US embassy cable - 04ANKARA5979

UNCLAS SECTION 01 OF 02 ANKARA 005979 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EUR/SE AND EB/IFD/OMA 
TREASURY FOR IA - MMILLS AND RADKINS 
NSC FOR MBRYZA AND TMCKIBBEN 
BRUSSELS FOR USEU 
PASS SEC FOR INTERNATIONAL AFFAIRS 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, PGOV, TU 
SUBJECT: CAPITAL MARKETS BOARD CHAIRMAN'S AMBITIOUS AGENDA 
 
 
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 
savings. 
 
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. 
 
 
EDELMAN