CHAPTER 4
NON-DEPOSITORY
INSTITUTIONS
INSURANCE COMPANIES
• They provide insurance policies
• They promise to pay specified amounts
contingent on the occurance of future events.
• They are risk bearers.
• They accept risk in return of insurance premium
• Their major task (underwriting Process):
– Deciding which applications for insurance they should
accept or reject.
– Determine how much to charge for insurance if they
accept the application.
INSURANCE COMPANIES
There are two kinds of sources for the
insurance companies;
• Initial Underwriting Income (Insurance
Premium)
• Investment income
INSURANCE COMPANIES
• TYPES OF INSURANCE COMPANIES in
Turkey
– Life Insurance Companies
• Term Insurance
• Whole Life Insurance
• Other Life Insurer activities;
– Private pension funds
– Accident and health insurance
– Group insurance: providing health insurance coverage to
corporate employees.
INSURANCE COMPANIES
– Non-life Insurance Companies
•
•
•
•
•
•
fire
transport
accident
engineering
agriculture
health
INSURANCE COMPANIES
Differences of non-life insurance from life
insurance;
• Non-life insurance covers a wide variety of
activities. However, life insurance is more
focused.
• Non-life insurance policies often last for a
short-term (one year or less) as opposite
to the long-term and even permanent life
insurance policies.
INVESTMENT COMPANIES
• They are financial intermediaries that sell
funds to the public and invest the
proceeds in a diversified portfolio of
securities.
• This portfolio is managed by the
investment company on the behalf of its
shareholders.
TYPES OF INVESTMENT
COMPANIES in U.S
• Mutual Funds
• Closed-end Funds
• Unit Investment Trusts (UITs)
– Real Estate Inv. Trusts (REITS)
– Real Estate Mortgage Conduits (REMICs)
MUTUAL FUNDS
• Funds comprised of various types of securities.
Such as common stock, bonds, MM instruments
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.
• The price of each share is Net Asset Value
(NAV):
• NAV = Mrk. Value of the port – Liabilities
Nr. Of shares outstanding
• NAV is determined only once in day , at
the close of the day)
Closed-End Funds
• The shares of closed –end funds are like
the shares of the common stock.
• The new shares of the closed end fund are
initially issued by an underwriter for the
fund.
• After the new issue the number of shares
are remains constant
Unit Trust
• They are like closed-end funds in that the
number of unit certificates are fixed.
• They specialize in bonds.
Differences btw Open-end Funds
(Companies) (Mutual Funds) and
Closed-end Funds (Companies)
• Purchase 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
continuously offer
their shares for
sale
They are
permitted to
invest in a
greater amount
of “illiquid”
secutities than
mutual funds
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.
Differences btw Unit Inv. Trusts (UITs)
and Mutual Funds
• Have a termination date
• Make a one-time public offering
of fixed amount of units

Never expire

No fixed amount.

Diversification is essencial . It
must hold a min. Nr. of diff.
Securities
• Can not buy or sell securities
frequently.

Can sell and buy securities
frequently.
• Does not have an inv. Advisor

Have an inv. advisor
• You can buy or sell at any time

Buy or sell at the end of the
trading day.
• 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)
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)
Fund Sales Charges and Annual
Operating Expenses
• There are two types of costs for the mutual
fund investors;
– Shareholder fee (sales charge): One –time
charge for a specific trensaction such as
purchase, redemption and etc.
– Annual operating expenses (expense ratio): is
debited annually from the investor’s fund
balance by the fund sponsor such as
management fee, investment advisory fee
and etc.
Economic Motivation for Funds
1. Risk reduction through diversification.
2. Lower costs of contaracting and processing
information.
3. Professional portfolio management.
4. Liquidity.
5. Variety.
6. A payment mechanism.
Types of Funds by Investment
Objective
• Main categories;
–
–
–
–
Stock funds
Bond Funds
MM Funds
Others.
• Other clasification;
– U.S only funds
– International funds (No U.S)
– Global funds (U.S and International)
• Another clasification;
– Passive funds (Indexed funds)
– Active funds.
• Acc. to market capitalization;
– Small cap
– Mid cap
– Large cap
• Acc. to style;
– Value
– Growth
• Acc. to sector specialization;
– Technology
– Utilities
– Go on....
• Funds in funds.
Common objective of the mutual
funds
– Long-term growth
– High current income
– Preservation of principal
Types of mutual funds in U.S
• Stock funds;
–
–
–
–
Equity income funds (conservative)
Growth funds-value funds (mainstream)
Small company funds (aggressive)
International funds (aggressive)
• Bonds (by maturity);
– Short-term bonds
– Intermediate bonds
– Long-term bonds
• Bonds (by creditworthiness of issuers)
–
–
–
–
Government bonds
Corporations
High yield corporations
Investment grade
• Asset Allocation funds,
Exchange Traded Funds
• They consist of investment companies that
are similar to mutual funds but trade like
stocks on an exchange.
• Even-though they are open-end funds,
ETFs are similar to closed-end funds
which have small premiums or discounts
from their NAV.
• They are based on stock indices or subindices, not actively managed portfolios.
Exchange-traded funds in US
• SPDRS, Spider, Spyders
– Traded as SPY on AmEx.
– Tracks S&P 500 index
• Qube
– QQQ on AmEx
– 2.5% of the NASDAQ 100 Index
• DIAMONDS
– DIA on AmEx
– 1% of the DJIA
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
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.
PENSION FUNDS
• It is a fund established by private
employers govenments, or unions for the
payment of retirement benefits.
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”.
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 5 million $ or more.
• The most famous hedge funds are;
– Quantom Fund (George Saros)
– L-T Credit Management
CM Entities in Turkey
• There are several participants in the capital
markets. The new Turkish Law 6362 refers to 11
of them, which are titled “capital market
institutions” in the article 35 as follows:
• Investment firms (Yatırım Kuruluşları)
• Collective investment firms (Kolektif Yat.
Kuruluşları)
• Auditing, rating, scoring firms(Bağımsız denetim,
değerleme ve derecelendirme kuruluşları)
• Portfolio management corporations (Portföy
yönetim şirketleri)
• Mortgage finance corporations( İpotek
Finansmanı kuruluşları)
• Housing finance and asset finance mutual funds
(Konut finansmanı ve varlık finansmanı fonları)
• Asset leasing corporations (for Islamic Bonds.ie.,
Sukuku İcara) (Varlık kiralama şirketleri)
• Central Clearing houses (Merkezi takas
kuruluşları)
• Custodian houses (Merkezi saklama
kuruluşları)
• Data storage houses (Trade
repositories)(Veri depolama kuruluşları)
• Others (Diğer sermaye piyasası kurumları)
1. Investment Institutions (Yatırım
Kuruluşları)
According to the Law 6362, 3 (v),
investment institutions consist of;
- Investment firms (Aracı kurumlar)
- Banks
Investment Institutions
• MiFID (Markets in Financial Instruments
Directive) refers to “banks and investment firms”
as “providing investment services such as
brokerage, advice, dealing, portfolio
management, underwriting, et al”.
• We may deduce two things out of this:
– Investment firms and banks are considered together
in providing investment services
– Dealers and brokers are only part of the investment
firms
Investment Institutions
• The Law 6362, likewise, refers to investment firms
and banks as “investment institutions” (yatırım
kuruluşu) in its sub article (v) of the article 3.
• In the USA “dealer” means any person who
engages either for all part of his time, directly or
indirectly, as agent, broker, or principal, in the
business of offering, buying, selling. Or otherwise
dealing or trading in securities issued by another
person (Securities Act 1933 – 2/12). “Broker” means
any person engaged in the business of affecting
transactions in securities for the accounts of others
(Securities Exchange Act 1934-4/A).
Investment Institutions
• Broker does business for the others only, yet
dealers may do business either in his name or
account, or for the others.
• In Turkish regulations, however, there is no
reference to “dealer” or “broker”, these words
are in use, and be it erroneously.
• Turkish capital markets call the customer
representative at the counters of banks or
intermediary institution “aracı kurum” as “dealer”,
and those who are seated in front of the
monitors at the Borsa Istanbul as “brokers”!
Investment Institutions
• Investment services and activities of Investment
institutions in Turkey
– They receive and send orders for the capital market
instruments
– They realize orders in their name and in their own
account or in their name and in their customers’
account
– They buy or sell capital market instruments from their
own account.
– They intervene public offerings of capital market
instruments through underwring.
– They intervene public offerings through best efford
selling.
2. Collective investment firms
• These are definitions that the old Capital Markets Act of
Turkey had no reference.
• Collective investment firms are made up of the “mutual
funds” (yatırım fonları), and “unit investment trusts”
(yatırım ortaklıkları) (6362 3/m).
• Previously, in Turkey for example, banks, investment
firms (brokers/dealers), insurance companies as well as
pension funds were allowed, subject of course to the
Capital Markets Board’s approval, to set up “mutual
funds”. Henceforth, the authorized “portfolio
management companies” only will have this right.
Collective investment firms
• The adjective “collective” is, again, a new
defining attribute.
• These institutions are for portfolio
management on the very basic principle of
risk diversification. But the new
regulations, MiFID of the EU and Turkish
6362, do not make reference to this
previous “diversification” principle.
2.1. Mutual Funds
• As in the old Capital Markets Act (2499), the
new one (6362) gives the definition for the
mutual fund as portfolio management entities
that are not incorporated, meaning with separate
assets, on the basis of fiduciary ownership.
• Portfolio management companies are
earmarked to set up, manage and represent;
and even audit the mutual funds (6362/52-3)
Mutual Funds
The basics of the definition for mutual funds are;
• They are set up for the sole purpose of portfolio
management
• They are unincorporated entities (no legal identities)
• They are set up and managed and even audited by
portfolio management companies on behalf of investors
on the following bases:
– Management is based on fiduciary ownership (İnançlı mülkiyet)
– Management is based on proxy relationship (Vekalet ilişkisi)
(Turkish Code of Obligation articles 502 & 514 applicable in case
of ambiguity)
– Management has to be strictly in line with the fund’s bylaw (Fon
İç Tüzüğü)
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.
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 at most 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.
2.2. Exchange-Traded Funds
• These intermediaries are on the rise
everywhere. Turkey could not have stayed
away from this trend. Turkish exchangetraded funds (borsa yatırım fonları) are
now traded on the “Borsa Istanbul Fund
Market”.
2.2. Exchange-Traded Funds
• DJIST: Dow Jones İstanbul 20 A Type ETF
GOLDIST: İstanbul Gold B Type Gold ETF
FBIST: FTSE İstanbul Bono B Type ETF
BANKA: Turkish Banks with High Market Capitalization
Rates A Type ETF
IST30: BİST-30 A Type ETF
DOLAR: Dollar B Type ETF
GÜMÜŞ: İstanbul Silver B Type ETF
2.2. Exchange-Traded Funds
• The asset distribution is announced daily in exchange
traded funds that enables the investors to follow up all
the content of their investments transparently on a daily
basis.
• They combine the possibility of availability for purchase
and sale easily with high liquidity of the equities and the
following features of the mutual funds; distributing risk
and letting the investors benefit from yields of the
markets in which they invest.
• ETFs enable the investors to invest in index by
purchasing only one product.
2.2. Exchange-Traded Funds
• ETFs can be purchased and sold as easily as the
equities during BIST session period.
• Management fees of the ETFs are lower compared to
the other mutual funds.
• The purchase and sale of ETF participation certificates,
deemed suitable for being traded on the Exchange, are
carried out with a feature code (F) on the Fund Market of
the Equity Market.
• Purchase and sale transactions are executed in the
trading hours of the market where securities forming the
underlying index of ETF are traded.
• The base price is determined by rounding the weighted
average of the transactions of the previous session to
the nearest price tick as with the stocks.
2.3. Hedge funds
• In Turkey, new announcements are expected to emerge
out of the Turkish Capital Market Board (CMB) under the
new Law 6362.
• Present legislation about the hedge funds is the
Communique of the CMB Serial VII No. 10. It defines
these funds as free funds (Serbest Yatırım Fonu), and
“Serbest Yatırım Fonları are for the “qualified investors”
only”.
• Nonetheless Turkish regulations require that these funds
should develop their risk management systems.
• The participation certificates of these funds do not trade
at exchanges in Turkey.
2.3. Hedge funds
• Said Communique gives the definition for
the “qualified investor” as follows:
2.4. Housing finance funds (HFFs)
• Housing finance funds (HFFs) are
portfolios of investors:
– Made up of “mortgage-backed securities”
– Unincorporated portfolios (no legal identity)
– Run (managed) by the founders on the bases
of:
• Fiduciary ownership
• Proxy relationship
2.4. Housing finance funds (HFFs)
(Konut Finansmanı Fonları)
• Housing Finance Funds (HFFs) are portfolios of
investors consisting of “mortgage-backed securities.
• HFFs are set up by the fund’s bylaw (Fon İç
Tüzüğü).
• Fund assets are under the protection of the Law
6362 against collateralization as well as mortgaging
by the fund managements.
• Fund Management Teams are held responsible by
the Law for the custody and safekeeping.
2.5. Assets finance funds (AFFs)
• Asset finance funds (AFFs) are portfolios
of investors consisting of “asset-backed
securities”.
• This is the basic distinction that
differentiates them from the HFFs. The
rest are same as above.
2.6. Unit investment trusts
• Unit investment trusts (UITs) are corporations
are set up to manage portfolios consisting of:
–
–
–
–
Capital market instruments
Real estates
Venture-capital investments
Other assets and rights to be designated by the
Capital Market Board of Turkey
• As a momentous change UITs can now be
open-ended or close-ended.
2.6. Unit investment trusts
• Prerequisites for new UITs are:
– A registered-capital system
– Compliance with the minimum initial capital
amount
– Fully-paid capital at setting-up
– Clear reference to UIT in the title
– Openly stated custodian
2.6. Unit investment trusts
• Publicly-held -shareholding ratios, lines of business,
types, share transfers, registry statements, asset
custody alignments, preferred share issues, dividend
distributions, share-call procedures, liquidation and
termination of the corporation methods are all to be
subject to the Capital Market Board decisions.
• Open-ended UITs’ capital will always be same as their
net-assets-value, which will be equal to the difference
between the assets and liabilities.
• Finally, UITs are required to seek the management
services of portfolio management corporations.
2.7. Open-ended investment trusts
• These are new types of investment trusts in the form of
joint stock companies for Turkey. Previously Turkey had
semi-open-ended investment trusts, for which “right
issues” (capital increases) were subject to the Turkish
Commercial Code.
• With these type of investment trusts a new and hybrid
kind of joint stock companies emerge. They are a
combination of mutual funds and unit investment trusts.
2.7. Open-ended investment
trusts
• The stocks of these companies will be the
total of investor shares and to-the-name
founder shares. The shares of openended investment trusts will not have par
values. Net asset values of these
companies will be the net of assets and
liabilities.
• An important point is that the founder
shares will not provide management
prerogatives to the founders.
3. Auditing, rating, and scoring
entities
• Auditing (independent auditing in the regulatory jargon)
has to be carried out by auditors listed by the “Public
Oversight - Accounting and Auditing Standards
Authority” of Turkey (simply KGK).
• They not only conduct auditing but also authorized to
give rating and scoring to the entities within the Law
6362.
• For your attention, there are;
– Certified Public Accountants (Bağımsız Denetim Kuruluşları)
– Chartered accountants (Yeminli Mali Müşavir)
– Certified Consultants and Accountants (Serbest Muhasebeci
Mali Müşavir)
3. Auditing, rating, and scoring
entities
• In the new Turkish Commercial Code, they
are all authorized to conduct auditing and
reporting.
• One thing that we know is that these
entities will be equally responsible in any
kind of harm that can be cause by auditing
inefficiencies.
4. Portfolio Management
Corporations
• Portfolios management corporations are defined
and described in the articles 55 and 56 of the
Law 6362.
• As far as asset management companies are
concerned, the point is that in Turkey, with the
advent of the new Law 6362, mutual funds will
only be set up by them, and will have to be
managed, and audited by them. Unit investment
trusts will have to receive management services
from these corporations.
5. Mortgage finance institutions
(İpotek Finansmanı Kuruluşları)
• The terminology on;
– Housing finance
– Mortgage finance
– Asset finance
• is a little confusing. We have touched on the
“housing finance funds” and “asset finance
funds” previously as they fall outright under the
category of “mutual funds”. Now, let us try to
give you the distinction among them in
summary.
5. Mortgage finance institutions
(İpotek Finansmanı Kuruluşları)
•
•
Housing finance corporations
These are solely:
–
–
–
–
Banks,
Leasing corporations and
Consumer finance corporations
All of whom solely engage in housing loans
and/or real estate rental activities.
5. Mortgage finance institutions
(İpotek Finansmanı Kuruluşları)
•
•
Asset financing activities
Asset financing is asset-backed or assetcollateralized financial activities. Asset-backed
finance is made up of the “asset finance funds”
as explained previously and asset
collateralized financing.
•
Latter is also categorized as credit derivatives,
among which the commonest ones are CDOs
(Collateralized debt obligations).
5. Mortgage finance institutions
(İpotek Finansmanı Kuruluşları)
• Mortgage vehicles consist of;
– Mortgage-collateralized vehicles,
– Mortgage-backed vehicles, made up of
housing finance funds
– Asset-collateralized vehicles, consisting
of SIVs (Structured investment vehicles)
– Asset-backed vehicles, made up mostly
of asset finance funds.
5. Mortgage finance institutions
(İpotek Finansmanı Kuruluşları)
• Collateralized debt obligations (CDOs) are a type
of structured asset-backed security with
multiple "tranches" that are issued by special purpose
entities and collateralized by debt obligations including
bonds and loans.
• A structured investment vehicle (SIV) was an operating
finance company established to earn a spread between
its assets and liabilities like a traditional bank. The
strategy of SIVs was to borrow money by issuing shortterm securities at low interest rates and then lend that
money by buying longer term securities at higher interest
rates, with the difference in rates going to investors as
profit.
6. Asset leasing corporations
(Varlık Kiralama Şirketleri)
• In order to tap certain segments of the oilrich Gulf markets “asset leasing
corporations” a new set of market rules
were laid down in Turkey in 2012.
• The new system makes it possible to pay
return to investors as rental instead of
interest. Turkish Treasury issued in
October 2012 the guidelines for this new
system as follows:
6. Asset leasing corporations
(Varlık Kiralama Şirketleri)
• The procedure will be explained during the
course of the Course.
6. Asset leasing corporations
(Varlık Kiralama Şirketleri)