Chapter 5

1. Chapter 5 INVESTMENT BANKING FIRMS

2. Inv. Banking activities are performed by; Securities firms and Commercial banks Security firms; Distribute newly issued securities, Involved in secondary market as market makers and brokers. Inv. Banking firms are highly leveraged companies. Revenues: Commissions, fee income, spread income, and principal.

3. Activities of the Inv. Banking Firms Public offering (underwriting) of securities. Trading of securities. Private placement of securities. Securitization of assets. Mergers & Acquisitions. Merchant banking. Trading and creation of derivative instruments. Money managemet

4. 1. Public offering (underwriting) of Securities The functions of the inv. Bankers; Advising the issuer on the terms and timing of the offering. Buying the securities from the issuer. Distributing the issue to the public.

5. Best Effort Selling: The inv. Banking firm agrees only to use its expertise to sell the securities. It does not buy the entire issue from the issuer. Underwriting: Inv. Banking firms buys the securities from the issuer and accepts the risk of selling the securities to investors. -Stand-by underwriting -Firm-commitment (Bought deal)

6. Underwriting fee (Gross spread, Underwrite discount): The difference btw the price paid to the issuer and the price at which the inv. banking firms reoffers the securities to the public.

7. Underwriting Syndicate Underwriting transaction involves the risk of capital loss. To share this risk, an inv. banking firm puts together a group of firms to underwrite the issue.

8. Gross spread is divided among the lead underwriter(s) and the others. The lead underwriter manages the deal (runs the book for the deal) To increase the potential investor base, the lead underwriter puts together a selling group. This group includes the underwritring syndicate and other firms not in the syndicate. Privatization: Inv. Banking firms may assist in offering the securities of gov-owned companies to private investors.

9. 2. Trading of Securities Revenue from this activity; Bid-ask spread. The diff. Btw the price at which the inv. Banking firm sells the security and the price paid for securities. Appreciation of the price of the securities held in inventory.

10. The strategies of the traders to generate revenue; 1. Riskless arbitrage; If price differences occur in various markets for the same security, investors can make profit after transaction costs by selling the security in the market where it is priced higher and buying it in the market where it is priced lower.

12. 2. Speculation; occurs when the trader positions the capital of the investment banking firm to take advantage of a specific anticipated movement of prices.

13. 3.Private Placement of Securities Inv. Banking firms place securities with a limited nr. of institutional investors such as insurance companies, inv. companies and pension funds.

14. 4.Securitization of assets It is the issuance of securities using a pool of assets as collateral. Asset-backed securities: Inv. Banking firms work with corp. to either securitize a wide range of loans and receivables or buy loans and receivables in the market and issue securities backed by them.

15. 5.Mergers and Aquisitions M&A activities include; Leveraged buyouts (LBOs) Restructuring&recapitalization of companies Reorganization of bankrupt and troubled companies.

16. Their M&A activities; Finding M&A candidates Advising acquiring companies or target companies with respect to price and non-price terms of exchange. Assisting acquiring companies in obtaining the necessary funds to finance a purchase. They receive an advisory fee (retainer) based on the percentage rate of selling price.

17. 6.Merchant Banking It is an activity of the inv. Banking firm when it commits its own funds by either taking an equity interest or creditor position in companies.

18. 7.Trading and Creation of Derivative Instruments Futures, forwards, options, swaps are used to control the risk of an investor’s portfolio. They are also used to protect an inv. Bank’s own position in transactions.

19. 8.Money management Inv. Banking firms create subsidiaries that manage funds for either individual and institutional investors.

20. Investment services and activities of Investment firms in Turkey They receive and send orders for the capital market instruments (order transmission intermediation) They realize orders in the name and for the account of their customers as well as in their own name and for the account of their customers (trading intermediation) They buy or sell capital market instruments from their own account (portfolio intermediation) Portfolio Management Investment Couselling

21. 6. They intermediate public offerings of capital market instruments through underwriting. 7. They intermediate public offerings without underwriting. (Best-efford selling) 8. They operate multidimentional buying and sellling systems and other organized market places out of exchanges. 9. They keep and manage capital market instruments for the name of customers and keep portfolios. 10.They provide other services and activities determined by the CM Board of Turkey

22. Banks can engage in (1), (2), (3), (9) and (10) • Investment and development banks can engage in all of them except (8)

23. 1. Order TransmissionIntermediation • Investment firms send the customer orders on CM instruments to another investment firms engaging in trading intermediation or portfolio intermediation. • Investment firms (aracı kurum) and banks can engage in “order transmission” intermediation activity after they get permission from the Board.

24. 2. Trading Intermediation • In addition to the “order transmission intermediation” activity, buying and selling orders on CM instruments those are in the name and for the account of their customers and in their own name and for the account of their customers are send by the investment firms • to the exchanges or other orginized markets, • to an investment firm engaing in portfolio intermediation

25. 2. Trading Intermediation • Investment firms (aracı kurum) and banks can engage in the trading intermediation activity after they get permission from the Board.

26. 3. Porfolio Intermediation • In addition to the “trading intermediation” activity, investment firms carry out the buying and selling orders of customers on CM instruments as a counter party. • They buy or sell capital market instruments from their own account • Investment firms (aracı kurum) and banks can engage in the portfolio intermediation activity after they get permission from the Board.

27. 4.Portfolio Management • It consists of the management of portfolios including different types of financial assets for the name of each customer on proxy basis other than the portfolios of the “Collective investment firms”. • Individual portfolio management includes the management and buling up the portfolios by considering the risk and return preferences and the financial conditon of the customers.

28. 4. Portfolio Management • These institutions have to apply “”suitability test” (yerindelik testi) to their customers before they sign the outline aggrement (çerçeve sözleşmesi). • The activity of portfolio management can be given by the investment firms (aracı kurum), investment and development banks and portfolio management companies after they get permission form the Board.

29. 4. Portfolio Management • These institutions; • Can not give any return guarantees to the customers • Have to document the investment decisions for the customers • Have to clarify risk/return preferences of customers, • Have to show their effort in handling the customers’ portfolio of securities • Have to be fair among their customers • The CMB regulations require that portfolio management services can be; • Given by experts with knowledge and proper education and experience.

30. 5. Investment Counselling • Giving advice and interpretations, verbal and in writing, to customers on; • CM Instruments, • Issuers • Inv. Counselling must be based on a written contract.

31. 5. Investment Counselling • The activity of investment counselling can be given by the investment firms (aracı kurum), investment and development banks and portfolio management companies after they get permission form the Board. • These institutions have to apply “”suitability test” (yerindelik testi) to their customers before they sign the outline aggrement (çerçeve sözleşmesi)

32. 5. Investment Counselling • Inv. Principles: • No misleading recommendation can be given, • Inv. recommendations must be properly documented, • The customers’ financial status must be taken into consideration, • No guarantee can be given on inv. returns, • Interest based conflict in all cases must be avoided, • Not free using information gathering for their own inv. purposes without initially supplying them to their customers.

33. 6. and 7. The Intermediation of public offerings • Investment firms and investment and development banks in Turkey can engage in the intermediation of public offerings through underwring or best efford selling. • There are four types of underwring activities in Turkey; • Stand by underwring (Bakiyeyi yüklenim) • Firm commitment (Bought deal) (Tümünü yüklenim) • Partially stand by underwriting (Kısmen bakiyeyi yüklenim) • Partially firm commitment (Kısmen tümünü yüklenim)

34. 6. and 7. The Intermediation of public offerings • The intermediation of public offerings services also consist of • They help to determine the price, the amount and the process of issue, • They apply to the Board with the required documents needed for the approval of the registration statements (izahname) • They form underwriting syndicate • Book-building (ön talep toplama) • They arrange both domestic and international organizations (events) for selling the securities

35. 6. and 7. The Intermediation of public offerings • Investment firms and investment and developments banks can engage in underwriting and best efford selling services after they get permission from the Board. • There must be a written agreement between these institutions and the issuer. • Many underwrites may come together and form an underwring sydicate. There must be a leader underwriter. • The must be a written agreement among the partnets of the underwriting sydicate.

36. 8. The organization of market places other than exchanges. • The Board can regulate and put some rules on the establisment of the organized markets those • get together the buyers and sellers of the CM instruments • intermediate the buying and selling • form systems and platforms for those activies other than the exchanges

37. 9. Keeping Services Keeping and managing of CM instruments for the name of customers and keeping portfolios. • Limited keeping services • General keeping services

38. 9. Keeping Services • Limited keeping services: Consist of keeping services for; • Capital market instruments that are subject to trading intermediation and portfolio intermediation, • Portfolios that are related to the individual portfolio management services, • Capital market instruments that are offered to public through underwriting or best efford selling.

39. 9. Keeping Services • General keeping services; these are the keeping services that are not related to the investment services and activities. • Limited keeping services can be provided by investment firms which are allowed to provide one of the following services; trading intermediation, portfolio intermediation, individual portfolio management, underwriting or best-efford selling. General keeping services can be given by banks and invetment firms which are entitled to carry one of the activities above. • These insttitutions have to get permission from the Board.

40. 9. Keeping Services • There must be a written aggrement (keeping agreement) btw the customers and these institutions.

41. Ancillary services of investment firms and portfolio mang. Comp. İn Turkey • They provide consultancy services on capital markets • They provide margin trading and short selling limited to the transactions on CM instruments. And they provide foreign exchange services. • They do investment research and financial analysis on CM instruments or provide general recomendations.

42. 4.They provide services about conducting underwriting 5. They provide intermediation services on borrowing and other sources of finance 6. Wealth management and finansal planning 7. They provide other services and activities determined by the CM Board of Turkey

43. 1. Consultancy Services • They provide investment plans for the firms by considering their long and short term financial objectives, risk preferences, cash requirements. • They provide verbal and written advices and interpretations on financial analysis, financial sources, risk definitions and reduction, financial improvements through revenue generation. • They provide verbal or written advices or interpretations on mergers and acquisitions, divestitures, reorganization, restructure.

44. 2. Margin Trading and Short Selling and Foreign Exchange Services • 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 purchasing power of the investors.

45. Margin Trading • 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.

46. 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.

47. 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.

48. 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 investment firms • 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 cannot exceed 10 percent of the net worth of banks and brokers.

49. General investment advices • They provide advices on the current and future (expected) prices of the CM instruments. • They make interpretations on the values of the securities. • They provide investment strategies and make research and provide information and make suggestions.

50. Services related with the performance of underwriting services • They make financial, economic and market analysis about the firms that want to issue their securities, • They determine whether the financial statements of the issues are appopriate to the capital market regulations, • They determine the information and documents which will be announced to the public