Kerim Rota: What does the new regulation in the swap market mean truly
Foreigners who already have the position of Turkish Lira will not be able to find the “volume” they want in “maturities up to one week”. Therefore, London swap rates will drop for maturities up to one week. As a matter of fact, this morning’s transactions were a maximum of 4%.
At first glance, the BRSA’s decisions on the swap market were difficult to understand even for market players. Let’s try to summarize it as simple as possible.
First of all, yesterday’s regulation did not have anything to do with the decision restricting the issuance of TL to foreign banks last year. At the time, assuming that feeding TL to the London market fueled TL depreciation; thus supplying TL was limited to 25% of shareholders’ equity,.
This time around, the restriction is imposed on maturities of those institutions that already hold TL and lend it to Turkish banks. Maturity limit is set up to seven days.
Thus, foreigners who already have the position of Turkish Lira will not be able to find the “volume” they want in “maturities up to one week”. Therefore, London swap rates will drop for maturities up to one week. As a matter of fact, this morning’s transactions were a maximum of 4%.
So, what will the foreigners with TL have to do next?
Let us summarize the two possible decisions that can be made by the two groups holding TL.
1) The first group: Due to the nominal high level of TL short-term interest rates, traders holding positions on behalf of the bank- the so-called prop desk;
a) They will try to extend their maturities quickly from one night to one week or more. In doing so, swap rates of up to two months will fall below the CBRT’s interest rates as they will show interest not only for one week maturities but for maturities up to one to two months.
b) There may be traders with no limit to extend the maturity of their TL position. These traders will change their TL back to foreign currency. Therefore, some foreign exchange demand will come from London today and tomorrow.
2) The second group: What will customers that have short maturity TL assets like mutual funds will do?
a) In order to not to lose the flexibility to buy Turkish Lira denominated stocks, bonds and etc. at any given time, they will remain at TL over night market, regardless of the short-term interest rate. The limit of 10% will be sufficient.
b) If they find the prices appropriate, they will start buying stocks and bonds. As a result, in the short term, besides the limited demand in foreign exchange, we will see a significant decrease in swap rates up to two months. In a sense, it is possible to read this circular as a message to foreigners who invest in TL to get more dedicated to TL and invest in longer maturities.