MKK is the central securities depository for capital market instruments which are decided by CMB to be dematerialized. MKK conducts full dematerialization model on a rights owner basis (direct model) for the Turkish capital market instruments.
Dematerialization process started with the dematerialization of mutual fund participation certificates in 24.04.2005, continued with the dematerialization of all stocks regardless of their types (traded at the exchange or not) until 28.11.2005. Following this date, corporate actions processes of publicly traded companies, issues of publicly traded companies and any capital market instrument issues of the companies started to be made as fully registered on an electronic medium without printing certificates physically.
One of the main goals of MKK is to fulfill its responsibilities of increasing market efficiency and minimizing possible risks as well as following the global post-trade industry standards.
MKK was designated as the Central Securities Depository of Turkey by the new Capital Market Law. In addition to this designation, our institution was defined by the Central Bank of Turkey as a Securities Settlement System (SSS) operator as per the “Law No. 6493 on Payment and Security Settlement Systems, Payment Services and Electronic Money Institutions”. MKK’s main duties and services are fully determined in accordance to global standards and best practices with the SSS operator definition.
MKK was further authorized by the Capital Markets Board in 2015 to establish a trade repository as per the related regulations. In pursuant to this authorization, our institution started the “e-VEDO: Electronic Trade Repository” project. Trade repository services that will be provided by MKK in international standards will gather counterparty and transaction data on over-the-counter traded derivatives in a single center, reduce systemic risks, and improve monitoring capabilities of regulatory bodies in this market.
MKK is transforming into a “technology firm” aiming to support our country with its value added projects and services besides its capability in offering efficient and affordable services to its members. Instead of having high revenues, MKK thrives to lower the market costs as much as possible for the market participants in favor of investors, being aware of the fact that its main aim is to add value to our economy while performing its functions as a central securities depository authorized by the regulations. As it is aimed by the Istanbul Financial Center Project (IFC) and MKK’s vision for 2023, it is evident that the capital markets will expand, new instruments will be introduced to the market and new IPO’s and issues will take place; however MKK’s intention is to use this opportunity for continuously cutting its central depository costs instead of increasing its revenues. With the discounts in fees, MKK will continuously lower its main operating revenues and increase its revenues from add value projects and services. A transformation like this is very crucial, not only for our company but also for our national capital markets. The positive effects of this transformation to our country, aiming continuous reduction in costs and adding value to our economy with add value services; will be better understood in the long run.
Our institution continues its efforts towards implementing its in-house developed software and systems in foreign markets. The ongoing efforts started to materialize as exemplified by the letter of intent and final agreement signed with Nasdaq OMX in 2014 and 2015 for the marketing of “e-GEM: Electronic General Meeting System” in 17 countries around the world, and by the cooperation agreement signed with the AFRICLEAR Consortium in 2016 for implementation of e-GEM in African capital markets.
What is a “Central Securities Depository Institution”?
Central Securities Depositories are among the most important post-trade institutions in capital markets. A Central Securities Depository (CSD) is an institution conducting at least one of the following activities; operating a Security Settlement System (SSS), performing first registry of securities (issue) (notary service) and holding securities accounts centrally at the highest level (central maintenance service).
Securities Settlement System is defined as a system in which securities transfer instructions are executed as per the EU Settlement Finality Directive numbered 98/26; article 2, section “i”, subsection 2. The core component of central depository function is to operate a central system, in which securities are issued, held in accounts either at participant or beneficial owner basis, traded, and their respective rights are installed.
MKK is a central institution that its responsibilities of issuing capital market instruments in dematerialized form, registering them in accounts opened at beneficial owner basis, monitoring their respective rights are given by law and the records kept in its books on these securities are legally binding. In other words, it is a central system which securities are issued, held in beneficial owner accounts, transferred and their respective rights are installed. Therefore, MKK with its current structure is the Central Securities Depository institution of Turkey.
History of Central Securities Depositories in Turkey
The ISE Settlement and Custody, Inc., which was established by the ISE in 1992, was the authorized central settlement and depository institution conducting settlement of transactions in cash and securities on the ISE markets. In Turkey, until 1995, Takasbank physically held stocks of listed companies in its vaults on a participant based immobilized system. After the financial crisis in 1994, as a result of the bankruptcy of some financial intermediaries, the ISE Settlement and Custody, Inc. was entrusted with the establishment of an investor (beneficiary owner) based immobilized system with respect to the Capital Markets Board (CMB) decree on 15 December 1994. The ISE Settlement and Custody, Inc. changed its name to the ISE Settlement and Custody Bank, Inc. (Takasbank) by receiving an investment banking license in 1997. During this period, stock certificates were continued to be physically issued and new certificates were printed for capital increases. However, publicly traded stocks of the ISE listed companies were immobilized at Takasbank first on a participant then on an investor basis. Therefore, the traditional valuable papers law and the physical system still existed legally for stocks and Takasbank continued its tasks accordingly until 28 November 2005.
Transition to the Dematerialised System and the Dematerialised System Law
The first step of the dematerialization reform for capital markets was taken with the addition of the Article 10/A to the Capital Market Law (CML). The Article 10/A of the (CML) brought about a significant change by annulling the former valuable papers law that was based on the physical certificates and introducing the legal framework for the dematerialized system in which Central Registry Agency Inc. (MKK) holds capital markets instruments and investor rights affixed on them in an electronic book keeping environment. MKK was founded in 2001 as the most important part of this reform.
The dematerialization process was started with mutual funds in April 2005, and on 28 November 2005 all publicly traded stocks on the ISE were fully dematerialized. Since 2005, all of the new capital market instruments have been issued in fully dematerialized form.
- The immobilized depository system that Takasbank continued to manage until 28 November 2005 was based on a CMB resolution, and our law did not attribute any legal impact concerning records held at Takasbank. In the physical system physical certificates constitute the legal basis whereas in the dematerialized system records held at MKK are deemed to constitute the legal basis. The Article 10/A of the CML removed the need for issuance of physical certificates on those securities and rights affixed on them that are deemed to be dematerialized by the CMB. Therefore, the former valuable papers system was discontinued for the new valuable rights system.
- The dematerialized system is a completely new legal discipline. The new system according to the Article 10/A introduced holding of shares and rights in an electronic environment by eliminating physical shares, and thus, eliminating the legal nature of the valuable paper. In this new system rights are entirely separated from papers. The dematerialized system removes many legal principles based on the valuable papers law. Besides bringing along new institutions the dematerialized system changed the legal nature of real rights to be established on shares.
- In the physical system that continued until 28 November 2005 only stocks that were traded on the ISE were physically held in Takasbank vaults. In the dematerialised system total capital, including all non-floating shares, are held in dematerialised form.
- At present all floating and non-floating shares of publicly traded companies, mutual funds, corporate bonds, commercial papers, warrants, covered bonds and asset backed securities are issued and held in MKK’s electronic book-keeping system. Rights affixed on all dematerialised securities are reflected to MKK records and these records bear legal basis. In this regard, Takasbank’s functions before the transition to the dematerialised system and the functions attributed to MKK by the relevant regulations concerning the dematerialised system are entirely different. MKK is not a depository institution which holds physically issued stocks in global form as Takasbank did. MKK is a central depository institution where capital market instruments and the rights on them are held in dematerialised form, and whose records are attributed legal basis as per the depository functions assumed from the law. MKK has assumed all the functions of a Central Securities Depository (CSD) in this structure.
- It can clearly be observed from the relevant regulations concerning the dematerialised system that the legislators concede legal basis to MKK records. The records created at MKK do not carry an organic but a declaratory status as claims made to third parties in connection with rights affixed on any dematerialised capital market instrument are based on the date of notification made by participants to MKK. It is not obligatory to carry out bilateral transactions on capital market instruments that are held at MKK through MKK for those transactions to be effectual for the parties. However, any notification that is made to MKK through the CDS renders a transaciton the ability to be claimed against third parties. Therefore, as per the Article 10/A of the CML, it has been acknowledged that the notification (date) made to MKK has a legal basis in right entitlements due to transactions in capital market instruments. Another novelty brought about by the Article 10/A is that, in registering the transfer of shares to their books, issuers can take the records at MKK as basis without the need for any documentary proof. MKK assumes a function with regard to the assessment of an investor’s status against issuers besides acting as the Central Securities Depository. This function is defined as the “registry” function in international post-trade industry. MKK has provided an efficiency by combining the Central Securities Depository (CSD) function with the Registrar function. In this context, the legal nature of the records held at MKK involves Registry functions beyond its CSD functions.
- The legal basis of the records held at MKK is further emphasised in the new Turkish Commercial Code which was adopted on 13 January 2011. By the Article no. 496 of the new Commercial Code it was decreed that in case the registered shares that are listed are sold on exchange, MKK will notify the companies about the identification of the transferor and the number of shares sold or will provide technical access to this information for those companies. Furthermore, the Articles no. 415-417 and 431 of the new Commercial Code, which regulates the procedures and principles of convening of general assemblies of joint stock companies, decrees that the list of participants to general assembly meetings shall be prepared according to the list of shareholders that will be received from MKK.
- The dematerialised system, which is primarily based on trust instead of documentary proof of right entitlements, cannot be insured in whole, and the inherent risks associated with this system cannot be covered by capital alone as the system carries substantial risks that cannot be fully indemnified. Therefore, by the Article no. 5 of the MKK regulation which was issued by the Council of Ministers, it was decreed that the CMB should appoint a member to the MKK board to act as the chairman of the board, through whom the CMB could effectively exercise its supervisory and regulatory roles. Furthermore, the Article no. 9 of the MKK regulation brings about additional requirements for the members of the MKK board of directors and its auditing board, and the MKK staff, preventing the hiring of personnel who were condemned of some specific criminal offenses.
- Another consequence of this is the management of the Investors Protection Fund by MKK.
Financial Accounts Center
MKK, was included to the integrated system which was established between Takasbank and the Turkish Derivatives Exchange (Turdex) for risk management purposes on a participant basis as the “Financial Accounts Center” in 2011. The CMB designated MKK as the “Financial Accounts Center” to enable assignment of unique registry numbers to investors for their transactions in different financial markets. In this respect, accounts that are opened with Takasbank for transactions on Turdex will be initially opened with MKK and the related arrangements that will enable assignment of unique registry numbers will be made by the two institutions. In this way, MKK has become the “Financial Accounts Center” of Turkey.
MKK, within the relevant legislative framework, shares data in the Central Dematerialised System on dematerialised capital market instruments with regulatory and supervisory authorities, settlement and custody institutions, exchanges, professional organisations, data vendors, issuer companies, investors and public in general. Data sharing is performed hourly, daily, weekly, monthly, quarterly and annually. The following institutions are among the organisations that MKK shares data with:
- Capital Markets Board of Turkey
- Banking Regulation and Supervision Agency
- Financial Crimes Investigation Board
- Central Bank of Turkey
- Istanbul Stock Exchange
- Takasbank-ISE Settlement and Custody Bank Inc.
- The Association of Capital Market Intermediary Institutions of Turkey
- Data Vendors
MKK, provides continuous data flow to the “CMB-ISE Surveillance Project” which was started to fulfil a surveillance function for the Turkish capital markets.
MKK also enables MKK members, within the designations of the Capital Markets Board of Turkey, to enter the following information to the Central Dematerialised System:
- Information on free-floating shares
- Mutual Funds Management Fees
- Information on account proxies
- List of insiders