The concept of the issuance of secured capital market instruments was introduced into Turkish legislation by a new article in Turkey's Capital Markets Law (the "Law") through the enactment of Law No. 7222 in February 2020. As such, the authority to determine the procedures and principles regarding the implementation of this concept was granted to the Capital Markets Board ("CMB").

The CMB has recently published its Communiqué on the Procedures and Principles on the Issuance of Secured Capital Market Instruments numbered II-31/B.1 (the "Communiqué"), which entered into force on the day of its publication.

The Communiqué regulates the concept of the security agent and its responsibilities, together with the general principles of the issuance of secured capital market instruments. 

Below we summarise some of the main concepts and principles set out in the Communiqué.

The concept of secured issuance is introduced

The capital market instruments to be determined by the CMB will be secured with the assets listed in the Communiqué by the CMB, and thus it will be ensured that the issuer fulfils its obligations arising from the relevant instruments in due time. Secured issuance is optional as a rule. An issuer establishes a secured issuance by (i) transferring the ownership of the assets subject to the security to a security agent, or (ii) establishing a right in rem on them in favour of a security agent. The Communiqué also clarifies that there must be no encumbrance or any other restrictions for such transfer or establishment of a right in rem. Without completion of one of the above transaction options, the sale of the relevant capital market instrument cannot be launched.

Framework of assets subject to security

Assets detailed in the relevant article of the Communiqué—including but not limited to cash, foreign currency bonds issued by the Ministry of Treasury and Finance, local government bonds, public companies' shares listed on the Borsa Istanbul Star Market, and mutual fund participation shares are eligible to be subject to security. The CMB has the right to ask the issuer to diversify and alter its security, as well as to determine the percentage of the relevant assets to be accepted as security.

Assets subject to security will be segregated from the assets of the security agent and monitored separately. That said, the assets subject to security cannot be seized, pledged, included in a bankruptcy estate or be subject to any interim relief or provisional attachment, even for public receivables of the debts of the security agent. 

Framework of the security management agreement 

The security management agreement is to be signed before the issuance and must incorporate basic information as determined by the Communiqué, such as the issuance, the assets subject to security and the liabilities of the parties, in order to determine the general terms of the relationship between the issuer and the security agent.

 As per the Communiqué, the security management agreement may be terminated unilaterally by the issuer, upon the request of the CMB, or ipso facto.

Default events and actions to be taken in case of default are clarified

Failure to make the principal, interest and similar payments of the capital market instrument within the time period as stated in the prospectus or issuance certificate will be deemed as a default event. The Communiqué enables the issuer to cover unpaid receivables with the securities specified in the security management agreement. The Communiqué also details how the security will be liquidated in case of a default event and other situations having the same consequences as a default event. If all receivables cannot be covered following the liquidation of the security, the security agent is obliged to pay the investors on a pro-rata basis.

The security agent is defined and its duties listed

The security agent is defined as the investment institution having general custody authorisation of the security in accordance with Turkish capital market legislation. The security agent has powers such as protecting and managing the asset subject to security, applying legal remedies for the security, as well as liquidating the security in order to repay the receivables from the security and distributing the output among investors without fulfilling any preconditions, following the signature of the security management agreement.

Within the scope of the Communiqué, the security agent is expected to comply with the following main obligations:

  • Independence;
  • Ensuring the confidentiality of information regarding the assets subject to security and the issuer;
  • Preparing a security report within ten days for the issues listed in the Communiqué;
  • Making a material event disclosure in cases specified in the Communiqué (such as a decrease in the value of the assets subject to security, a default event of the issuer etc.);
  • Keeping a separate security book for the assets subject to security for each issuance; and
  • Fulfilling the document archiving obligation.

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.