Having recently introduced derivatives trading, Turkey is yet on the bottom rung of the derivatives market ladder. While there are many exchanges where futures, forward or option contracts are traded in Europe and the United States, in Turkey there is only one derivatives exchange called VOB ("TurkDEX") (Turkish Derivatives Exchange). TurkDEX is a joint stock company established in 2002 based on the Regulation on the Establishment and Functioning Procedures of the Derivative Exchanges. Accordingly, the Turkish Derivatives Exchange Regulation (the "TurkDEX Regulation") was published in 2004 in order to regulate the operation and activities of TurkDEX and the trade of derivative contracts started in 2005.
As per the TurkDEX Regulation, the Capital Markets Board ("CMB") decides the underlying upon which the contracts to be quoted in the TurkDEX will be based. Until very recently, the derivative contracts traded in TurkDEX were mainly based upon underlyings such as currency, interest and commodities such as grain and cotton. Neither electricity nor electricity price were traded. On 8 September 2011, TurkDEX announced that the CMB approved the Base Load Electricity Futures Contract with its decision dated 22 July 2011. As per the announcement of TurkDEX, the Electricity Futures Contracts were opened to trade as of 26 September 2011 for the months of December 2011, January, February and March 2012. In accordance with the decision of the CMB, TurkDEX published the Circular numbered 2011/146 and dated 8 September 2011 (the "Circular"). The Circular regulates the provisions of the Base Load Electricity Futures Contracts and the trade procedure of such contracts in TurkDEX.
The Underlying of the Contracts as per the Circular
The Circular also determines the underlying of the contracts. Currently, the day-ahead balancing is realized through the day-ahead planning until the start of the day ahead market. Although the day ahead market is planned to start functioning on 1 December 2011 and the earliest term of the electricity futures agreement traded in TurkDEX is the month of December, the Circular determined the underlying of the contract differently for the day ahead planning period considering the possibility of a postponement in the functioning of the day ahead market. Accordingly, as per the Circular, during the day ahead planning period, the underlying of these futures contracts will be the arithmetic average of the System Day Ahead Price of each hour of the term announced by Turkish Electricity Transmission Company ("TEİAŞ"). When the day-ahead market starts functioning, the underlying will be calculated as the arithmetic average of the Unconstrained Market Clearing Price of each hour of the term announced by TEİAŞ.
How will the system work?
For the time being, only base load (24 hour) electricity futures contracts are being traded in TurkDEX, however the peak load electricity futures contracts are soon to be opened to trade as well. In the base load electricity future contracts prepared by TurkDEX, there will be no physical settlement at the end of the term, but only cash settlement. Cash or financial settlement will be made through closing out of the open position at the end of each contract term. If the calculated underlying is lower than the contract price, it will be the party taking the long position which will make the payment of the cash amount difference between the underlying and the price settled between the parties. If the contract price is lower than the underlying, then the party taking the short position will make the payment.
The term of the contracts to be quoted in TurkDEX are monthly and the size of contracts is calculated as the product of 1 MWh and the total number of hours in the relevant month. In the Circular, the margins to be deposited by the parties in order to take long or short positions in a contract are determined as TL 12,000 (circa Euro 4,800) whereas the maintenance margin is 75% of the initial margin. However, in order to increase the participants' number and the transaction volume and ensure compatibility with the Market Financial Settlement Center (PMUM), TurkDEX is planning to reduce the size of a contract by changing the 1 MWh as 0,1 MWh, which would also decrease the margin amount from TL 12,000 to TL 1,200 ( circa Euro 480). We understand that TurkDEX will submit such amendment to CMB for its approval. In addition, as an incentive to increase the participation, TurkDEX announced that the exchange transaction fee which will be taken from the parties as per the TurkDEX Regulation will not be collected until the end of 2011.
The critiques on the start of the Electricity Future Contract trades
Usually, the application of derivative contracts starts with the over-the-counter platform and is standardized in the exchange when matured. However, the application in Turkey has been the opposite as there is neither an over-the-counter platform nor an energy exchange where a spot index can be determined, and this has been criticized by the market players. Another concern in the market was the start of the electricity future contract trades before the functioning of the day ahead market.
We believe that the introduction of electricity future contracts will serve as an important opportunity for the market players to become familiar with the exchange market, in which they are likely to become much more involved in the near future. Even though the timing of the start of the future electricity contracts' trade and the non-existence of physical settlement as an alternative to cash settlement have been criticized, all the market players agree that beginning of trade in this area is a positive improvement and a significant step towards the establishment of a separate energy exchange.