CHAPTER 4

1. CHAPTER 4 CAPITAL MARKET ENTITIES (INSTITUTIONS)

2. CM Entities • In international markets; • Brokers • Dealers • Long Position • Short Position

3. 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)

4. 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)

5. Financial Intermediaries (Banks and Brokerage Firms) • Primary Market Activities (IPOs) • Secondary Market Activities • Repo and Reverse Repo Transactions • Investment Counseling • Portfolio Management • Derivative Transactions

6. Activity Trading activities IPO activities Repo and reverse repo activities Portfolio management Investment counseling Derivative businesses Minimum Equity Capital RequiredX 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 Min. Capital Requriment for the Brokerage Firms

7. Banks and Brokerage Firms • Margin Trading • Short Selling • Borrowing and Lending

8. 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.

9. 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.

10. 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.

11. 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.

12. 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.

13. 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.

14. 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.

15. 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.

16. 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.

17. 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.

18. INVESTMENT TRUTS in TURKEY 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

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

20. 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”.

21. 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

22. Real Estate Inv. Trusts 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

23. 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

24. 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

25. 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

26. Venture Capital Inv. Trusts 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

27. Capital Market Institutions Investment Companıes in US • Mutual Funds (Open-end Funds) • Closed-end Funds • Unit Inv. Trusts (UITs) • REITs • REMICs

28. 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 Differences btw Open-end Funds (Companies) (Mutual Funds) and Closed-end Funds (Companies)

29. 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.

30. 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. Differences btw Unit Inv. Trusts (UITs) and Mutual Funds

31. 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)

32. 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

33. 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.

34. 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”.

35. 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