Turkey's forex market in agony after drastic measures

A board showing the currency exchange rates of the US dollar and the euro against the Turkish lira is on display at a currency exchange office in Istanbul, Turkey, Jan. 11, 2017. (photo by REUTERS/Murad Sezer)

Turkey’s forex market in agony after drastic measures

Author: Mehmet CetingulecPosted July 24, 2017

Foreign exchange (forex) trading in Turkey, launched officially in 2011, is relatively unfamiliar to Turks, which is why training courses and seminars are being organized for aspiring investors. Eager to make quick money, thousands of neophytes lost big in leveraged transactions on the forex market in recent years as they virtually bet on whether foreign exchange and gold prices would rise or fall. Some lost cars and homes used as starting capital; others lost their entire fortune. As explained in March in Al-Monitor, the main attraction factor here was the leverage ratio, which stood as high as 100:1 until February, meaning that investors were able to trade in sums 100 times larger than what they had deposited. The ratio promised big earnings, but for the unversed investor, it often meant huge losses, and the market came to resemble a casino.

Summary⎙ Print Many brokerage houses have closed in Turkey since February, when the authorities drastically lowered the leverage ratio for foreign exchange transactions.

As the outcry grew, victims of the forex fever came together in online platforms and their grievances reached the parliament’s Petition Commission and the government. The Capital Markets Board (SPK) took action Feb. 10, lowering the leverage ratio to 10:1 and setting a minimum deposit of 50,000 Turkish liras (about $14,000).

Yet pushing on the brakes so hard sent the forex market into shock. As the trade volume nose-dived, many brokerage houses shut up shop. Foreign firms began to exit Turkey or lay off staff. Most recently, in early July, Saxo Bank Forex closed its Turkey offices, following in the steps of XTB. Major local companies such as Referans Menkul Degerler, Ekspres Yatirim, ATIG Forex and Destek Yatirim Menkul Degerler also ended their operations.

SPK head Vahdettin Ertas said last week that the daily trade volume on the forex market had fallen from 44 billion liras ($12.4 billion) to about $10 billion liras ($2.8 billion) since the ratio revision. The number of investors, meanwhile, fell from about 21,500 to some 6,500, he said.

The huge contraction in the trade volume — nearly 80% — speaks in itself to the severity of the shock. High-ratio “addicts,” however, found a way to circumvent the new regulations. The SPK’s February decision did not restrict Turks from engaging in forex transactions abroad, which led those ready to take risks to turn overseas, either online or via foreign brokerage houses.

This, in fact, was something that market players had expected. Following the SPK’s move, Tuna Yilmaz, the director-general of the now-defunct Destek Yatirim Menkul Degerler, had issued the following warning: “We are concerned about this decision because only 5% of active traders on Turkey’s forex market have security deposits of more than 50,000 liras. And the 10:1 ratio is not attractive to investors. Those investors will now turn to foreign forex companies operating with high leverage ratios. So the money will eventually go abroad or turn to underground brokerage houses. One should not underestimate the economic contribution of the [legal] companies, which have provided jobs to thousands of people in the financial sector.”

Yilmaz proved right. Many have come to trade via illicit companies or internet sites, attracted by higher leverage ratios and no requirement for security deposits. The forex gambling has thus moved overseas, with online ads and articles trying to draw Turkish clients to foreign brokerage houses with headlines such as “Which foreign forex companies are reliable” or “How to open a forex account abroad.” The SPK is now scrambling to rein in this realm as well. According to media reports, the watchdog took legal action in mid-July to ban access to six internet sites that provided intermediary services for forex trading abroad, and it slapped hefty fines on a number of companies.

Since the February clampdown, the victims of the forex market have also changed. The parliament’s Petition Commission is now flooded with petitions from brokerage houses and their laid-off staffers. The government, under pressure to have the SPK reverse its decision, appears to be holding its ground for now. On July 12, then Deputy Prime Minister Nurettin Canikli, who has since become defense minister, stressed that the government would not back down, saying that the current leverage ratio was a good one in terms of risk management.

The official statements and the way the problem was handled show that the government, very much like some of the broke aspirants, tends to see the forex market as a “casino” rather than a financial instrument. The market had turned into a “casino” because of an ill-conceived leverage ratio, which does not mean that it is inherently a gambling house. The government, however, seems to have opted to weaken the forex market rather than better regulate it. The SPK’s veiled contentment with the shrunken trade volume suggests the same.

A popular instrument in the global economy, forex trading is used especially by private companies to hedge foreign exchange risks. Turkey needs to find a midway on the leverage ratio, which was really excessive but is now too low. In countries such as the United States and Japan, which have some of the largest forex markets, the ratio stands at 20:1 or 25:1. It is obvious that Turkey’s current ratio contributes nothing to diversifying and further developing capital markets. One cannot expect a financial market to thrive when its regulators boast about an 80% contraction in the trade volume. The blows dealt on the market to disciplined investors — a reflection of the “casino” logic — have left the sector in a state of agony.

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Turkey's forex market in agony after drastic measures