CHAPTER 4 CAPITAL MARKET ENTITIES (INSTITUTIONS)

CHAPTER 4

CAPITAL MARKET ENTITIES (INSTITUTIONS)

CM Entities

In international markets;– Brokers– Dealers

Long Position Short Position

CM Entities

In Turkey– According to the CM Law No: 2499/3i

Financial Intermediaries (Aracı Kuruluşlar)– Commercial Banks (Ticari Bankalar)– Brokerage firms (houses) (Aracı Kurum)

– According to the CM Law No: 2499/32 Capital Market Institutions (Sermaye Piyasası Kurumları)

– Brokerage Firms– Mutual Funds (Yatırım Fonları)– Investment Trusts (Yatırım Ortaklıkları)

Real Estate Inv. Trusts (Gayri Menkul Yatırım Ortaklıkları) Venture Capital Inv. Trusts (Risk Sermayesi Yatırım

Ortaklıkları)

CM Entities

In International Markets– CM Institutions (Investment Companies)

Mutual Funds Closed-end Funds Unit Investment Trusts (UITs)

– Real Estate Inv. Trusts (REITS)– Real Estate Mortgage Conduits (REMICs)

Financial Intermediaries (Banks and Brokerage Firms)

Primary Market Activities (IPOs) Secondary Market Activities Repo and Reverse Repo Transactions Investment Counseling Portfolio Management Derivative Transactions

Min. Capital Requriment for the Brokerage Firms

Activity Trading activities IPO activities Repo and reverse repo

activities Portfolio management

Investment counseling

Derivative businesses

Minimum Equity Capital Required X Amount of New TL Half of above Same as above

40 percent of what is required for trading of securities

10 percent of what is required for trading of securities

Same as what is required for trading activities

Banks and Brokerage Firms

Margin Trading Short Selling Borrowing and Lending

Margin Trading

is the use of credit to purchase securities You can borrow up to 50% of the marginable securities by

using your own assets as collateral. (Initial Margin) Benefits;

– Increase the purchaing power of the investors. Risks associated with margin borrowing;

– The value of the securities you deposited or purchased on margin may decrease.

– If the equity in your account falls below the min maintenance requirements (maintanence margin), a maintanence call will result.

– If the maintenance call occurs, you will be required to increase the equity up to the min. maintenance levels by immediately deposited additional funds or marginable securities.

Short-selling

Sale of the borrowed securities that are not owned .

It is required from the customers to deposit at least 50% of the deal for short-selling in cash or in securities.

Marginable securities can not be used as equity in short sale deals.

Borrowing and Lending Activities

Borrowed securities are lent by the lender to the borrower with a view the borrower makes short-sale and return them in a certain time span to the lender.

Banks and brokerage firms may lend securities either from their own or customers portfolios.

Customers who sign margin aggrements also routinely sign loan-consent form.

Margin Trading- Short-selling and Lending-Borrowing Activities

The communiqué of the CMB stipulates that; Margin trading rates be limited to half of the net-

worth of banks and brokers Total of securities on credit, short sales, securities on

borrowing be limited to twice as much as their net worth

Each such deal to a single customer not exceed 10 percent of the net worth of banks and brokers.

MUTUAL FUNDS

Funds comprised of various types of securities. Such as common stock, bonds, cash investments and combination of them.

Since each investor may sell their shares or buy new shares each business day, they are called as “open-end investment companies”.

Each mutual fund has a manager or investment advisor.

MUTUAL FUNDS

Common objectives of the mutual funds;– Long-term growth– High current income– Preservation of principal

Advantages of the mutual funds;– Diversification– Professional Management– Liquidity– Convenience.

Mutual Funds in Turkey

Investors receive participation certificates from their investments into these funds in Turkey. It is called “shares” in U.S.A.

Only banks and brokerage firms can set up mutual funds under some regulations.– Funds are preserved on fiduciary basis.– Funds are run on proxy basis.

Types of the Mutual Funds in Turkey

A Type Fund: These funds are accounted for by at least 25% stock of companies that are founded and operate in Turkey.

B Type Fund: These funds are “the other types” than A type funds that do not have any limitations.

Names of the Mutual Funds in Turkey

If at least 51% of the portfolio consists of;– bonds and bills, it is called as bonds and bills fund– common stocks, it is called as common stock fund– foreign securities, it is called as foreign securities fund– gold and other precious metal, it is called as gold and other precious metals

fund– the securities of the main company and its sub-companies, it is called as

group fund If the whole fund consist of ;

– At least two of the following instruments; common stock, bond, bills, gold and other precious metals and other capital market instruments and also the value of investment in each instrument will not be lower than the 20% of the fund value, it is called as mixed fund

– financial instruments which has at least 90 days maturities, it is called as liquid fund.

If the 80% of the portfolio consist of the securities of an index, it is called as index fund.

INVESTMENT TRUTS in TURKEY

They are set up as joint stock companies on registered capital basis with a view to running portfolios of securities or gold or other precious metals.

They do not allow to control the equity and management of the corporation that they buy.

Management principles must be as follows; Any involvement into stocks of portfolio corporations more than 9% is prohibited No more than 10% of their portfolio can be invested into securities of any corporations Investment trusts are not free to issue preference shares, non-voting shares, and any debt

instrument with maturity more than 360 days These trusts can only purchase real estate as many as their activities require, and the total

may in no case exceed 5 percent of their total assets and/or 10 percent of their net worth They have to conduct their business through exchanges They are not free to buy assets for any value above market ranges Investment trusts are not free to use their assets as collateral or chattel mortgages (the

only exception is that 5 percent of their portfolios can be given as collateral in securing credits in their favor)

No investment into the shares of other investment trust or participation certificates of mutual funds are free with the exception of venture capital trusts

Investment into overseas securities can only be made so long as there is reference to this extent in their articles of association


There are 2 types of Inv. Trusts in Turkey;– Real Estate Inv. Trusts – Venture Capital Inv. Trusts


Real Estate Inv. Trusts

Set up or transformed from an existing company with a view to making inv.s in– Real estates– Real estate-backed securities– Real estate projects

with the proviso that minimum 25 percent of shares are owned by a “leader entrepreneur”.


Real estate trusts are banned from; taking deposits engaging in commercial, industrial and agricultural activities engaging in other capital market activities other than those real

estate related deals assuming construction responsibilities, and employing

workforce or equipment for this purpose (instead, builders do these on contractual basis)

running estates on their own (instead, estate agents are employed)

providing project services, financial feasibility, and management services in this context

Real estate investment trusts are free to; invest into real-estate-related securities invest into other capital market instruments invest into reverse repo agreements invest into lands and real estates of all kinds sell real estates in their portfolios invest into real estate rights engage in build-operate-transfer projects let the estates in their portfolios out engage in forward, swap deals; write options purchase futures contracts with the exception of commodities

futures



And real estate trusts are not free to; invest into gold and precious metals invest into unlisted securities invest into commodities sell securities short, nor can they be involved in capital market

transactions on borrowed securities engage in speculative derivatives pay commission in excess of three percent of the assets they

purchase (legal payments are excepted) invest into any properties that are not freely disposed

Venture Capital Inv. Trusts

public corporations set up with registered capital for the sole purpose of investing into ventures in order to gain capital gains, dividends, and interest.

“Ventures” are described by the CMB as corporations (existing or to be set up);– in funding needs – with high expectations


They make inv.s in; IPOs of ventures Debt instruments of ventures Securities traded at secondary markets Current values of reverse repo agreements

They are banned from; lending activities taking deposits engaging in commercial, industrial and agricultural activities

engaging in any other capital market activities investing into gold and other precious metals futures and options deals short sales and create positions on borrowed securities owning real estate more than their activities warrant


Capital Market Institutions Investment Companıes in US

Mutual Funds (Open-end Funds) Closed-end Funds Unit Inv. Trusts (UITs)

– REITs– REMICs

Differences btw Open-end Funds (Companies) (Mutual Funds) and Closed-end Funds (Companies)

Purchased its shares from the fund.

Redeemable Shares are being sold on a

continues basis More liquid securities

Traded in the secondary market.

Not redeemable They do not continuesly

offer their shares for sale They are permitted to invest

in a greater amount of “illiquid” secutities than mutual funds

Similarities of the open-end and closed-end funds

Both funds are managed by seperate entities known as “investment advisors” that are registered by the SEC.

Both can come in many varities. They are subject to SEC registration and

regulation and are subject to numerous requirements imposed for the protection of investors.

Differences btw Unit Inv. Trusts (UITs) and Mutual Funds

Have a termination date Make a one-time public offering of fixed

amount of units Buy and hold a fixed portfolio of stocks,

bonds etc. concentrated in a particular industry. Have shares of stocks of a few companies. (Dogs of Dow Approach)

Can not buy or sell securities frequently. For. Exp. SPDR,the trust can replace the securities only if they are replaced in the S&P’s 500 İndex.

Does not have an inv. Advisor

You can buy or sell at any time

Never expire

No fixed amount.

Diversification is essencial . It must hold a min. Nr. of diff. Securities

Can sell and buy securities frequently.

Have an inv. advisor

Buy or sell at the end of the trading day.

Similarities of the Mutual Funds and UITs

Their shares are both redeemable. Closed-end funds are not redeemable.

They must both calculate the NAV at least once every business day after the major US exchanges are closed. Closed-end funds are not subject to this requirement.

The share price of them are based on; – Per share NAV+fees at purchase (sales load, purchase

fees) The price the investors receive at redemption;

– app. NAV-fees (deferred sales loads or redemption fees)

UITs in US

SPDR, Spider, Spyder– Traded as SPY on AmEx.– Has a value of 10% of S&P 500 index

Qube– QQQ on AmEx– 2.5% of the NASDAQ 100 Index

DIAMONDS– DIA on AmEx– 1% of the DJIA

REITs and REMICs

They are pass-through securities.– REITs specializes in investing in mortgages, property or

real estate company shares offering their investors an apportunity to participate in real estate profits and tax benefits

– REMICs must invest only in mortgages not real estate. There are 3 institutions that sell these securities (REMICs)

guaranteed and issued by the government;– Government National Mortgage Association, Ginnie Mae– Federal Home Loan Mortgage Corporation; Freddie Mac– Federal National Mortgage Association; Fannie Mae.

HEDGE FUNDS (Private Limited Partnership)

Private inv. tool that invests all or most of their assets in publicly traded securities.

Make inv.s in CS, bonds, commodities and currencies and using some tools such as leverage, derivatives and arbitrage.

Structured as limited partnerships. They are unregulated. Hedge fund fees (management fee or performance

fee); US hedge funds charge the standard “one-to-twenty”.

HEDGE FUNDS

Min inv. For one share is 250,000 $ Accredited investor; professional, sophisticated,

institutional investor who has net worth of 1 million $ or more.

Qualified purchasers; super accredited investors who has net worth of 5million $ or more.

The most famous hedge funds are;– Quantom Fund (George Saros)– L-T Credit Management

Documents

CHAPTER 4 CAPITAL MARKET ENTITIES (INSTITUTIONS)