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