ARTICLE
30 May 2024

Establishment And Operational Principles Of Intermediary Institutions

KC
Kilinc Law & Consulting

Contributor

Kilinç Law & Consulting established by Levent Lezgin Kilinç currently operates in Istanbul, Izmir and London. Our firm, provides services to clients in a wide range of complex matters including Project Finance, Corporate Law, M&A, Energy Law, Dispute Resolution, Maritime Law, IP Law, International Transactions as well as Litigation of the disputes.
Financial intermediaries, also classified as financial institutions, play a significant role in financial markets. Since that investors cannot directly access the securities markets, and therefore...
Turkey Finance and Banking

INTRODUCTION

Financial intermediaries, also classified as financial institutions, play a significant role in financial markets. Since that investors cannot directly access the securities markets, and therefore, they need to benefit from professional intermediation activities; one of the most crucial activities of financial institutions within the financial system is intermediation.

In the capital markets, intermediary institutions (“Intermediary Institutions”), as defined in Article 37 of the Capital Markets Law No: 6362 (“Law”), exclusively refer to investment institutions authorized by the Capital Markets Board (“Board”) to perform the investment services and activities listed in subparagraphs (a), (b), (c), (e), and (f) of the first paragraph. Intermediation activity involves the commercial buying and selling of capital market instruments by Intermediary Institutions, either on their own behalf, on behalf of others, or on their own behalf for the account of others.

Brokerage activities in the capital market consist of underwriting, brokerage, and intermediation in the trading of derivative instruments.

A. ESTABLISHMENT OF INTERMEDIARY INSTITUTIONS

1.

Intermediary Institutions are subject to the Board's approval for establishment. Pursuant to Article 5 of the III-39.1 Communiqué on the Principles of Establishment and Activities of Investment Firms (“Communiqué III-39.1”), for the Board to permit the establishment of intermediary institutions:

  1. Must be established as joint-stock corporations, 
  2. All of their shares must be registered under the name of shareholders,
  3. Their shares must be issued against cash payment, 
  4. Their initial capital must not be less than the predetermined amount by the Board, with the condition that, in any case, it is not less than the minimum shareholders' equity requirement for intermediary institutions having been broadly authorized (explained under the ‘D. Licences'), pursuant to regulations of the Board pertaining to capital adequacy
  5. Their articles of association must adhere to the stipulations outlined in the Law and relevant regulations,
  6. Their founders must meet the criteria specified in the Law and relevant regulations,
  7. The shareholding structure should be transparent and clear.

It is a requirement for intermediary institutions to include either the phrase “securities” or “investment instruments” in their trade names to indicate their investment services and activities. However, fully authorized intermediary institutions can use the phrases “investment securities” or “investment instruments”.

B. TYPES OF INTERMEDIARY INSTITUTIONS

2.

Pursuant to Article 8 of the Communiqué on Principles Regarding Investment Services, Activities and Ancillary Services (“Communiqué III-37.1”), intermediary institutions are classified based on the activities they undertake into three categories. These categories vary depending on the scope of activities that intermediary institutions can perform. The activities that intermediary institutions (i) narrowly authorized, (ii) partially authorized, and (iii) broadly authorized can undertake are outlined below:

Narrowly Authorized Partially Authorized Broadly Authorized
Entities authorized by the Board to conduct order transmission intermediary activities and investment advisory activities are referred to as intermediary institutions. The purpose of classification is to necessitate lower capital requirements in narrowly authorized intermediary institution establishments compared to other authorization types due to the risk associated with the services provided by the intermediary institution and the impact of this risk on the financial structure of the intermediary institution. Partially authorized intermediary institutions are those authorized to provide transaction brokerage, individual portfolio management, best efforts underwriting activity in public offerings, and limited custody services in addition to the investment activities that narrowly authorized intermediary institutions can offer. A fully authorized intermediary institution is authorized to provide all services and activities defined in the Law and ancillary services. In addition to the services that a partially authorized intermediary institution can offer, a fully authorized intermediary institution may also provide portfolio management activities, underwriting activity in public offerings, and general custody services. It is mandatory for fully authorized intermediary institutions to have the phrase “investment securities” or “investment instruments” in their trade name.


Indeed, during the stage of obtaining activity permits for each of the aforementioned categories, it is necessary to submit the documents specified in Communiqué III-39.1 to the Board and obtain permission from them.

As per Article 5 of the Communiqué III-39.1, minimum capital requirement amounts specified below must be fulfilled by the Intermediary Institutions which shall posses following authorization licenses for the year of 2024:

  1. Narrowly authorized: The minimum capital requirement narrowly authorized intermediary institutions must have at least TRY-25,000,000.-
  2. Partially authorized: The minimum capital requirement narrowly authorized intermediary instutions must have at least TRY-100,000,000.-
  3. Broadly authorized: The minimum capital requirement narrowly authorized intermediary institutions must have at least TRY-200,000,000.-

C. MAIN ACTIVITIES AND ANCILLARY SERVICES OF INTERMEDIARY INSTITUTIONS

3.

In order for Intermediary Institutions to commence their activities, they are required to obtain permission from the Board. In this context, Intermediary Institutions may provide the investment services and activities listed below, subject to obtaining permission from the Board for each activity, as stipulated under Communiqué III-37.1:

  1. Receiving and transmitting orders related to capital market instruments
  2. Executing orders related to capital market instruments on behalf of and for the account of customers or on its own behalf and for the account of customers
  3. Trading capital market instruments for its own account
  4. Individual portfolio management
  5. Investment advisory
  6. Underwriting of capital market instruments on a firm commitment basis
  7. Placing of financial instruments without a firm commitment basis
  8. Operation of multilateral trading systems and regulated markets other than exchanges
  9. Safekeeping and administration of capital market instruments in the name of the customers and portfolio custody services
  10. Conducting other services and activities to be determined by the Board. 

Additionally, Intermediary Institutions may also provide ancillary services listed in Article 6 of Communiqué III-37.1, depending on the investment services and activities they are authorized to offer, provided that they notify the Board.

D. INTERMEDIARY INSTITUTIONS IN TURKISH CAPITAL MARKETS

4.

As of November 2023, there are 71 Intermediary Institutions operating in the capital markets. The top ten Intermediary Institutions, among them, account for approximately 70% of the total trading volume in equities, futures contracts, and leveraged transactions.

By the end of 2023, the total assets of Intermediary Institutions amounted to 167.3 billion Turkish Lira, total revenues reached 24.6 billion Turkish Lira, and operating revenues amounted to 18.2 billion Turkish Lira.

Intermediary Institutions, with a total equity of 46.6 billion Turkish Lira, continued to impress in creating economic value by achieving a net profit figure of 14.5 billion Turkish Lira.

E. CONCLUSION

5.

One of the most important activities of financial institutions within financial systems is intermediary activity. Intermediary activities within the financial system are carried out by Intermediary Institutions. Intermediary Institutions are joint-stock companies that engage in the buying and selling of securities and financial assets on behalf of others or on their own behalf, either in their own name or on behalf of others.

Intermediary Institutions can engage in various capital market activities. These include intermediation in the issuance or public offering of capital market instruments, intermediation in the trading of previously issued capital market instruments, intermediation in the trading of derivative instruments, repo and reverse repo transactions, investment advisory, and portfolio management, which are significant activities.

Over the years, Intermediary Institutions have continuously increased and developed their transactions and the number of investors they serve within these activities. Especially in terms of stock trading and exchange transactions, Intermediary Institutions have continually progressed over the years, and the significance of these transactions within the activities of Intermediary Institutions has increased every year.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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