Derivatives Market in Turkey and New Trends

Global Derivatives Market on Organized Exchanges

For the last couple of decades the volume of derivatives contracts traded on organized exchanges increased continuously. Eventhough the pace of the growth seems slowed down since the global credit crisis in 2008, the global volume of derivatives market keeps increasing. According to Futures Industry Association (FIA) the global volume of derivatives reached 21.7 billion contracts in 2013 out of which 12.2 billion contracts were futures (56%) and the remaining exchange traded option contracts (44%). This represents a 2.1% increase compared to the previous year. The main contributors to the growth of last year were the interest rate and energy futures and option contracts which increased 14% and 36% respectively.

When we look at the notional amounts of the total trading volume, we can easily understand how huge this market is. According to Bank for International Settlement (BIS) the global volume of derivatives was an enormous 1.9 quadrillion dollars in 2013.

History of Derivatives Market in Turkey

The first future contract in Turkey was launched by Istanbul Gold and Commodities Exchange in 1997. The underlying asset was gold. After the 2001 financial crisis, Istanbul Stock Exchange decided to develop a mechanism for people who would like to hedge their currency exposures. For this reason they launched two currency futures contracts on USDTRY and EUROTRY. Both attempts were unsuccessful.

In 2005 Turkdex, the first derivatives exchange of Turkey, was established and became a success story right after its launch. Its flagship product, ISE30 equity index future contract, became a globally traded and accepted equity index contract in a very short period of time. Besides equity index contracts, currency futures, interest rate futures, energy futures and commodity futures were also traded at Turkdex. Towards 2010, some days the total trading volume of the exchange either exceeded or approached to the Istanbul Stock Exchange’s daily equity trading volume. In 2012, Istanbul Stock Exchange decided to open its derivatives department (VIOP) and launched futures and options on single stocks. In 2013, Borsa Istanbul was established as an independent corporation and acquired Turkdex with all of its products. All the future contracts at Turkdex were transferred to Borsa Istanbul in August 2013. Since then, all future and option contracts are traded at Borsa Istanbul’s trading platform.

The Development of Structured Products

Turkdex also contributed indirectly to the development of the structured product market in Turkey. With extensive trainings and marketing seminars the financial industry professionals became more familiar with the derivatives products. Right after the development of the futures market, brokerage houses and banks started to develop their own structured products. First the warrant market became active in 2010. And then some other products such as discount certificates and turbo certificates started to be offered by Turkish financial institutions. Currently these warrants and certificates are traded on the Collective Products Market at Borsa Istanbul.

New Market Developments and Prospects in Turkey

There is no doubt that the derivatives market in Turkey will keep growing. Eventhough the trading volume of exchange traded future and option contracts decreased after the Turkdex merger, the future seem quite bright. This market will keep growing after the addition of new products and after the completion of new projects:

Option Trading:

Unfortunately the volume of option contracts traded at VIOP is almost non-existing. But when we check the well developed derivatives markets, we can easily see that in addition to future contracts option markets are also quite active. In 2013, 44% of total global trading volume was from option contracts. For this reason after the introduction of new market making system it won’t be a surprise that we will have an active option market in the near future. Investors will be able to apply different trading strategies by buying and selling different types of exchange traded option contracts.

New Trading Platform:

Currently the biggest project conducted by Borsa Istanbul is the development of a new trading platform. At the end of last year, the exchange signed a strategic partnership agreement with Nasdaq OMX. According to this agreement, Nasdaq will deliver its technology and advisory services to Borsa Istanbul and in return will get an equity stake. The go live date for the spot equity market is 2015 and derivatives market is 2016. With the new trading system the exchange will be able to launch new products and provide new services such as collocation and DMA.

Structured Products:

On the structured product site, we will see some more warrants, discount and turbo certificates coming to the market. It is obvious that the issuers will add new underlyings to the existing ones. The term “Financial Engineering” will be more widely used in Turkish capital markets.

Forex (FX) Markets:

After the new regulation, issued by the Capital Markets Board of Turkey (CMB) in 2011, Forex (FX) Markets accelerated its growth. CMB granted licenses to many brokerage houses to be able to trade legally FX products in Turkey. The trading volume of leveraged products increased significantly during the last couple of years. FX trading is a very profitable area for the brokerage houses and it seems that the volumes will keep growing. But since the legal leverage limit might reach up to 1/100, FX markets can be quite dangerous for investors who don’t have the necessary knowledge and education. Brokerage houses should be so cautious for not loosing their investors. They should organize extensive training programs and seminars and explain the risks involved with FX trading.

Career Opportunities in Derivatives Markets

There is no doubt that derivatives market will offer new job opportunities to experienced market professionals and new comers. Especially when the option market becomes more active, firms will need people who have knowledge on options and on complex derivatives structures. Careers in this field will drive demand for people with degrees in financial engineering and who have quantitative skills.

On the other hand there is no limit to develop new derivatives contracts on different underlyings. This is the beauty of derivatives market. Energy is an important area to look at. There are some plans to launch a spot energy exchange. With the privatization and the development of spot energy markets, derivatives on energy products will be much more popular in the future. Naturally some opportunities will arise accordingly.

After the 2008 credit crisis, regulations for banks on risk management got quite stricter in Europe and in the US. In terms of risk management, Turkish banks were much more ready since they had already experimented the financial crisis in 2001. But on the brokerage house site there are a lot of things to do. There is a high change that regulations on risk management would be much stricter for them and this will open some doors for risk management professionals.

Required Certifications

People who are willing to work at the derivatives market in Turkey need to have the Derivatives License issued by the Capital Markets Board of Turkey (CMB). To get this license, industry professionals need to pass an exam which has 8 different modules. The exam includes several subjects such as regulations, tax, futures and option markets, hedging and arbitrage, settlement and clearing, economics and capital market instruments. CMB conducts these exams two or three times in a year. There will be two exams in 2014, one at May 31st  and the second one at  November 15th.

Emin Tolga Uysal