Turkey
Financial Sector Assessment Program: detailed assessment of Observance-Assessment of Observance of the CPMI-IOSCO Principles for Financial Market Infrastructure

This paper presents an assessment of observance of the CPMI–IOSCO (Committee on Payments and Market Infrastructures–International Organization for Securities Commissions) principles for financial market infrastructures in Turkey. The electronic funds transfer system in Turkey broadly observes the risk management framework and liquidity risk management, default management, and operational risk management principles. It partially observes the tiered participation principle. The rest are observed or not applicable. The electronic securities transfer system broadly observes the risk management framework, liquidity, default management, and operational risk principles; the rest are observed or not applicable.

Abstract

This paper presents an assessment of observance of the CPMI–IOSCO (Committee on Payments and Market Infrastructures–International Organization for Securities Commissions) principles for financial market infrastructures in Turkey. The electronic funds transfer system in Turkey broadly observes the risk management framework and liquidity risk management, default management, and operational risk management principles. It partially observes the tiered participation principle. The rest are observed or not applicable. The electronic securities transfer system broadly observes the risk management framework, liquidity, default management, and operational risk principles; the rest are observed or not applicable.

I. Introduction

7. The present document is the assessment of select Financial Market Infrastructures (FMI) in Turkey against the Committee for Payments and Market Infrastructures (CPMI) and International Organization of Securities Commission (IOSCO) Principles for Financial Market Infrastructures (PFMIs). The assessment1 was conducted in the context of field missions of the Financial Sector Assessment Program (FSAP) to Turkey in April 2016.

8. This assessment covers the following FMIs: The Electronic Funds Transfer (EFT) system and the Electronic Securities Transfer System (ESTS). These two FMIs form part of an integrated payment and securities settlement system called the “CBRT Payment and Securities Settlement System”. This integrated system also includes the Retail Payment System (RPS) which functions in Real Time Gross Settlement (RTGS) mode for customer initiated inter-bank transactions. The EFT system also functions in the RTGS mode, but is used exclusively for transactions related to participating banks proprietary transactions including for the settlement of primary and secondary market transactions on Government securities and central bank bills. The ESTS functions as a Central Securities Depository (CSD) for Government securities and central bank bills; the ESTS also functions as a Securities Settlement System (SSS) for the primary and OTC secondary market transactions between the banks on these securities.

9. The assessment takes into account the interlinkages of the EFT and ESTS with the other FMIs in Turkey: Takasbank and Merkezi Kayit Kurulusu (MKK). The Takasbank functions as the SSS for the secondary market transactions and repos on Government securities on the Borsa Istanbul (BIST); SSS for equities and corporate bonds traded on the BIST; and, as Central Counterparty (CCP) for the derivatives traded on the BIST. The Takasbank also operates a Securities Lending and Borrowing (SLB) platform; money market with banks and other institutional investors as participants; and a collateralized cash credit facility for banks and other institutional investors. The Takasbank is also the Legal Entity Identifier Operating Unit (LOU) for Turkey. The MKK functions as the CSD for equities and bonds traded in the BIST and for Government securities held by brokers and individual and institutional investors. The MKK holds securities in the name of the beneficial owner. There is a link between the MKK and ESTS to record movement of Government securities from banks to investors and vice versa. The MKK has an account at the ESTS to reflect the consolidated holding of Government securities in the MKK by investors. The MKK has also recently received a license from the CMB to function as a Trade Repository (TR) for OTC derivatives.

10. The information used in the assessment included all relevant laws, rules and procedures governing the systems, material available on these FMIs in the public domain and from the CBRT and the CMB. In addition, extensive discussions were held with the regulators and overseers – CBRT and CMB, the other FMIs – Takasbank and MKK; and commercial banks. In addition, the mission team was provided with:

  • Self-assessment of the EFT system against the PFMIs.

  • Self-assessment of the ESTS against the PFMIs.

  • Self-assessment of the CBRT and CMB on their responsibilities for FMIs against the PFMIs.

  • Excerpts of the daily, monthly, quarterly and annual reports produced by the CBRT related to the EFT, ESTS and the RPS.

  • Excerpts of the documents related to the internal policies and procedures and deliberations of relevant working groups and committees.

11. This assessment uses the methodology presented in the CPMI-IOSCO publication – “Assessment Methodology and Disclosure Framework for PFMIS (December, 2012)” and takes into account the considerations related to the FMIs operated by central banks, outlined in the CPMI publication “Application of PFMIs for central bank operated FMIs” (August 2015).

12. The presentation of the assessment takes into account the integrated nature of the EFT and ESTS. These two systems are part of an integrated system and share the operating rules, governance arrangements, risk management framework, access criteria and system interfaces and message formats. The assessment tables for the EFT provide the detailed descriptions for these and these are referenced in the ESTS assessment table instead of repeating the same details again. The principles on credit risk, collateral management and liquidity risk have been assessed for ESTS, to account for the credit extension to participants which happens outside the EFT and ESTS system but it is integral to the functioning of both FMIs. In the summary section and recommendations table, the highlights of the EFT and ESTS assessments and the recommendations are presented together.

II. Overview of the Payment, Clearing and Settlement Landscape

A. Regulation, Supervision and Oversight of Payment and Securities Settlement Systems

Institutional arrangements

13. The Central Bank of the Republic of Turkey (CBRT), the Capital Markets Board (CMB) and the Banking Regulation and Supervisory Authority (BRSA) are the authorities with responsibility for specific elements of the Turkey National Payments System (NPS). The CBRT, is the central bank and has regulatory and oversight responsibility for payment and securities settlement systems. The CMB has responsibility for the safe and efficient functioning of the capital markets and is responsible for the CSDs, CCPs and TRs. The BRSA as part of its banking supervision responsibility is responsible for regulation of payment instruments and also regulation and supervision of non-bank e-money and payment institutions.

14. The CBRT is the regulator, overseer and licensing authority for the payment and securities settlement systems. The CBRT published its objectives and policies as regards payment and securities settlement systems on its website in October 2014. According to this the main objective of the CBRT is to ensure “safe, uninterrupted, efficient and effective functioning of the systems.” The CBRT, is a member of the CPMI. The CBRT is the overseer of the payment and securities settlement systems. The Payment Systems Department (PSD) of the CBRT was established in November 2013 and is responsible for leading all initiatives related to payment and securities settlement systems, operating the core systems, and overseeing all payment and securities settlement systems in Turkey. The PSD is headed by an Executive Director (ED) reporting to one of the four Deputy Governors of the CBRT and executes its functions through four divisions – Payment Systems Operations, Regulation & Oversight, Payment Transactions, and Research & Development; organized as two groups with each group reporting to a Deputy Executive Director (DED). The organization chart of the CBRT and the PSD is presented below.

Figure 1:
Figure 1:

CBRT Organization Structure

Citation: IMF Staff Country Reports 2017, 045; 10.5089/9781475576870.002.A001

Figure 2:
Figure 2:

CBRT Payment Systems Department (PSD)

Citation: IMF Staff Country Reports 2017, 045; 10.5089/9781475576870.002.A001

15. The CMB is the regulatory and supervisory authority for the capital markets. The Borsa Istanbul (BIST) is the only securities exchange and Merkezi Kayit Kurulusu (MKK) functions as Turkey’s central securities depository (CSD) and registrar of dematerialized corporate securities. Capital market trades conducted over BIST are settled and cleared by the Istanbul Settlement and Custody Bank (Takasbank).2 Takasbank also acts as the central counterparty (CCP) for derivatives transactions undertaken on BIST and at the Securities Lending Market operated by itself. Government bonds, treasury bills, CBRT bills, capital market instruments, share income certificates and international securities are traded on the Borsa Istanbul. The BIST bonds and bills market is the only organized, fully automated market for outright purchases and sales, as well as repurchase (repo) and reverse repurchase (reverse repo) transactions with fixed income securities. Treasury bills and government bonds are the most actively traded instruments. The CMB is a member of IOSCO and is responsible for regulation, supervision and oversight of Turkey’s corporate securities market FMIs (CSD, CCP and TR) and their observance of the PFMIs.

16. The BRSA is the sole authority for banking regulation and supervision.3 The fundamental goal of the BRSA is to ensure confidence and stability in the financial markets, provide effective operation of the credit market, and safeguard the rights and interests of depositors. It was established in 1999 by the Turkish Government to improve the effectiveness of regulation and supervision of the banking industry. BRSA is public legal entity with administrative and financial autonomy. It was established according to Banks Act No. 4389 in June 1999 and began operating in August 2000. According to Banking Law (No. 5411), in order to establish confidence and stability in financial markets, the sound operation of the credit system, foster the development of the financial sector, and protect the rights and interests of depositors, the responsibilities of BRSA are three-fold: (i) Regulate, monitor and supervise banks and financial holding companies, as well as leasing, factoring and financing companies, and ensure the enforcement of their regulations; (ii) Become members of international financial, economic and professional organizations in which domestic and foreign equivalent agencies participate, to sign memorandum of understanding with the authorized bodies of foreign countries regarding the issues that fall under the Agency’s duty field; and (iii) Fulfil other duties assigned by the law. As part of its responsibility for banking supervision, the BRSA also regulates payment instruments and also regulates and supervises non-bank e-money and payment institutions.

Legal and regulatory framework

17. The CBRT derives its authority over the NPS from the Law on the Central Bank of the Republic of Turkey (CBRT Law) – Law no. 1211, which was enacted in 1970 and amended, most recently, in 2011; and the Law on Payment and Securities Settlement Systems, Payment Services and Electronic Money Institutions No 6493 (PSL) enacted in June 2013. The CBRT law, as amended in 2011, authorizes the CBRT to establish payment, securities transfer and settlement systems, enact regulations to ensure the uninterrupted operation and oversight of existing or future systems, and to determine the methods and instruments, including the electronic environment for payments, that shall be used for payments. The PSL, granted the CBRT broad authorities and responsibilities for the nation’s payment and securities settlement systems. In specific, the law assigned responsibility to CBRT to (i) prepare secondary regulation regarding establishment, operations, acquisition and transfers of shares, and oversight of payment and securities settlement systems within a year (Articles 4.3 and 8.1); (ii) designate payment and securities settlement systems that are subject to the provisions of settlement finality and publish them in the Official Gazette;4 (iii) license payment and securities settlement systems; (iv) monitor licenses and revocation of licenses in certain situations defined by the Law; (v) overseeing all payment and securities settlement systems that operate in Turkey; and (vi) impose administrative fines on the system operators that violate the provisions of Law and secondary regulations.

18. CBRT has issued implementing regulations for the operation and oversight of payment and securities settlement systems since the passage of the Payment Law. CBRT’s ‘Regulation on Operations of the Payment and Securities Settlement Systems’ and ‘Regulation on Oversight of the Payment and Securities Settlement Systems’ were both enacted in June 2014. They set forth the principles and procedures regarding operating licenses, system rules, operating conditions, the risk management framework, collateral, guarantee and credit mechanisms, acquisition and transfers of shares, and oversight. The “Regulation on Operations of the Payment and Securities Settlement Systems” (June 2014) – (ROPSSS) sets forth the principles and procedures regarding operating licenses, system rules, operating conditions, the risk management framework, collateral, guarantee and credit mechanisms, acquisition and transfers of shares. The “Regulation on Oversight of the Payment and Securities Settlement Systems” (June 2014) – (ROSPSSS) forms the basis for CBRT’s oversight activities. The CBRT has also prepared the ‘Communique on Information Systems of Payment and Securities Settlement Systems’. The Communique defines detailed provisions that system operators are expected to take into consideration regarding the management of information systems.

19. Banking Law No 5411 lists payment services as one of the activities banks are allowed to carry out. 5 In specific Article 4 (d) mentions “Carrying out any type of payment and collection transactions, including cash and deposit payment and fund transfer transactions, correspondent bank transactions, or use of check accounts” and Article 4 (g) refers to “Issuing payment instruments such as credit cards, bank cards and travellers checks, and executing relevant activities.”

20. The PSL lists activities, which are considered to be payment services and also covers non-bank e-money providers and payment institutions. Article 12 of the PSL lists the transactions that are to be deemed as “payment services”. Among these activities are all operations required for operating a payment account, payment transactions including transfers of funds on a payment account of the payment service user and direct debits, issuing or acquiring of payment instruments, money remittance and services for mediating invoice payments. The PSL, includes provisions on the establishment, licensing, operating conditions, and oversight of payment services. It is also considered to be a general framework of payment services, and empowers the BRSA to prepare secondary regulations. Article 13 of the Law exhaustively lists the institutions authorized to perform the above listed payment services as: (i) The banks within the scope of the Banking Law; (ii) Electronic Money Institutions or (iii) Payment Institutions. It should also be noted according to Article 5 of the Regulation No. 29043 on Payment Services, Electronic Money Issuance, Payment Institutions and Electronic Money (27 June 2014), the Post Office (PTT) is also authorized to perform such payment services within the scope of the provisions of the Postal Services Law No. 6475.

21. Cheque Law (No 5941), which was enacted in 2009 and amended further in 2012, governs all aspects of cheque payments. It describes and defines the modalities for the issuance, acceptance and payment by cheque. The amendments to the law in 2012 decriminalized the issuance of bad cheques, imposing administrative sanctions in place of the criminal sanctions in the 2009 version of the law. The law enables the establishment and functioning of interbank cheque clearing houses, whose oversight and supervision vests with the CBRT under the CBRT Law and the PSL. The rules and procedures of the Inter-bank Cheque Clearing House (ICH) are governed according to the regulation issued by the CBRT.

22. The Bank Cards and Credit Cards Law (No 5464), which was also enacted prior to the PSL6, serves to ensure efficient and effective functioning of the card payments system by establishing the principles and procedures applicable to the issuance, use, and clearing and settlement of bank cards and credit cards.7 Organizations and entities which establish a card system, issue cards and enter into merchant agreements, as well as merchants and card holders are subject to and governed by the provisions of this law. This law is complemented by secondary regulation of BRSA.

23. On the securities side, the issuance and management of public debt is governed by the Public Finance and Debt Management Law (Law No 4749). The law establishes rules and procedures for the management of domestic and foreign public debt by the central government and other establishments with more than 50% of their capital belonging to the state, state banks, investment and development banks, municipalities, and other local government agencies. The CBRT as an agent of the Undersecretariat of Treasury, is responsible for issuing and settling government bonds and Treasury bills on behalf of the Treasury.

24. The mandate of the Capital Market Law No 6362 (CML) is to “regulate and supervise capital markets to ensure the functioning and development of capital markets in a secure, transparent, efficient, stable, fair and competitive environment and to protect the rights and interests of investors.” To this end, the CML provides for the establishment of the CMB, as the independent regulator and overseer of the capital markets in Turkey. Capital market instruments, their public offering and sale, exchange markets and other markets organized pursuant to the law, capital market activities, capital market institutions, and investor protection are subject to the provisions of the law. Settlement finality and irrevocability with respect to capital market transactions is provided under the law. In addition, the law enables the setting up of market infrastructures such as central securities depositories (CSD), central clearing institutions, central counterparties (CCPs) and trade repositories (TRs) and defines their activities. The law also has provisions for the setting up of the Turkish Capital Markets Association (TCMA) as a self-regulatory professional body for institutions authorized to perform investment activities. The CMB has issued secondary regulations related to CSDs and CCPs and is in the process of issuing the regulations for TRs.

B. Payment, Clearing and Settlement Systems in Turkey

25. The CBRT owns and operates an integrated payment and securities settlement system comprising two payment systems – EFT and RPS, functioning in RTGS mode; and ESTS - a CSD-cum-SSS for Government securities and CBRT bills. The EFT is an RTGS system and is fully integrated with the ESTS. The EFT was launched in April 1992, modernized in 2000, and again, in 2012. The second generation EFT added key functionality to the system, including a central queuing mechanism, funds management facilities, direct debit facilities, and phased closure of operations, as well as an emergency backup center. The third generation split the processing of interbank (time critical banking payments) and retail payments into two separate operations creating the RPS for customer initiated transactions and with the EFT covering inter-bank proprietary transactions. There is no transaction value ceiling or floor for these systems. According to the CBRT, by 2011, the rapid growth in the volume of low value retail payments was creating a significant risk to the settlement of large value and urgent payments, hence in consultation with the banks the RPS that was developed as a system for handling the customer initiated transactions was created. The EFT, RPS and ESTS all use the same inter-bank network and function as an integrated system. Message types are used to direct messages to the appropriate sub-system. The CBRT is the system owner and operator, the operative and administrative responsibility lies with the CBRT’s Payment Systems Operation Division of the PSD and the technical responsibility with the Analytical IT Development Division (Information Technology Department). Any bank operating in accordance with the Banking Law can, with CBRT’s approval, become a direct participant in the EFT, RPS and ESTS. There are a total of 54 participants, with the exception of the MKK all other participants are banks.

26. The participants in the EFT system and RPS are only banks. They have different accounts at the CBRT for the EFT and RPS and support only local currency credit transfers. The systems differ on the SLA for processing time and queue management features. While both components are based on the RTGS-principle, the EFT service level agreement (SLA) limits processing time8 to a maximum of one minute (current average is one second). In contrast, the RPS SLA limits the processing time to no more than 15 minutes (current average is 30 seconds). EFT settles on First-in first-out (FIFO)-basis based on priority and the RPS on By-Pass first-in first-out (By-Pass FIFO) basis; and EFT allows for queue management, whereas RPS does not. The EFT system also has an automated multilateral offsetting generated every minute. Participants have different settlement accounts for EFT and RPS, between which funds can be moved intra-day. Both components support only Turkish Lira (TRY) denominated credit transfers. In 2015, RPS settled 315,243,249 payments with a total value of TRY 9.99 trillion, whereas EFT settled 2,918,019 payments with a total value of TRY 42.73 trillion. The total value processed by the EFT and RPS system in 2015 was around 27.9 times the GDP of Turkey in 2015. The number of transactions processed by the EFT shows a distinct skew to the later part of the operational day – on a typical day around 50% in the last 2.5 hours of operations. In January 2016, around 15.94% of transactions were queued for inadequate balance and remained in the queue for an average of 7 minutes. The maximum queue time9 in January 2016, was around 18 minutes.

Figure 3:
Figure 3:

Transaction pattern on a typical day in the EFT system

Citation: IMF Staff Country Reports 2017, 045; 10.5089/9781475576870.002.A001

27. The ESTS is the CSD for government debt securities and the CBRT bills. It also functions as an SSS for the primary and OTC secondary market operations on these securities, settling in DVP mode using Model 1; the ESTS also supports the use of these securities as collaterals for the CBRT liquidity facilities. The ESTS maintains these securities in dematerialized form and records the securities ownership from their initial issue, transfers arising from secondary market transactions through to their final redemption. The ESTS works in an integrated manner with the EFT to support DvP, using Model 1 – gross settlement of both funds and securities leg. The proprietary securities holdings of banks are held at banks’ own accounts in the ESTS. Retail and institutional investors accounts are held in the MKK at the beneficial owner level. The MKK is also a participant in the ESTS and has an account to reflect the consolidated holdings of these securities held by investors. Banks also have separate collateral accounts, one each for respective CBRT liquidity facilities. The ESTS supports holding of sub-accounts for customers – called the “007” accounts. As a practice banks use this account only for intra-day transactions and at the end of day move all holdings in the “007” accounts to the invetsors account in MKK. The Takasbank, is an exception, and it uses this to also reflect holdings of investor’s assets as parts of its SSS activities. The ESTS also supports various business flows such as Free of Payment (FOP) transfers of securities between participants, repositioning of securities between the accounts of a participant, direct debiting of securities by the CBRT, and the CBRT Portfolio Operations. In 2015, the ESTS processed 302,512 securities transactions, 113,542 were DvP operations, for which the total value of corresponding payment legs settled in EFT was TRY 7.01 trillion; the rest were free of payment transfers.

28. Operating hours of EFT, RPS and ESTS are weekdays (except national holidays) from 8:30 to 17:30. The EFT and RPS settlement accounts are zero balance accounts, at the start of the day EFT and RPS receives the previous day’s closing balances as starting balance from the CBRT. The EFT and RPS receive electronic payment orders sent by the participants on an ongoing basis, debit the sender’s account if its balance suffices, credit the settlement account of the receiving participant, and inform the receiving bank. If funds are insufficient, the messages are queued. At the end of every business day, EFT and RPS send reconciliation reports to the participants and the CBRT.

29. The Participant Interface System (PIS) is the system component used by participants for interfacing with the CBRT Payment Systems. The PIS is essentially a messaging system and is the gateway to the EFT, RPS and the ESTS system. The participants access PIS through a closed private network. The PIS checks the access rights, enforces security measures, verifies digital signatures, manages the encryption and decryption and validates messages. The PIS system is also used for distribution and access to end of day reports and files shared between the participants and the CBRT payment and securities settlement systems. The below figure shows how the various system components interact with each other.

Figure 4:
Figure 4:

CBRT payment and securities settlement Systems

Citation: IMF Staff Country Reports 2017, 045; 10.5089/9781475576870.002.A001

30. The banks have access to diversified sources of liquidity for use in the EFT and RPS system. The reserve maintenance period for banks is 14 days, within this period the banks have access to their statutory reserves at the CBRT for use in the EFT and RPS system. The CBRT as part of its monetary policy operations offers collateralized Intra-day Liquidity Facility (ILF), overnight credit, daily repo operations, weekly repo auctions and finally the Lender of Last Resort (LOLR) facilities. These are collectively called CBRT liquidity facilities. The CBRT sets an overall borrowing cap across the standing facilities except the LOLR. The cap is based on the asset size of a bank. The banks in addition have access to: the BIST repo market; the inter-bank money market operated by the Takasbank; the cash credit facility offered by the Takasbank; and, pre-agreed credit lines between banks. The below table summarizes the various sources of liquidity, their operating hours, collaterals accepted, clearing and settlement (C&S) institution and the Average Daily Value (ADV) based on data for March 2016.

Table 1:

Liquidity Facilities available to banks

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31. The Takasbank functions as the SSS for the secondary market transactions and repos on Government securities on the Borsa Istanbul (BIST); SSS for equities and corporate bonds traded in the BIST; and, as Central Counterparty (CCP) for the derivatives traded on the BIST. The Takasbank also operates a Securities Lending and Borrowing (SLB) platform and acts as CCP at this platform as well; money market platform for banks and other institutional investors as participants; and a collateralized cash credit facility for banks and other institutional investors. The Takasbank is also the Legal Entity Identifier Operating Unit (LOU) for Turkey. The below charts shows the size of the various markets and the collaterals held by Takasbank for the operations across these markets.

32. The MKK functions as the CSD for equities and corporate bonds traded in the BIST. Government securities held by brokers and individual and institutional investors are also monitored on the MKK system. The MKK holds securities in the name of the beneficial owner. There is a link between the MKK and ESTS to record movement of Government securities from banks to investors and vice versa. The MKK has an account at the ESTS to reflect the consolidated holding of Government securities in the MKK by investors. The MKK has also recently received a license from the CMB to function as a Trade Repository (TR) for OTC derivatives.

Figure 5:
Figure 5:

Value of trades across markets and collaterals held with Takasbank

(in Billion USD)12

Citation: IMF Staff Country Reports 2017, 045; 10.5089/9781475576870.002.A001

33. Foreign exchange transactions are primarily conducted bilaterally between banks and by banks with the CBRT. There is no PVP arrangement for the inter-bank foreign exchange transactions. The banks place their bid and asks for foreign currency at the CBRT’s Reuters page. The CBRT seeks to intervene, processes these and settles the Foreign Currency (FCY) leg in correspondent accounts abroad. The CBRT also operates periodic FCY auctions which also function in the same way. The banks also use OTC trades, again using foreign correspondent bank accounts for the FCY leg. The banks have FCY accounts with the CBRT, but these are only used for reserve maintenance and transactions are not allowed.

34. Interbank cheque transactions are cleared through Interbank cheque Clearing House (ICH)) which is overseen by the CBRT. Cheque clearing activities are executed in Istanbul and Ankara Clearing Houses. Both clearing houses have identical hardware and software, and can serve as a back-up center for each other. ICH functions as a Deferred Net Settlement (DNS) system for cheque transactions clearing and settlement. Transactions are settled, based on multilateral netting on T+2 basis, through the special settlement account of ICH at the CBRT. The ICH notifies its member banks and the CBRT of each bank’s net debit or credit position. After all debit positions have been closed by the debtor banks, the payments are credited to the creditor banks.

35. All domestic payment card transactions are processed through two domestic switches - the Interbank Card Center System (BKM) and Gosas. The BKM is a DNS system for debit card and credit card transactions. All banks in Turkey issuing cards or operating ATM and POS are members of BKM. Payments are settled, based on multilateral netting, on the books of the central bank through the BKM’s special settlement account at the CBRT.13 Net results calculated on T+1 and settlement made on T+2. Credit and debit transactions with non-member banks or with banks outside Turkey are processed outside Turkey by Visa or MasterCard or via correspondent banking arrangements. BKM also offers BKM Express, a digital wallet, which can be accessed via smartphones too and allows, among others, Person-to-Person Transfers. The Gosas system also operates a card switch for its 10 members and processes the transactions between these banks. Gosas settles in DNS mode on T+2 in the books of Garanti Bank. The Gosas system also has an acceptance mark called “Bonus”.

36. The Post and Telegraph (PTT) – the Turkish post operates postal banking services through its department “PTT Bank”. The services provided by PTT Bank include: Postal Cheque Account – a regular checking account with a linked Maestro14 branded debit card (96.72 million); prepaid cards for social protection payments of Government and other international agencies (1.5 million); remittances, collection services, bill payments through its vast network of branches (4,414 – largest in Turkey) for over 359 institutions; operate network of ATMs (2124); and, ecommerce acquiring. The PTT bank also offers a mobile solution for accessing its various services. The PTT bank does not have direct access to the EFT and RPS, it accesses these through other banks. The PTT bank indirectly participates to the BKM.

37. Pursuant to the provisions the PSL, the BRSA has recently commenced the process of licensing e-money issuers and other payment institutions15. The PSL introduced the category of non-bank e-money issuers and other payment institutions and assigned the regulatory and supervision of these institutions to the BRSA. The BRSA issued the implementing regulations related to these in 2014. The BRSA has received 48 applications and is in the process of reviewing them. It has already provided licenses to 5 e-money issuers and 11 payment institutions. The applications of the remaining 32 are under examination. Some of these firms were already operating and applied under the “transition period” allowed under the PSL for institutions in operation prior to the PSL coming into force.

38. The below chart shows the interactions between the various elements of the Turkish NPS.

Figure 6:
Figure 6:

The Turkey NPS

Citation: IMF Staff Country Reports 2017, 045; 10.5089/9781475576870.002.A001

C. Planned Reforms

39. The CBRT is in the process of developing an oversight framework which envisages articulating the specific standards to be used for specific types of systems, the data and reporting requirements. As noted earlier the CBRT has issued a general policy statement on payment and securities settlement systems, which makes the PFMIs applicable for all payment and securities settlement systems in Turkey. As part of the new oversight framework the CBRT intends to adapt the PFMIs in terms of specific principles and key considerations which would be applicable for specific retail payment systems.

40. The CBRT in co-ordination with the banks is evaluating inclusion of the TRY in the CLS System.

III. Summary Assessment

Principles: Key Findings and Follow up

General organization (Principles 1 - 3)

41. The legal basis for the EFT and ESTS, are the CBRT law, the PSL and specific regulations pertaining to operations and oversight. The CBRT as the operator has developed detailed operating rules – the Payment Systems Operating Rules (PSOR). The participants are required to sign a participation contract which binds them to the PSOR. The participation contract and the PSOR have a sound legal basis. All material legal aspects are adequately covered in the PSL and the CBRT law. All participants of the EFT system are subject to Turkish laws and regulations; and all operations are also performed in Turkey.

42. The legal certainty for the arrangements with respect to the collateralized liquidity support relating to securities held in ICSDs, should be ascertained. The usage of liquidity support against securities held in the ICSDs are very limited and the securities pledged as collateral are held in the name of CBRT, hence it is not an immediate issue of concern. However as a good measure it would be important to review the legal certainty for these arrangements.

43. There appears to be some ambiguity on the legal basis for the protection of participant securities holdings which are transferred by participants to the account of Takasbank in ESTS.. Banks and individual and institutional investors participating in the Government securities secondary market at the BIST or in the inter-bank money market operated by the Takasbank, transfer securities to the account of Takasbank (in ESTS) for their securities transactions and also to be used as collateral. The specific provisions related to collateral in the PSL and CML are applicable, which protects the securities pledged as collateral, however the protection for securities holdings in the sub-accounts from any insolvency of Takasbank is not clear. The PSOR does not clearly recognize holding of government securities sub-accounts by a participant [Takasbank in this case]. The CML and other provisions related to CSDs do not specifically apply to this arrangement, as the ESTS is outside the scope of the CML. However, articles in CML pertaining to segregation of assets of investors in investor firms (article 46) appears to be applicable to Takasbank. Investor firms as defined in article 3(v) of the CML and investment services as defined in article 37 (g) encompass the activities of Takasbank as a SSS.

44. The objectives and policies of the CBRT regarding Payment and Securities Settlement Systems place a high priority on stability, safety and efficiency. The CBRT has documented governance arrangements for the institution as a whole that define clear and direct lines of responsibility and accountability. The same governance framework has been applied for the EFT system and ESTS as well, as a core responsibility of the PSD. There is a risk management framework for the CBRT operated payment systems. There is an existing process of auditing departmental risk management framework, however the PSD’s risk management framework has not been audited yet. Mechanisms exist for involving stakeholders in decision-making process, and the CBRT effectively communicates with the stakeholders through different channels.

45. The PSD has developed a risk management framework based on the ISO 30001 framework. The risk management framework covers the specific risks outlined in the PFMIs. The framework is reviewed annually and is also subject to audit by the CBRT audit committee. The PSOR provides adequate powers to the CBRT to ensure conformance to the operating and security procedures outlined in the PSOR. The PSD has mechanisms in place for measuring and monitoring specific aspects of liquidity risk and operational reliability of the EFT system.

46. The risk management framework is however internally focused and does not explicitly take into account the dependencies on other FMIs and also internal systems of the CBRT. In particular, the operations of the EFT system has a heavy dependence on the money markets operated by Takasbank and the CBRT markets department, given their role in providing liquidity to participants. The Markets Department is the decision maker on the provision of the CBRT liquidity support facilities and also has its own systems and processes. This risk however is to an extent mitigated as the Takasbank and other FMIs are subject to the oversight of the CBRT and the Markets department also has its own risk management framework and co-ordination framework is in place.

Credit and liquidity risk management (Principles 4 - 7)

47. The credit risk in the EFT and ESTS stems from the CBRT liquidity support operations to the participants. The liquidity support operations are not integrated into the EFT system and as such are handled by the markets department. The credit risk is considered as part of the EFT risk management framework, but the full treatment of the credit risk from liquidity support operations is in the domain of the markets department. The markets department’s credit risk management framework includes instituting overall borrowing limits, requiring all credit facilities to be collateralized with good quality securities, and applying haircuts. The collaterals are re-valued daily and the CBRT has the rights to ask for additional collateral when there is an adverse movement.

48. The collateral management system and processes are external to the EFT and ESTS and are managed by the CBRT markets department. The extension of liquidity support is considered a monetary policy instrument. The choice of securities, haircut rates, valuation practices and operational arrangements are an integral part of the CBRT monetary policy operations framework. The CBRT maintains a list of eligible securities and their haircut rates. The haircut rates depend on the types and maturity of securities. The eligible securities are TRY government bonds, central bank bills, lease certificates issued by ALCTT (Asset leasing company of the Turkish Treasury), foreign bonds and notes, IILM issuances and foreign exchange deposits and foreign exchange banknotes deposits.

49. The CBRT as the operator of the EFT system and ESTS, by itself is not constrained in TRY liquidity. However the participants could face liquidity shortages. The participants have access to liquidity support from the CBRT and the inter-bank money markets. These liquidity options are collateralized and in the case of the intraday and overnight CBRT liquidity support there is an overall borrowing limit for the participant. However, liquidity support is available without any limit within the framework of LOLR. There is no explicit stress testing mechanism in place, however there is an ongoing review of the policy framework relating to the CBRT intraday liquidity support. There is however no set time-period for this. The transaction pattern in the EFT system shows existence of substantial liquidity risk. The CBRT has studied this and is currently evaluating suitable options.

Settlement (Principles 8 - 10)

50. The EFT functions as a RTGS system with final settlement through the day and settles in central bank money. Settlement finality is protected in the PSL and clearly articulated in the PSOR and as such has a sound legal basis.

51. In ESTS, securities are dematerialised and processed in book entry form. Although it was possible to rematerialize and physically deliver the securities previously, as of November 2012 physical printing of government debt securities has been terminated. With the redemption of latest printed securities, there have been no printed government debt securities since July 2013. Since government debt securities are only in dematerialised form, there is no risk associated with the storage and delivery of physical instruments.

CSD and exchange-of-value settlement systems (Principles 11, 12)

52. The ESTS functions as a CSD-cum-SSS for Government securities and central bank bills. The ESTS system settles the securities transactions in DVP mode using model 1. The funds leg is settled at the EFT system. The CBRT, in the capacity as the agent of the Prime Ministry Undersecretariat of Treasury, carries out the dematerialised issue, custody and redemption of government securities, which are issued by the Prime Ministry Undersecretariat of Treasury, by the CBRT, and by other public institutions. Since the CBRT is the CSD for the securities in ESTS, there is neither custody risk stemming from the insolvency of the CSD nor the risk of the participants’ securities being sequestrated due to the other activities of the system operator. In ESTS, the securities owned by the participants’ customers are segregated from the participants’ own holdings and kept in a special securities account of the MKK. MKK keeps these securities by customer details in its system enabling customers to track their holdings. All the operations by the CBRT in ESTS require dual approval, are logged and, if needed, can be tracked. During the end of day operations of ESTS, participants are notified about their securities account holdings and their daily operations for reconciliation purposes. All the securities held in the ESTS are in dematerialized book entry form, there are no physical securities.

Default management (Principles 13, 14)

53. The PSD has developed a default management procedure recently covering all the payment and securities settlement systems operated by the CBRT. The default procedure is consistent with the provisions in the PSOR and derives its legal basis from the PSL. Given that the procedure was adopted very recently it has not been tested in its entirety. The participants in the system are all banks, except the MKK. Banks are supervised by the BRSA and the MKK by the CMB. These authorities have the sole right related to insolvency or bankruptcy of these participants. There are existing co-ordination and information sharing arrangements between the CBRT, BRSA and the CMB. Hence there is high degree of certainty that the CBRT will have adequate notice to execute its default management process. Nevertheless, any delays in executing the default management process, could escalate the risks in the system.

General business and operational risk management (Principles 15 - 17)

54. The EFT and ESTS are central bank operated FMIs, as such aspects related to liquid assets, wind down plans and viable plan for raising additional capital are not applicable. The pricing policy for the EFT system aims for a full investment and operational expenses recovery. The pricing structure is clear and communicated to the participants. The fees are recovered on a monthly basis and the corresponding information is available to participants. The costs of the EFT system are covered under the general budget of the CBRT and subject to the standard audit process.

55. The CBRT Payment and Securities Settlement Systems have a comprehensive operational risk management Framework spanning people, process and systems. The risk management framework is reviewed once a year. Industry best practices for IT risk management framework – ISO 27001 and ITIL for IT services management, have been used. There are adequate processes and procedures in place to address people aspects and the IT systems and processes have been developed using industry standards and best practices. There are periodic IT security reviews and there are dedicated organizational arrangements in place for monitoring and managing the IT security aspects. The IT infrastructure is built in a way that there is no single point of failure and there is full-fledged backup site which works on a load sharing basis with the main site. In addition there is an application package developed using a completely different hardware and software platform to cover the risk of a simultaneous impact on both the infrastructures, which is a possibility in particular with cyber risk incidents.

56. There is a well-laid out BCP plan with an organized governance arrangement to monitor and review its execution. However the BCP scenarios are focussed on the infrastructure of the CBRT payment and securities settlement systems. Scenarios, either arising within the CBRT payment and securities settlement systems, within the CBRT or externally, which can cause a widespread impact have not been included. The participants are included in the BCP tests and there are plans underway to include complex scenarios to fully cover business continuity risks arising from and posed to other FMIs and participants– in particular Takasbank and MKK.

57. The PSOR covers operational risk management in articles 17-20, however there is no explicit mandate on this and there is no structured process to measure ongoing compliance with these aspects. However, the CBRT recently surveyed the participants to assess their BCP plans and cyber resilience. All the participants reported having BCPs, but there were some gaps in terms of the quality of the BCP and cyber resilience readiness of some participants. The CBRT is already addressing this as part of its revised business continuity guide.

Access (Principles 18 - 20)

58. Criteria and requirements for participation are clearly stated in the PSOR and are disclosed to related parties. Only banks and the MKK, which is a special participant of ESTS for the implementation of safekeeping of the securities in the name of customers, are accepted as participants in the CBRT payment and securities settlement systems. Only banks are participants in the EFT system. The policy decision on only allowing access to banks has been taken based on considerations of liquidity risk management. The CBRT does not allow access to specific components of the CBRT payment and securities settlement systems, all participants have access to the EFT, RPS and ESTS system. The MKK is the only exception. The CBRT monitors compliance to operational aspects of the participation criteria and is guided by the BRSA for the continued qualification of the participant to function as a bank. Suspension and orderly exit rules are stated in the PSOR and disclosed to participants.

59. The PSOR acknowledges and regulates only the direct participants in the CBRT payment and securities settlement systems and there is no definition or rules set for indirect participation; however the EFT system in practice does have tiered arrangements. Entities that are not eligible for participation can perform operations through the participants, but are treated as customers of participants, rather than indirect participants. One bank and one entity carrying out electronic payment services, are accessing the EFT system through other banks. Other market intermediaries and non-bank financial entities also access the services of the EFT and also likely other elements of the CBRT payment and securities settlement systems. The usage of TETS by brokers and other market intermediaries is also an example of a tiered participation arrangement for the EFT system. The ESTS system however by design does not have tiered participation. The CBRT has developed capability to track the details of the initiator, recipient and purpose of transactions, based on specialized fields in the message formats. These tools can be used to develop a comprehensive monitoring framework for tiered participation arrangements.

60. The ESTS and the MKK system have an issuer CSD-investor CSD link. The risk management framework however does not explicitly acknowledge this arrangement as a link. However the MKK is overseen by the CBRT for its SSS functions and hence also has a full integrated view of the risks arising from the ESTS-MKK link.

Efficiency (Principles 21, 22)

61. Message exchange of the CBRT Payment and Securities Settlement System is managed via secure services using industry standard technologies and using XML based proprietary message formats. It is possible to easily convert XML messages used in the CBRT payment and securities settlement systems into other message formats. The PIS used to interface with the CBRT payment and securities settlement systems offers adequate tools to allow STP mode.

62. The process for secondary market transactions on Government securities varies based on the nature of counterparty, creating inefficiencies for the participants. The processes related to settlement of the securities and funds leg vary based on whether the counterparty of a transaction for a bank is another bank, a custodian, individual investor or other institutional investor. Addressing this will require some changes in ESTS and introducing new interfaces between the MKK, ESTS and Takasbank.

Transparency (Principles 23, 24)

63. Rules and procedures for the CBRT Payment and Settlement Systems are defined clearly and shared with participants. System descriptions, system rules, general structure and workflows, summary statistics and pricing policy are disclosed to the public through the CBRT web page and the CBRT Payment Systems User Group web site. Pricing tariff is defined yearly based on pricing policy and disclosed to participants and to the public at least one month before its entry into force. The CBRT is committed to publish the details of the assessment of the EFT system and ESTS in line with the requirements of this principle.

Table 2:

Ratings Summary for the EFT system

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Table 3:

Ratings Summary for the ESTS

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Recommendations for EFT system and ESTS16

Table 4:

List of prioritized recommendations for the EFT system and ESTS

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IV. Summary Assessment

Responsibilities: Key Findings and Follow up

64. The CBRT law, the PSL and the CML clearly layout the specific payment and market infrastructures that are subject to regulation, supervision and oversight of the authorities. These laws put together, assign the responsibility for regulating, supervising and overseeing payment systems and SSS with the CBRT; and CCPs, CSDs and TRs with the CML. The authorities have further publically announced their adoption of the CPMI-IOSCO PFMIs. The CMB has specifically stated that the PFMIs would be applicable for the MKK and Takasbank. The CBRT in its public statement on its objectives for payment and securities settlement systems has articulated that it will apply the PFMIs to all the payment and securities settlement systems under its oversight. The CBRT has further issued the ROPSS, which articulates its powers to regulate and oversee the payment and securities settlement systems. The CMB has issued specific regulations/communiques for the CSDs and CCPs, however it has not yet issued regulations for TRs. The powers of the CMB with respect over TRs is however clear and derives from the CML. Also, while the CMB has licensed the MKK as a TR, it has not yet commenced operations and the CMB as part of its approval to MKK to commence operations as a TR intended to issue a regulation/communique to fully articulate its regulatory and oversight actions and powers related to TRs.

65. The CBRT and the CMB have the relevant powers to obtain information and induce change to carry out their oversight activities. These powers have been explicitly articulated in secondary regulations with respect to the payment systems and SSS, by the CBRT. The CMB has articulated its powers with respect to the CCPs and SSS. However its powers with respect to the TRs have not been explicitly articulated yet. At this point, however there are no TRs in Turkey. The CMB has licensed the MKK to function as a TR. However prior to its becoming operational, the CMB intends to issue specific regulations.

66. The CBRT and the CMB has adequate resources and qualified staff to carry out its oversight and regulatory responsibilities with respect to the FMIs in its oversight. The CBRT has specific designated staff for carrying out the oversight activities. The CMB’s oversight activities are housed in a department which also includes regulation and supervision of brokers and also the BIST. The CMB has however not allocated dedicated resources for the oversight of FMIs under its purview.

67. The CBRT and the CMB have articulated their policies with respect to FMIs through a policy statement publsihed on their respective websites. The policy statement is consistent with the respect legal powers and regulations issued by these authorities. The CBRT and the CMB have issued policy statements articulating their adoption of the PFMIs. In the case of the CBRT it has required all the payment and securities settlement systems in its purview to adopt the PFMIs and has already completed the self-assessment against the PFMIs for the FMIs operated by it. The CBRT in addition has asked the Takasbank and the MKK, to complete self-assessments as SSS. The CMB has asked the Takasbank and the MKK to complete self-assessments as CCP and CSD respectively. The legal and regulatory measures governing the functioning of the CBRT and the CMB allow data sharing amongst them and with other related authorities, in particular the BRSA which regulates the Takasbank as a banking institution. The FSC provides the structured mechanism for sharing, analyzing and resolving any issues related to the financial sector that may impact financial stability. This mechanism is also used for FMI related discussions. There are also other ad-hoc mechanisms in place to share and seek information and collaborate on an as needed basis.

Table 5:

Ratings Summary for the Responsibilities

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Table 6:

List of prioritized recommendations for responsibilities

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V. Detailed Assessment Report – EFT System

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