Turkish banking watchdog intervenes in TRY transactions

On 5 May 2020, the Turkish Banking Regulation and Supervision Authority (BRSA) imposed a restrictive ratio on banks for certain transactions with foreign financial institutions.

The banking watchdog's measure comes after a challenging week for the Turkish lira (TRY) and the Turkish financial sector with the TRY falling to a record low against the US dollar.

Subsequently – the Regulation on the Manipulation and Misleading Transactions in Financial Markets was published in the Official Gazette on 7 May 2020 – enabling the BRSA to stipulate transactions and implementations, which falls within the scope of Article 76/A (Manipulation and Misleading Transactions in Financial Markets) of the Banking Law No. 5411.

In addition, on the same date the Regulation was published, the BRSA introduced a swap ban, which prevents Turkish banks from entering into TRY swap transactions with certain foreign banks that had failed to fulfil their TRY commitments to Turkish banks and hence defaulted.

The ratio on Turkish bank transactions with foreign institutions

The BRSA announced that its 5 May decision ensures that the total TRY placement, TRY reserve, TRY repo and TRY credit transactions to be made with foreign financial institutions are restricted by 0.5% of their regulatory capital. (This decision applies to include credit agencies subject to consolidation abroad and any affiliated financial institutions and branches abroad).

The indicated ratio will be calculated on a daily basis.

Furthermore, Turkish banks are also restricted from executing new transactions like those indicated above and from renewing a matured transaction that is in effect equivalent to executing a new transaction.

This BRSA's decision will remain in force until the extraordinary conditions brought on by the COVID-19 pandemic end.

On 20 May 2020, the BRSA has announced that the board has exempted two (2) banks from this restriction as an indicator of the BRSA's approach towards the flexibility of its decisions.

Manipulation and misleading transactions

The Banking Law No. 5411 was amended on 20 February 2020 to include Article 76/A, which provides a definition for "manipulation and misleading transactions in financial markets". The amendment also gives the BRSA authority to determine these transactions to comply with the EU's Market Abuse Regulation (Regulation No. 596/2014 of 16 April 2014).

It was within this framework that the BRSA issued the 7 May Regulation, defining manipulative and misleading transactions as follows:

• Being involved in, intermediating in, giving an order for or engaging in actions that create or carry the possibility for creating wrong or misleading impressions regarding the supply, demand or price of a financial instrument (including foreign exchange rates or interest rates); or actions hat maintain or carry the possibility of maintaining the price of a financial instrument at an abnormal or artificial level.
• Being involved in, intermediating in, giving an order for or engaging in actions that may affect the price of a financial instrument, foreign exchange rate or reference value, such as CDS, in a way that adversely affects financial market stability or increases market irregularity by taking advantage of these markets during periods when supply-demand equilibrium is not operating under normal conditions.
• Realising or intermediating in transactions and implementations, which may indirectly neutralise or overstep BRSA restrictions and decisions regarding cross-currency swaps including TRY, forward options or any other derivative transactions completed with non-residents or providing liquidity abroad. (Examples of transactions, in this case, include the early retirement of transactions, deferment of matured transactions, or nonfulfillment of obligations).
• Being involved in, intermediating in, giving an order for or engaging in similar actions, which affect or carry the possibility to affect the price of a financial instrument (including foreign exchange rates and interest rates) by a deceptive mechanism or fiction.
• Spreading by any means including the internet wrong or misleading information or rumours, which create or carry the possibility of creating wrong or misleading impressions regarding the supply, demand or price of a financial instrument (including foreign exchange rates or interest rates), or spreading false information, which maintains or carries the possibility of maintaining the price of a financial instrument at an abnormal or artificial level.
• Affecting or trying to influence the price of a financial instrument (including foreign exchange rates or interest rates), which was positioned beforehand by stating an opinion via the internet or other mass media and withholding any conflict of interest from the public regarding a position taken.
• Transmitting or providing wrong or misleading information, which the relater knows or ought to know that such information is wrong; or behaving in such a way that manipulates the calculation of a reference value.
• Engaging in activities to fix the price of a financial instrument or derive any improper benefit by abusing the dominant position over such a financial instrument's supply or demand.
• Having investors who positioned as per the opening and closing price of the financial markets mislead by realising transactions, which affect or carry the possibility of affecting the prices of financial instruments (including foreign exchange rates or interest rates) during the opening and closing of the financial markets.
• Misleading the account owners or misrepresenting facts to them.
• Circulating rumours or information, which may cause a systemic risk by damaging the trust in the financial system.

The Regulation's references, such as "circulating rumours or information, which may cause a systemic risk by damaging the trust in the financial system", is open to wide interpretation. Hence, statements made by the BRSA Chairman Mehmet Ali Akben on the purpose of the Regulation is important.

According to the Chairman of BRSA, the Regulation was drafted in line with the Market Abuse Regulation and targets manipulative banking transactions, not speculation based on relevant updates and analyses of financial markets nor does it target assets.

Additionally, through Article 146(1)(s) of the Law, the BRSA is able to impose administrative fines of up to 5% of the total interest and dividend income, collected fees and commissions and revenues from banking services as indicated in the most recent financial report. The sum of an administrative fine would not be less than the benefit provided through the actions prohibited by the Regulation.

Another issue is the impact of the Regulation on capital market regulations. Article 107 of the Law on Capital Market No. 6362 (Capital Market Law) defines the manipulation of capital-market instruments as a crime carrying the threat of imprisonment and judicial fines.

In contrast, the Regulation specifies administrative fines for the manipulation of financial instruments, which it defines as an administrative violation. Within this context, if a bank violates both the Regulation and the Capital Market Law with the same action, the harsher provisions of the Capital Market Law are likely to prevail.

Swap ban

According to BRSA decision no. 9016 of 7 May 2020, Turkish banks are banned from making TRY cross-currency swap transactions with certain foreign banks due to the watchdog's contention that certain foreign banks had failed to fulfil their TRY commitments.

Additionally, these foreign banks and their groups were prevented from completing these transactions with Turkish banks until further notice. Not long before, the BRSA had removed the transaction ban since trusting the relevant banks have fulfilled their commitments. However, investigations are now underway to determine if some of these foreign banks are guilty of forex manipulation.

Furthermore, banks that fail to comply with the decision may be subject to an administrative fine of between TRY 50,000 and TRY 500,000 under Article 148(1) of the Law.

Regardless of the outcome of these investigations, the BRSA's decisions regarding administrative sanctions can be challenged in administrative court and are not final under Article 105 of the Law.

Remarks

The banking watchdog has been actively intervening in TRY-based transactions and has demonstrated that it will not hesitate to enforce the Regulation and take immediate action, as the latest swap ban reveals.

When considering banking regulation and capital market regulation together, it is advisable to follow legal updates closely to avoid any administrative or judicial sanctions and receive advice before concluding a TRY-based transaction with a financial institution, especially during these challenging times.

For more information, contact your regular CMS advisor or local CMS experts Dr. Döne Yalçın and Alaz Eker Ündar.