Turkish Brokerages Mitigate Futures Market Risk Ahead of Expiry

(Bloomberg) – Turkey’s regulator has urged local brokers to take measures to limit volatility in the country’s stocks ahead of the expiry of September contracts in the futures market, which has about $2 billion in daily trading volume.

Brokers have closed contracts on some of the stocks with the most open interest in the recent crisis, a move aimed at averting a highly volatile September 30 expiration day for Turkish markets. That’s according to a broker and a senior official with knowledge of the matter who spoke to Bloomberg yesterday.

Open positions on September contracts for Sekerbank Turk AS, Turkiye Sinai Kalkinma Bankasi AS and real estate developer Is Gayrimenkul Yatirim Ortakligi AS fell 71%, 74% and 49% respectively this week after remaining near highest levels on record during the loss were , according to open interest data collected by Bloomberg. Open positions are trades that expose the investor to market movements and are able to generate profits or losses until closed out with an opposite trade.

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These stocks were seen as the top concern by analysts as their precipitous drop in the spot market was still ongoing even after the heat of the sell-off for other bank stocks had mostly passed, posing problems for brokers. Authorities have begun scrutinizing transactions in the market over the past 12 months and agree that some market movements are disruptive, the official said.

Turkey’s brokerage and capital markets regulators have held several meetings since last week to mitigate the fallout for investment firms. Before the deal went through, authorities first asked the brokerage firms to secure enough funds to close their positions.

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Five brokerage firms that held the largest open positions in the futures market and arbitrage funds — which buy stocks in the spot market and sell them in the futures market — liquidated and closed some of their positions in the futures market, the official said .

Also, brokers bought the stocks that arbitrage funds were holding in the spot market and posted the current trading loss on their own balance sheets. It was unclear how large these losses could be.

Both Turkey’s regulator, the Capital Markets Board, and the Turkish Capital Markets Association, which represents brokerage firms, declined to comment.

Turkish bank stocks suffered one of their biggest setbacks in the two weeks ended September 26, falling 38%, the decline fueled by higher margin demands that threatened the financial stability of some brokers. The defeat came after an unprecedented rally in just two months in which trading in futures and leveraged markets played a key role.

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“Ensuring a smooth settlement process for September contracts is extremely important in terms of Turkey’s stock market reputation and investor confidence, which is also likely to affect market sentiment,” said Nuri Sevgen, derivatives markets manager at Istanbul-based Yatirim Finansman .

While the deal has now taken some of the pressure off, the market won’t be completely off the hook until all deals are settled and settlement goes smoothly on October 4, the official said, adding that this will depend on brokers who act at the request of the authorities on the day of the settlement provide additional funds.

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