With Muammer Çakır, Head of Derivatives (VIOP) Borsa Istanbul
Borsa Istanbul, with historical roots going back to 1873, is a diversified regional and global trading venue in Turkey, home to the world’s oldest known exchange and birthplace of minted coinage, providing trading, settlement, custody and registry services for a wide range of products. Borsa Istanbul operates a broad range of equities, fixed income, derivatives, precious metals and Islamic finance markets in Turkey all under a single umbrella after successfully completing horizontal integration via acquisition of the derivatives and gold exchanges after its de-mutualisation in 2012.
With a Gross Domestic Product (GDP) of $786 billion, Turkey is the 18th largest economy in the world. In less than a decade, per capita income in the country has nearly tripled and exceeded $10,000. Foreign Direct Investment (FDI) per annum has grown from just over $1 billion to an average of $13 billion in the past five years. Turkey’s geopolitical advantage combined with growth opportunities facilitates its journey to become the largest financial center of the Eurasia region. Bridging East to West, Turkey is capable of combining Western and Islamic financial practices more than any other country.
The project to gather Istanbul Stock Exchange (ISE), Istanbul Gold Exchange (IGE) and Turkish Derivatives Exchange (TURKDEX) under the same umbrella to make Istanbul a financial center was started in 2009. Following the Capital Market Law, enacted on December 30, 2012, Borsa Istanbul A.Ş. was founded to become the hub of all centralized trading activities. In 2013 Istanbul Gold Exchange (IGE) and Turkish Derivatives Exchange (TURKDEX) merged under the umbrella of Borsa Istanbul. By these mergers, horizontal integration has been completed successfully. Borsa Istanbul has also increased its equity share at Takasbank (Istanbul Settlement and Custody Bank) and MKK (Central Securities Depository) to complete the vertical integration.
After this merger, all derivatives contracts have started to trade at Borsa Istanbul Derivatives Market (VIOP). As the region’s leading and most liquid derivatives marketplace, investors and corporates use VIOP as a trading venue to manage their risk. VIOP offers the widest range of regional benchmark products across all major asset classes, including futures and options based on equity indices, currencies, precious metals, commodities and energy. With daily average of around 250,000 futures and options contracts traded in 2014, VIOP is an important derivative marketplace to manage risks in its region. The flagship BIST 30 Index futures on the other hand, currently trade, on average, more than 170,000 contracts per day.
On the other hand, since March 2014 Takasbank has become Central Counterparty for all VIOP contracts. In the central counterparty practice Takasbank commits to complete the clearing and settlement for all VIOP contracts by acting as buyer against seller and seller against buyer. Takasbank regulates this service and related issues in line with the CPSS-IOSCO and European Union regulations.
To meet the demand of increasing order flow and trading activity, Borsa Istanbul and NASDAQ OMX Group signed a strategic partnership agreement, which includes the delivery of market-leading technologies to Borsa Istanbul. NASDAQ has become a 5% shareholder of Borsa Istanbul. Key aspects of the agreement include the provision of NASDAQ OMX’s most advanced and complete selection of market technology solutions, based on the globally market-leading Genium INET suite and all associated platforms and applications, with regional resell rights and also eventual self-sufficiency for Borsa Istanbul. Further, the parties are working together to strengthen Borsa Istanbul’s position as a financial center of the Eurasia region.
Moreover, Borsa Istanbul signed a partnership agreement which covers derivatives and index products with the London Stock Exchange Group. Under the terms of this partnership agreement London Stock Exchange Derivatives Market (LSEDM) will offer trading in futures and options contracts on the BIST 30 Index first and on leading Turkish stocks. LCH.Clearnet will provide central counterparty services to LSEDM and its clearing members.
Borsa Istanbul VIOP is cooperating with other exchanges in the region. Sarajevo Stock Exchange blue chip index SASX 10 futures contracts have been listed at VIOP as of December, 2014. Other futures contracts based on the regional exchanges’ blue-chip indices are in the pipeline.
Borsa Istanbul VIOP launches new products in line with the investors’ preferences and hedging needs and has the vision of being a one-stop shop for all sorts of risk management needs in its region. Steel scrap futures contract based on The Steel Index (TSI)’s daily Turkish scrap price index published by Platts was launched on April 2, 2015 to meet the hedging needs of the growing Turkish steel industry participants.
Furthermore The London Metal Exchange (LME) and Borsa Istanbul A.S. signed a partnership agreement under which the LME licensed LME steel billet settlement data to Borsa Istanbul VIOP, and will work with Borsa Istanbul to develop derivatives products and related services for the steel market. Borsa Istanbul also acquired LME’s stake in the clearing house LCH. Clearnet. Additionally, Borsa Istanbul obtained the right to disseminate real time data from the LME and HKEx.
At the moment, VIOP is also working on overnight repo rate futures which will fill the need for an interest rate product in the Turkish markets. Another important project is to increase the liquidity of the commodity futures at VIOP. The currently cash settled contracts, mainly wheat and cotton, will be converted to physically settled ones via licensed warehouse system currently available in Turkey.
In April 2014, the FIX protocol was enabled at VIOP. At the same time Borsa Istanbul launched the Primary Data Center. Borsa Istanbul is able to serve as the data center of the region’s exchanges as part of its strategic partnership with NASDAQ OMX. The Primary Data Center will also offer co-location services for the financial institutions.
Borsa Istanbul VIOP also launched a popular market making program based on revenue sharing. The principle of the program is to distribute the exchange fees collected by Borsa to market makers. The program has become quite successful for single stock futures and is planned to be extended for other products.
Borsa Istanbul Derivatives Market VIOP is dominated by retail investors flow which accounts for 64% of the daily total volume. One of the important strategic objectives is to increase the institutional flow in the Derivatives Market to peer standards. Similarly, even though the foreign investor participation in the total volume has almost doubled from 15% in 2011 to 28% in 2015, as an exchange we are aiming for 40-45% in the next couple of years.
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