Our Information Note on the decisions of the BRSA and the CMB with respect to certain restrictions to derivative transactions in view of COVID-19 has been published.

1. INTRODUCTION

In response to the adverse effects of the COVID-19 pandemic on financial markets, the Banking and Regulatory Supervision Agency (the "BRSA") and the Capital Markets Board (the "CMB") have adopted similar decisions, introducing new restrictions to foreign currency denominated swap and other derivative transactions carried out by banks and financial institutions.

2. RESTRICTIONS INTRODUCED BY BRSA

The BRSA had previously, with its decision dated 9 February 2020, introduced certain restrictions on swaps, forwards, options and other derivatives. On the basis of its decision adopted on 12 April 2020, the BRSA has now expanded the scope of such restrictions.

In a related press release, the BRSA stated that the new restrictions have been set in place due to the rising uncertainties and risks in the global markets created by the outbreak and spread of the COVID-19 pandemic. 

Any transactions carried out by domestic banks with their foreign affiliates consolidated in the same financial statements have been exempted from the scope of the restrictions.

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   1. Restrictions pertaining to TL Forward Buying  
   
   
   
   

The following new restrictions will be applicable to domestic banks’ currency swaps, forwards, options and other derivatives transactions with foreign counterparties in foreign currency where the domestic bank will receive a TL equivalent at the maturity date:

• the total volume of such transactions may not exceed 1% of a bank’s latest regulatory capital (this threshold was set at 10% in the previous decision of the BRSA);


• transactions with different maturity periods will no longer be subject to differential treatment in the daily calculation of the 1% limit; and


• the BRSA’s written approval will be required in case of a termination of such transactions prior to their maturity dates or the extension of their maturity dates.
  
  
  
  2. Restrictions pertaining to TL Forward Selling 
  
  
  
  

The previous announcement of the BRSA stated that the total volume of such transactions carried out by banks may not exceed 10% of their latest regulatory capital amount. The BRSA has now adopted a new limit in view of the rising financial risk caused by the COVID-19 pandemic.

Accordingly, the new restrictions applicable to domestic banks’ currency swaps, forwards, options and other derivatives transactions with foreign counterparties in foreign currency where the domestic bank will sell the TL equivalent at the maturity date are as follows:

• The total volume of such transactions may not exceed in any calendar day:

• 1% of the bank's regulatory capital for transactions with a maturity of 7 days or less


• 2% of the bank's regulatory capital for transactions with a maturity of 30 days or less


• 10% of the bank's regulatory capital for transactions with a maturity of 1 year or less

• the BRSA’s written approval will be required in case of the termination of such transactions prior to their maturity dates or the extension of their maturity dates.

3. RESTRICTIONS INTRODUCED BY CMB

In parallel with the BRSA’s recent decision, the CMB has introduced certain restrictions with respect to capital market institutions in its bulletin dated 13 April 2020 and numbered 2020/24. Such restrictions are similar in scope to those introduced by the BRSA.

Whilst the BRSA’s restrictions will apply to banks, the CMB’s decision, which sets out the same limit ratios for the same transactions, will cover investment firms, portfolio management companies, intermediary institutions, funds and other capital market institutions

4. CONCLUSION

The objective of the BRSA’s and the CMB’s regulations is to limit the volume of derivative transactions carried out by banks and capital market institutions. As these types of transactions contribute to a downward trend in the value of TL (which has rapidly decreased in value during the past weeks), the BRSA and the CMB attempt to counter this trend.