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Emerging Financial Instrument in Turkey: Asset Backed Securitization

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Securitization is the transformation of receivables and cash flow created from a collection of financial assets into securities which are backed by these assets. Hence, the idea of securitization is to generate a capital market product and it results in the generation of a security which is a marketable product, asset backed securities are considered both a fixed income and a derivative instrument.

Asset securitization is the issuance of a debt instrument backed by a revenue producing asset of the issuing company and this encompasses producing bearer asset backed securities which can be freely traded and which are secured by a portfolio of receivables. So as to ensure marketability, the instrument must have general acceptability as a store of value; therefore, the security is generally either rated by credit rating agencies, or is guaranteed by an independent guarantor.

Worldwide Analysis of Asset Backed Securities

Securitization plays a crucial role in the world because it reduces their borrowing cost and in the case of banks, lowered regulatory minimum capital requirements. In particular, international financial markets encounter new financial tools which depend on developments that affect the financial market. Through new financial tools or innovations, there is an importance of asset backed securitization instead of traditional investment banking applications. In addition to this, Turkey has financial market dynamic because the privatization program is initiated by the government in order to enhance economic productivity through country, so this circumstance reflect to make Turkish currency convertible and remove the restrictions on cash flow in and out of the country. Turkey’s financial market is principally dependent on the Istanbul Stock Exchange (ISE) which is stock or securities exchange in the country.

Foundation Stage of Asset Financed Funds in Turkey

Turkey is an emerging market among its neighbors with its own dynamic structures and there is a significance expectation in terms of asset backed securitization. There is the impact of securitization on the capital market since securitization allays transaction costs in the capital market by generating a market for financial claims otherwise, there would be have remained illiquid. In respect to this, securitization preserves intermediation costs because the specialized intermediary cost are service related and generally lower. Securitization is beneficial tool in terms of saving as it offers a security to investors with guaranteed interest or payments and an assurance of credit quality. As a result of this, securitization avoids the informal difficulty as this is offered generally in a public offer, and its features are well disclosed to the investors. In respect to this, Turkish government brings new regulations for asset backed securitization because this is important for the investors. Additionally, so as to sustain financial stability, Asset Backed Securities issuance is launched Capital Markets Board Communique Series III, No.58.1, published in the Official Gazette of January 9th 2014.  According to Article 7, all applications shall complete the necessary documents to the Board and there is twenty working days which is concluded by the Board. Asset finance fund is a separate property which is formed with the proceeds of asset backed securities (ABS) issued, in accordance with the principle of fiduciary ownership. Asset finance fund (AFF) must be established within the borders of Turkey. AFF does not have a legal entity and its assets are separate from those of the founder, servicer and other originators. Services shall possess the qualifications of a founder who responsible for the day to day management of the assets in the AFF portfolio. In accordance with article 10, asset-financed funds shall keep 5% total nominal value of asset backed security for the purpose of hedging the liquidity risk. Besides Capital Market Board of Turkey (CMB) is authorized body to augment the reserve ratio up to 10% of total asset value in terms of underlying asset. The purpose of this is to regulate the establishment and activities of asset finance funds, the principles related to registration and issue of asset backed securities and also the related public disclosure principles.

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