Cablegate: Capital Markets Board Chairman's Ambitious Agenda

Published: Thu 21 Oct 2004 10:57 AM
This record is a partial extract of the original cable. The full text of the original cable is not available.
211057Z Oct 04
E.O. 12958: N/A
This cable was coordinated with Congen Istanbul.
1. (Sbu) Summary. Turkey's securities markets regulator has
an ambitious agenda for 2005-6: opening a futures and options
exchange in Izmir, EU harmonization of capital market
regulations, founding a NASDAQ-like stock exchange for SME's,
and launching a secondary mortgage market. The coming
changes in capital markets are signs of the transition in the
Turkey towards a more normal, low-inflation, low-interest
rate economy. Private sector contacts are skeptical both
about the Capital Markets Board's agenda and the efficacy of
the Capital Markets Board in general. End Summary.
Izmir Futures and Options Exchange:
2. (Sbu) In recent meetings, Dogan Cansizlar, Chairman of
Turkey's Capital Markets Board (CMB), has laid out a series
of initiatives that he hopes to bring to fruition in the next
year or two. The most imminent of these initiatives is a
futures and options trading exchange to be located in the
port city of Izmir. Cansizlar hopes that the Izmir exchange
will be up and running by the end of 2004. Cansizlar said
that the Izmir exchange, modelled on the Chicago Board of
Trade, will begin operations with hedging instruments
covering agricultural commodities, especially cotton, but
will eventually trade financial derivatives such as foreign
exchange products. Though banks in Istanbul offer foreign
exchange hedging instruments, mostly for foreign exchange
risk, Cansizlar downplayed the importance of the Istanbul
market for these instruments. Note: Turkish corporates
traditionally have underutilized hedging instruments,
although Central Bank Governor Serdengecti has publicly urged
Turkish companies to make greater use of foreign exchange
hedging instruments. The Vice Chairman of Akbank, Akin
Kozanoglu, recently told econoffs that use of hedging
instruments is small but growing. End Note.
Stock Exchange for SME's:
3 (Sbu) A longer-term project, that Cansizlar says he is
working on with the Turkish Union of Chambers of Commerce
(TOBB) is a NASDAQ-like electronic stock exchage for small-
and medium-sized businesses. Cansizlar elaborates that the
goal is to move the financing of mostly Anatolian small
businesses into more conventional, formal channels, such as a
traded exchange. At present, Cansizlar said most of these
businesses finance themselves through family savings and
personal contacts. He hopes to tap into local savings and
knowledge of local companies and bypass Istanbul, which he
said Anatolians tend to distrust as a place to put their
Transition period in Turkish Capital Markets:
4. (Sbu) The Izmir and SME stock exchange projects fit with
the broader goal of developing Turkish capital markets.
Cansizlar, echoing many financial community contacts, noted
that Turkey's government securities market--with its very
high returns--has crowded out private capital market
development. He said only 9 percent of securities traded in
Turkey were private sector securities. The pool of savings
was effectively financing the government rather than private
investment. The market capitalization of the Istanbul stock
exchange was only about $100 billion, and Cansizlar said the
CMB is trying to convince people to put more money into
capital markets.
5. (Sbu) With interest rates and inflation coming down to
more reasonable levels, the Turkish financial system is
poised to undergo a significant transition. Whereas up until
now, the financial system has been dominated by trading in
government securities, the fall in interest rates opens up
the possibility for greater interest in other instruments.
Though there is no corporate bond market, for now, Cansizlar
claims regulations are in place that would allow financial
houses to underwrite and issue corporate bonds. Both bankers
and bank regulators, however, have pointed out to econoffs
that the tax system and bank capital adequacy rules create a
bias in favor of holding government securities. Unlike other
instruments, government securities earnings are not taxed,
and banks are required to hold capital against other
instruments, but not against government securities. A few
days after his meeting with econoffs, Cansizlar proposed that
the government impose a transaction tax on equity trading as
an alternative to capital gains tax.
EU Harmonization and International Cooperation:
--------------------------------------------- -
6. (Sbu) Though in an earlier meeting Cansizlar had claimed
that Turkey's capital markets regulations were about 65
percent harmonized with EU regulations, in an October 4
meeting he said it would probably take two years to complete
the harmonization process. He said the EU Commission will
provide a twinning project by year-end. (The twinning
advisor is likely to come from either the UK, Germany,
Netherlands or France or there might be a consortium.) He
noted that Turkey's regulatory framework is more like that in
the U.S. or France or Italy, rather than the UK model of a
single regulator of the entire financial sector. Cansizlar
said the GOT at one point considered creating a single
regulator but that he had succeeded in convincing the
government that it was unwise to merge the longstanding
Capital Markets Board (founded in 1981) with the more recent
bank regulatory agencies, particularly when there are a
number of unsettled issues in the banking sector.
7. (Sbu) Cansizlar described his apparently extensive
activities in international securities regulatory bodies. He
is an active participant in IOSCO, and said he chairs a
committee of emerging market securities regulators.
8. (Sbu) Comment: Though Cansizlar seems sincere, financial
community contacts have expressed both frustration over what
they characterize as the rigidity of CMB's attitude towards
new instruments, and some general skepticism about CMB's
effectiveness as an organization. This view of the CMB does
not seem to track with Cansizlar accomplishing his very
ambitious agenda in the time frame he laid out. End Comment.
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