergincan, CEO, MKK – Central Securities Suppositry (or CSD) of Turkey.

Please tell us our readers about MKKs new services such as electronic voting and general meeting, which have taken place because of, and in response to, the regulatory changes.

The new Turkish Commercial Code, which was implemented on 13 January 2011, makes it compulsory for listed companies in Turkey to simultaneously hold both physical general assembly meetings and electronic meetings and to build a system to enable the exercising of shareholder rights on an electronic medium. Also, the articles concerning corporate governance, general meetings and voting in the new Capital Markets Law no 6362, which was implemented on 6 December 2012, stipulate that electronic general meetings shall be held on the platform developed by MKK.

The Electronic General Assembly Meeting System (e-GEM) was developed and launched by MKK on 1 October 2012 as the single electronic platform for general assembly meeting processes in Turkey. e-GEM, is a bilingual, real-time, online general meeting, management, e-voting and e-proxy platform. The system, for the first time in the world, enables issuers, beneficial owners and proxy holders to manage the whole GM process that starts with notification of shareholders and conduct meetings that are broadcast live on the same platform. Moreover, through e-GEM, shareholders can attend general meetings remotely from anywhere with internet connections by using their e-signatures, assign proxies without any need for granting Power of Attorney and vote on the system’s electronic platform in a safe and secure way.

e-GEM eliminates costly manual pre-meeting procedures for issuer companies by allowing them to upload electronically signed GM related documents, including convocations, meeting agenda, voting suggestions of board members and proxy materials, to the e-GEM system. Shareholders and intermediary institutions are automatically notified, on a real-time basis via SMS and e-mail messages, of the posting of documents on the system and are able to view and download these documents.

e-GEM facilitates pre-meeting procedures by enabling shareholders to register for GMs and assign proxies using their e-signatures without delivery of any written documents. Assigned proxies are listed in the list of shareholders which is available on the system before the meeting for issuers’ access. Registered shareholders and proxies are immediately notified through SMS and e-mail messages.

Custodians are one of the major beneficiaries of the system. Electronic assignment of local custodians through e-GEM allows them to carry out GM operations for their clients and attend GMs without submitting a Power of Attorney document. Also, with the automation that e-GEM introduces in GM related operational processes, custodians can make better allocation of their resources.

e-GEM delivers new capabilities in meeting day procedures by providing sophisticated solutions. The platform establishes a single point of access for investors, thereby enabling them to attend several GMs on the same day. Shareholders and assigned proxies can attend several meetings on the same day by using e-GEM.

e-GEM is fully compliant with regulations such as the EU Shareholder Rights Directive, global industry practices, general meeting standards and corporate governance principles. The system allows shareholders to register for meetings one business day before the meeting date with no blockage of shares. GM attendance and voting rights are determined according to records as of the record date (GMD-1). Once a meeting convocation is made and the meeting documents are posted on e-GEM, investors are instantly notified via SMS, e-mail and ISO formatted messages through SWIFT. The list of attendees can be accessed by issuers in an electronic format from e-GEM at 23:59 on the day before the meeting.

Although they are not legally required to do so, non-listed companies can also use e-GEM in managing their GM processes. In fact, e-GEM was developed as a system that could be effectively used by all public companies in Turkey. The table (above) depicts some statistics for the period from October 2012 (when the system was launched) to February 2014.

By facilitating the exchange of information and the exercising of management rights on an efficient and safe platform e-GEM will not only increase the level of corporate governance in Turkey but also foster the development of the Turkish capital markets by bolstering investor confidence. In fact, e-GEM has increased the number of GM participations by more than 100% in a year, which proves the potential impact of the system. e-GEM is also a benchmark for value-added services that can be developed or adapted by financial market infrastructures all over the world.

Is there now increased protection for investors?

The new legislation improves transparency and corporate governance in capital markets and raises the level of investor and asset protection beyond the level of many other advanced financial centers.

MKK has several modules of investor and issuer services that constitute the e-MKK Information Portal in regard to the ancillary duties assigned to it by the new Capital Markets Law (CML). Investors benefit from services of the e-MKK Information Portal with their MKK registry numbers (or the Turkish citizen ID Numbers) and passwords. Non-investing real persons or institutional investors can register to the portal using their e-mail addresses. e-MKK services ensure that end-investors receive all relevant information flowing from their holdings with regard to corporate action events and general meetings.

e-CAS (Electronic Investor Notification and Alert System) is one particular component of the e-MKK Information platform that has brought about an advanced level of investor protection in Turkish capital markets. The system notifies investors against any errors or abuses affecting their securities holdings immediately, and minimizes potential individual or systemic risks. Domestic real investors can receive instant information on securities outflows from their investment accounts through e-mail or SMS by simply registering to e-MKK Information Portal with a valid mobile number and an e-mail address. Other investors can also use this service by registering to the Portal using their e-mail addresses.

As well as e-GEM, which has introduced the effective use of management rights in Turkey ahead of most of the advanced economies, MKK’s e-GOVERNANCE (Corporate Governance and Investor Relations) was constructed to establish a high level of information transparency in Turkey. Through the platform, investors can get any information from a single point that is shared by issuer companies on issuer web pages created on the portal, not only for the securities kept in their portfolio, but also on any other securities that drive their attention for investing. Such information can also be requested by the investors via e-mail or SMS. By ensuring better communication between companies and investors, e-GOVERNANCE contributes to better dialogue and more informed voting in corporate governance and thus to increased investor protection. Additionally, the Public Disclosure Platform (which is the main source of information for corporate events, material disclosures, etc. that will be managed by MKK after 17 March 2014) announcements, and statements published by issuer companies to the PDP will be fully integrated to e-GOVERNANCE platform.

MKK is working on e-DATA (Capital Markets Data Bank) project for the distribution of capital markets data which will be sourced from MKK’s system and e-MKK Information Portal, and production of data analysis and models thereon for the use of government institutions, rating agencies, and academia. As part of this project, MKK has introduced Investor Risk Appetite Index (RISE). This index is derived by evaluating the weekly changes in investors’ portfolios (around 800,000). RISE is calculated for different groups of investors (i.e. domestic investors, foreign investors, domestic real investors, domestic legal investors, domestic funds, and qualified investors) on a weekly basis.

The Turkish Commercial Code Article No. 1524 obliges joint stock companies, which are subject to supervision, to open a website and reserve a part of their website for publishing the announcements obligatory by law. MKK’s e-COMPANY (Companies Information Portal) enables companies to publish information and documents initially on the portal, integrate those information and documents with company web sites, provide required security levels, enable access from a single source and consistency, and establish data transmission to the Central Registry Number System (MERSIS) infrastructure. In this way, all documents that companies are required to publish on their web sites are gathered in a single center and presentation of data and information on all companies in Turkey on specific criteria are provided in a safe manner.

The new law has also established a new investor protection scheme, the Investors Indemnification Center (IIC), for the compensation of investors for losses suffered due to insolvency of investment institutions. The (IIC) enhanced the level of protection established by the Investors Protection Fund (IPF), which used to be managed by MKK according to the previous legislation. Currently, the (IIC) is managed by the CMB and covers financial instrument delivery and cash payment obligations arising from transactions of intermediary institutions for which an administrative liquidation or bankruptcy decision is made. The new scheme covers all capital market instrument obligations besides equities. Furthermore, the coverage amount was increased from around USD 35,000 to USD 50,000 per investor.

Borsa Istanbul has been formed to replace the old Istanbul Stock Exchange, what are the major differences.

The enactment of the new Capital Markets Law in December 2012 has been a game-changer for financial markets in Turkey. With the new law, Istanbul Stock Exchange merged with Istanbul Gold Exchange and Turkish Derivatives Exchange (TurkDex) to form Borsa İstanbul as a joint stock company. However, the transformation from a non-profit structure into a for-profit organization means more than just a legal act. The move is a growth factor on its own and will lead to improved operational efficiency and better corporate governance. The fact that the share of for-profit exchanges in total rose to 74% in 2012 from only 38% in 1998 also clearly confirms the current trend in exchange business.

With the merger of separate exchanges, Borsa İstanbul is now a one-stop shop for all kinds of financial instruments and investors have the opportunity to trade in a wide range of products, which include equities, fixed income instruments, derivatives and commodities. Such horizontal consolidation will add to Borsa Istanbul’s competitive power at a time when alternative trading platforms, with their flexible structures and high-technology, have started to gain significant market share.

At the heart of the Istanbul Financial Center (IFC) project, Borsa İstanbul aims to be the finance and technology hub of the region. Accordingly, it stepped up its efforts to have a solid technological infrastructure and to be more active in broadening its product mix, enlarging its investor/issuer base and developing relations with international exchanges and organizations.

Thanks to the agree ment with Nasdaq OMX; Borsa İstanbul will soon be able to provide investors with the broadest possible product mix on the most reliable and transparent platforms with the highest efficiency possible.

There are 421 companies currently listed on the exchange and yet the Market Capitalization to GDP ratio reached only 39% at the end of 2012. Considering the fact that only 127 out of the 1000 largest industrial companies in Turkey are listed currently, Borsa İstanbul’s focus will be more on blue chip firms which will not just boost the market capitalization of the Turkish stock market but will also be a role model for small and medium size enterprises. Borsa İstanbul stepped up its efforts in the context of IPO campaign through organized events, on-site visits and media campaigns. Moreover, a new project called Listing Istanbul has been initiated in order to attract foreign companies for listing on Borsa İstanbul. Increasing Market Capitalization to GDP ratio to 70 or 80% levels and the number of listed companies to 1.000 by 2023 are major targets of Borsa İstanbul in this context.

Broadening the existing product mix and initiation of new business areas are important elements of Borsa İstanbul’s strategic roadmap as well. The fixed income business offers vast opportunities in this respect. In recent years, the new corporate debt issues jumped to USD 29 billion in 2013 from almost nothing. Another line of fixed income business on which Borsa İstanbul aims to show progress is Islamic debt securities. Although it is not a mature business yet, funding needs and large infrastructure investments in Turkey will be the reasons behind the momentum in the Turkish Sukuk market in the near future. Larger and more frequent issuances will also support the liquidity of such instruments at Borsa İstanbul. Options and futures contracts based on equities and indices are now traded at Borsa İstanbul platforms, too. The upcoming Turkey Energy Exchange is another line of business. Borsa Istanbul will become a shareholder and the platform operator of energy trading in Turkey. Energy derivatives including electricity and natural gas contracts will be traded in Borsa İstanbul’s trading system.

As an exchange which aims to be the technology and finance hub of the region, Borsa Istanbul establishes new relations with exchanges all around the world as well. For this purpose, Borsa Istanbu signed MoUs with various exchanges in the Balkans, Central Asia and the MENA region. Joint product and technology development schemes, connectivity projects, exchange of personnel, education are major cooperation areas where Borsa İstanbul continues to work and likes to show significant progress in this respect.

What is the timeframe for Borsa Istanbul to become a publicly traded company?

The IPO of Borsa İstanbul is expected to be completed in the first half of 2015.

Will the implementation of the CML mean that Turkish capital markets will become more active in the coming years?

The Turkish government and all capital market participants are working on the Istanbul Financial Center Project, which aims to establish Istanbul a regional and international financial center in the coming years. The new CML was aligned with this role and created a foundation for the project. The new legislation, coupled with the strong macroeconomic structure, helped Turkey receive an investment grade rating from international rating agencies after 18 years. These developments were crucial factors behind Borsa Istanbul’s historic performances in 2013.

As a market infrastructure institution we are supporting this project by improving the technological capabilities of the settlement and custody system in Turkey in compliance to international standards, regulations (i.e. EU shareholders directive) and best practices. Furthermore, at the moment we are working on opening links with many regional and international CSDs to integrate our markets with the global financial world. Indeed, allowing foreign CSDs to open omnibus accounts at MKK and the related changes in the capital markets legislation is expected to improve the cross-border custody and settlement business in Turkey. New securities will be able to be issued in Turkey by foreign participants in a more efficient way and MKK will be able to provide custody and settlement services for these instruments. Moreover, the market for Turkish capital market instruments will gain momentum as international investors’ access to our markets will be enhanced.

Borsa Istanbul’s partnership with Nasdaq OMX will establish another pillar of the new structure of our capital markets. The partnership will foster the development and internationalization of our capital markets and financial market infrastructure by implementing best-in-class technology.

All in all, the new legislation has constituted;

• Further compliance to EU regulations and global industry standards,

• Improved transparency and safety in domestic capital markets,

• Better investor and asset protection,

• Better corporate governance and closer relationship between company & shareholders,

These aspects will surely establish more globally integrated and active capital markets in Turkey.

Please tell our readers about the Turkish Capital Markets Association.

The Association of Capital Market Intermediary Institutions of Turkey is a self-regulatory organization in the Turkish capital markets. The Association represents all banks and brokerage firms and oversees its members.

The new Capital Market Law, which came into effect at the end of 2012, will broaden the Association’s membership structure. With the recent amendments, asset management companies will also become members of the Association, in addition to the current 141 members, consisting of 100 brokerage firms and 41 banks.

The Association’s mission is to contribute to the development of a community of professionals equipped with a high level of expertise who are sincerely committed to ethical values and perceive competition as offering better products and services to investors. In this regard, various training programs are offered to market professionals. In 2013, 6.000 participants attended the training programs offered by the Association. Moreover, since the last quarter of 2012, the Association has been running a comprehensive investor education program for the public, based on behavioural finance principles.

Are new capital market instruments introduced with the new CML?

The introduction of new investment incentives for the population as a whole, expansion of the investor base and diversification of capital market instruments were fundamental issues that were addressed by the new CML. The new legislation paves the way for the development of the derivatives market in Turkey by including derivative instruments in the capital market instruments definition. Articles on establishment of CCPs and trade depositories will further support the development of the OTC derivatives market in the future.

The new CML and related secondary legislation also supported issuance of new instruments such as shariah compliant instruments (ijara certificates) and introduced new incentives for investments in pension funds in order to foster the growth of the Turkish capital markets and increase saving rate in the country.

In accordance with the duty assigned to MKK by the new CML, provisions of the Agricultural Products Licensed Warehouse Act. No. 5300 and the e-Warehouse Receipt Regulation which is based on this act, MKK was designated as the Electronic Registry Agency by the Ministry of Customs and Trade for keeping of records on electronic warehouse receipts. Electronic warehouse receipts are created at MKK on behalf of farmers or any institutions that deliver products to a warehouse licensed by the Ministry of Customs and Trade. The records, which are considered as valuable papers, and rights attached on products are held in the MKK system as electronic book-entry records. The service has integrated the financial world and the agricultural world by paving the way for new capital markets instruments (i.e. derivatives products) that will be issued on these electronic receipts in the near future. In 2013, the first electronic warehouse receipts were issued on cotton by a licensed warehouse which became an MKK participant.

The partnership with Nasdaq OMX will provide the exchange with state of the art technology. What is the timescale for the introduction of these new systems?

With the agreement, Borsa İstanbul will acquire state of the art technology employed by the leading exchanges of the world and a multi-asset, multi-currency platform, integrated into all post-trade functions, with customary key features such as connectivity and risk management will be in the service of all investors. Borsa İstanbul will also have the right to make changes and improvements to these technology solutions which will enable it to develop and maintain its technology in the medium and long term.

The whole system is set to go live by the second quarter of 2016. The project will be completed in two phases. In the first phase, the platforms for the trading and clearing of cash equities will be delivered. The first phase is set for completion by the second quarter of 2015. On the other hand, the second phase will include the transfer of platforms for the trading and clearing of derivatives and fixed income instruments. During the whole period, pre- and post-trade risk management tools together with surveillance systems associated with each product type will be established.