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FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT MAY 2005 TAKASBANK Emin Catana President and CEO INTRODUCTION Takasbank (ISE Settlement and Custody Bank Inc) is incorporated as a non-deposit taking banking institution and is authorized by the Capital Markets Board of Turkey to function as: the Central Securities Depository of Turkey, the Clearing and Settlement Institution for ISE markets, the Clearing House for the Turkish Derivatives Exchange, the National Numbering Agency of Turkey, the Custodian for the Mutual Funds and Pension Funds incorporated in Turkey. Takasbank is owned by the Istanbul Stock Exchange (ISE) (26%) and by the members of the ISE (20 banks and 70 brokerage houses with 40% and 34% stake in the share capital, respectively). Participants of Takasbank are the members of the Istanbul Stock Exchange, the institutional investors and the issuers. Equity investors’ holdings are recorded in the subaccounts of the participants. Services provided by Takasbank includes the execution of corporate actions, safekeeping of physical securities, custody and transfers of securities in book-entry form, web based monitoring service for investor sub-accounts, central clearing and settlement for the organized market (based on multilateral netting), real time gross DvP “member to member” settlement, settlement and custody for foreign securities, cash settlement and transfer facilities (domestic and crossborder), Takasbank Money Market, securities lending and borrowing, cash credits, allocation of ISIN for securities issued in Turkey. Takasbank is an active member of international organizations such as Association of National Numbering Agencies (ANNA), International Securities Services Association (ISSA) and is also member and user of the Society for Worldwide Interbank Telecommunications (SWIFT). On February 4th, 2005, the Turkish Derivatives Exchange (TurkDEX) commenced its operations with a variety of contracts including commodities and PAGE 10 We believe the Turkish Capital Market will be supported by new markets and financial products and market dynamics will produce better conditions for investors. financial futures. Takasbank is appointed and authorized as the Clearing House for TurkDEX. Thus, Takasbank has become the clearing and settlement center for all transactions in spot/derivatives markets of the organized markets in Turkey. CLEARING HOUSE FUNCTIONS Takasbank acts as a buyer to every seller and a seller to every buyer in each trade executed at TurkDEX. In accordance with the regulations, Takasbank guarantees the derivatives market liquidity and safety with the deposited margins and the Guarantee Fund resources. The important issue here is the limited guarantee (not full). Thus, Takasbank is the guarantor for TurkDEX trades with a limited liability. This liability is underlined in the 78-79th article of TurkDEX regulations. Takasbank main functions regarding with the derivatives market and the Clearing House Operations are as follows: • Approval of clearing members. • Central counterparty for TurkDEX trades. • Limited guarantee with margins and Guarantee Fund. • Determination of collateral types and operational procedures. • Keeping position and collateral data on either member or account basis. • Marks to market daily. • Monitoring collaterals and composition check. • Settlement of daily profit/loss. • Announcement and monitoring of margin calls (if any) • Application of default process (if any) • Liquidation of collaterals in case of default. • Position/collateral transfers between accounts. • Corporate actions of collaterals deposited as margin. • Management of Guarantee Fund. • Interest payment for cash margins and Guarantee Fund cash part. • Training of clearing members. CLEARING CONDITIONS FOR DERIVATIVES Open positions marked to market daily following the announcement of settlement price by the exchange. Session hours for TurkDEX are 10-12 am, 1-3 pm (there is a 1 hour lunch break for traders). Settlement price for each contract is calculated and announced as of 3:15 pm. Takasbank starts the settlement by deducting losses from each account. If there is any deficiency in the cash margins (if total collateral value in hand is below maintenance margin level or minus cash value existed) it should be paid in cash as a margin call. Profits are added directly to each account’s cash margins. Deadline for derivatives daily settlement is 4:30 pm on the same trading day (T+0). In order to open a new position in the market there should be enough collateral deposited into that account. Daily settlement is finalized by cash payment only. All transactions are executed and settled on account basis. CLEARING MEMBERSHIP REQUIREMENTS There are two types of membership; the first one is the general clearing membership, the second one is the direct clearing membership. At the beginning, all trading members are authorized to clear their own trades, which means that all exchange members become direct clearing members. After receiving the brokerage certificates for derivatives from the Capital Market Board, an applicant member should become a trading member. Then, the member delivers those certificates to the Clearing House and applies to become a clearing member. There are some additional requirements to become a clearing member such as capital/financial requirements, personnel, operational and hardware requirements. The clearing member and the Clearing House sign in a written contract that underlines the both sides’ liabilities. Clearing members should
FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT MAY 2005 participate in the Guarantee Fund of derivatives, when their application is approved by the Clearing House. Termination of the clearing membership is bound by ending the trading membership or by the decision of the TurkDEX/Clearing House or at the member’s own discretion. ACCOUNT STRUCTURE & SURVEILLANCE Account segregation is the main principle in the derivatives market. Both trading and clearing transactions related with the TurkDEX products are based on client account numbers. There are four different account types. The first one is a portfolio account used for the member’s own transactions. The customer account is used for client positions. The market maker account and global account are the remaining accounts and they are not in use at the moment. We can define the global account as an omnibus account, while the market maker account is used only by the authorized market makers of a single or multiple futures contracts. Account opening is done by the clearing member by using Takasbank Derivatives System (TDS). Members should match their own account number with the owner’s Takasbank registry number during the opening process or in seven days. By this way the Clearing House can monitor the client’s overall open position risk even if the client uses more than one broker. Detailed ID references such as identity card or passport copies must be delivered to the Clearing House immediately, if there is no Takasbank registry number. ELIGIBLE COLLATERALS & VALUATION Takasbank mainly accepts two different types of collateral but they are similar to each other. The first one is accepted as an initial margin against an open position. Initial margins should include minimum 30% cash in order to buy/sell in the derivatives market. Non-cash collaterals may be in the form of CONTACT INFORMATION bonds and bills, US$ or EUR, equities (ISE-30 index shares), mutual funds and ETF’s. They are also subject to haircut by their liquidities. Because of the minimum cash requirement of 30%, non-cash composition may be at maximum 70%, and equities in collaterals cannot exceed 50% of total non-cash. This means that a maximum of 35% of the total collateral requirement might be in equities. Furthermore, the Clearing House manages the concentration risk by applying 5 different equities conditions. Thus, a maximum of 7% of the total collateral requirement might be from one single equity. The Guarantee Fund is the second type of collateral and accepts all of the non-cash types except equities. Members may also deliver Banks acceptance as a non-cash collateral for Guarantee Fund. Collaterals are subject to valuation at the end of day process of TDS. Bonds and bills are valued with ISE calculated prices, equities are valued with 2nd sessions weighted average prices, FX collaterals valued with the daily announced parity of Central Bank of Turkey and mutual funds valued with the unit price announced by their founders at the end of each business day. GUARANTEE FUND CONTRIBUTIONS The Guarantee Fund is aimed for the default probability of members and designed to share the members’ risk with the surety of each other. Members Guarantee Fund liabilities are determined by the TurkDEX, while the management is realized by the Clearing House. At the beginning, each clearing member should participate with 200,000 (New Turkish Lira) TRY to the fund. Contribution is mandatory in order to be approved as a clearing member. This amount is valid until the pre-announced tranches. Tranches are defined as a market value of the total open position of a clearing member. If the total position value exceeds the pre-defined tranches, that member should redeposit collaterals to the fund. Margin call (if any) and tranches calculations are calculated daily by the Clearing House. Contact Name Mr. Osman Gunsel Topbas E-mail gtopbas@takasbank.com.tr Website www.takasbank.com.tr FUTURE PROJECTS Currently derivatives settlement at the maturity of a contract is based on cash settlement. There are 4 main products: stock index futures, currency futures, interest rate futures and commodity futures. Especially commodity futures require some physical settlement in many countries. In the future, Takasbank may settle some of the futures contracts physically. More and more options contracts are the complementary products of derivative markets and in future it is expected that options on equities are very possible contracts. If we consider only the first month’s performance of 2005, the total open position reached to 9,314 (approximately US$ 15 million) as of April 13, 2005. Daily volume is around US$ 2 million and there are 46 trading/clearing members with 1,030 accounts in total. We believe the Turkish Capital Market will be supported by new markets and financial products and market dynamics will produce better conditions for investors. PAGE 11
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