Istanbul Stock Exchange (ISE) has opened its offshore International Market with the launch of trading in Turkish Eurobonds.
The International Market will operate in a free zone within the 24,500 square metre exchange, which is the most modern in Europe, and is designed to become a platform where companies from central Europe, the Middle East and central Asia can offer their shares to international investors.
In the words of Tuncay Artun, ISE chairman and CEO, it represents Istanbul's hopes of becoming the most important securities market between London and Singapore by the early years of the 21st century.
The ISE has chosen Turkish Eurobonds for the offshore market's first activity in an attempt to put it quickly on the map. There is already an active, but not very liquid, market in Turkish Eurobonds of which $13 billion worth have been issued by the Turkish treasury since 1988.
Most of the activity is concentrated in London, where Turkish Eurobonds are sold over the counter by such market-makers as Chase, Goldman Sachs, JP Morgan, Merrill Lynch, Morgan Stanley and UBS, which have been among the principal lead managers of Turkish issues.
Turkish Eurobonds are considered to be high-return, high-risk, paper. Between 60% and 70% of the Eurobonds are estimated to be in the portfolios of Turkish banks, which use them as a hedge for their foreign-currency deposits, says Mehmet Besimoglu from Finansbank's treasury marketing department. For Turkish banks these are long-term, secure investments, he says. Considerable amounts of paper are also held in east Asia.
According to Erol Sabanci, managing director of Akbank, his bank's Eurobond portfolio of $403 million contains $320 million of Turkish foreign currency paper.
The market for Turkish Eurobonds is not very deep. A $5 million buy or sell order is enough to move prices up or down, says Sabanci.
Huseyin Erkan, vice-chairman of the Istanbul Stock Exchange, believes both the treasury and the banks will benefit from the offshore market. He believes its tax-free status and transparency will deepen the market and create arbitrage opportunities.
"The market is not very liquid now," says Erkan. "We think that daily volume in the London over-the-counter market is between $5 million and $10 million. I am confident that very quickly this volume will multiply. The tax-free status of the market is a big booster. Before the end of the year daily volume will easily reach $50 million. In the next year this should double or quadruple."
According to Erkan, convertibility will lead to the reduction of the risk premium on Turkish bonds and help bring down spreads.
The ISE has plans to create a fully automated wide-area network but in the beginning the trading system will be semi-automatic. Orders will be delivered via telephone to an ISE blind broker who will distribute it through data vendors such as Reuters. The top five rows of the order book will be displayed on-line by the data vendors. Settlement date is three days.
It remains to be seen whether the price-discovery mechanism will shift from London to Istanbul. Akbank's Sabanci says that while it is good that a new market has been created for Turkish Eurobonds it will not have a substantial effect on the trade. Already it is easy to buy and sell, he says. It takes 10 minutes to carry out a transaction in London.
John McCarthy, general manager of ING Istanbul, considers it a great development. It will improve the image of the Turkish debt. And to those doubters, there's nothing new about Istanbul as a centre for international bond trading. "Before 1936 bonds for international borrowers such as the Panama Canal and the Shanghai Railway were traded on the Istanbul stock exchange in vast quantities," says a Turkish securities specialist. Metin Munir