New Regulation: Manipulation and Speculative Transactions in Financial Markets

Recent Development

The Banking Regulatory and Supervisory Authority (the “ BRSA “) regulated the concept of the manipulation and speculation in financial markets which was brought in the amendments made to the Banking Law No. 5411 (the “ Banking Law “) in February this year. The Regulation on Manipulation and Speculation in Financial Markets (the “ Regulation “) was published on May 7, 2020

What’s New?

Pursuant to the Regulation, engaging in the following practices of Turkish banks (including the branches of international banks in Turkey) will be deemed manipulation and speculation:

• Transactions that (i) are or can potentially result in false or deceptive impressions regarding the issuance, demand or price of a financial instrument; or enable or are conducted with the intention of maintaining the price (including exchange rate and interest;) of a financial instrument at abnormal or unnatural levels.
• Transactions that affect reference values such as the price, interest, exchange rate, or credit default swap that would augment the volatility or disrupt the stability of financial markets and benefiting from the volatile or shallow financial markets when there is a gap in supply and demand. A reference value is the referenced ratio, index or figure formulated and calculated pursuant to various components such as value or predicted prices of referenced assets, realized or expected interest and surveys to determine the price of or amount to be paid for a financial instrument.
• Practices that would breach the BRSA’s restrictions and decisions on currency swaps, forwards, options, other derivative transactions and provision of TRY liquidity to overseas. These practices include postponement of matured transactions, early retirement of transactions and/or breach of obligations.
• Transactions through a fraudulent mechanism or act that will or would potentially damage the price (including the exchange rate and interest rate) of a financial instrument.
• Dissemination of misinformation or rumor that will or potentially would, through mass media, including the internet or by other means, (i) result in false impressions on the issuance, demand or the price (including exchange rate and interest rate) of a financial instrument; or (ii) keep the price at abnormal or unnatural levels.
• Expression of opinions while covering the conflict of interest on the positions the banks have on a financial instrument to affect or attempt to affect the price (including the exchange rate and interest rate) of a financial instrument via mass media (including the internet).
• Intentional provision of false or deceptive information about the reference value; possession of false or deceptive input; or manipulation of the calculation of the reference value by any means. These acts are considered manipulative and speculative when the banks do not know but should have known that the information provided was false or deceptive.
• Preservation of the price of or derivation of an improper benefit from a financial instrument by exercising its dominant position on the market forces.
• Engagement in sales or purchases that will or would affect the opening and closing prices of a financial instrument (including the exchange rate and interest rate) so as to mislead investors who have a position on these financial instruments.
• Fallaciously misleading savings holders.
• Dissemination of information or rumors that would cause distrust in the financial markets and consequently result in systemic risk. Systemic risk occurs when problems that emerged in the majority of or the entirety of financial markets interrupts the provision of financial services and could potentially have material adverse effects on markets and/or the real economy.

“Engaging in” should be broadly interpreted; a bank would be considered being manipulative or speculative if it were involved in, mediated or ordered any of the transactions enumerated.

Turkish banks that engage in manipulation and speculative transaction may be imposed a fine up to 5% of the sum of interest, profit share income, fees and commissions and other income of banking operations specified in the bank’s most recent year-end financial statements, this fine being no less than twice the benefit that concerned bank has derived from the concerned transaction.

Conclusion

This new concept of manipulation and speculative transactions took shape with the Regulation. Turkish banks need to be mindful of the transactions that may fall into the scope of this concept and the result thereof.