Turkey Has Lagged behind in Derivatives Markets

Forward and futures contracts, together with options and swap transactions are all called as derivative instruments. All these are futures transactions based on selling or buying any good or financial instrument today with delivery at a later date. But only options and futures transactions are traded at organized exchanges. Exchanges where these instruments are traded called as derivatives exchanges. While transactions related with grains were carried out at derivatives exchanges previously, also contracts based on financial instruments have begun to be traded in accordance with new developments and needs. As investors became aware of those contracts, derivatives exchanges have turned into organizations with large trading volume that are preferred all over the world.

 Futures exchanges date back to 1800s. The U.S. which leads world markets in many respects is a pioneer also in this field. When futures exchanges are analyzed, it is seen that American farmers who wanted to be protected from price fluctuations have an important role. When 1848 came, grain dealers established Chicago Board of Trade (CBOT) and this stands out as one of the important steps in this field. In later periods in such cities as Tokyo, New York and London which are among the leading financial centers in the world today, attempts to establish futures markets have started. 

Financial futures contracts have not been observed in the U.S. until 1970s. At the beginning of the 1970s, however, dollar’s excessive fluctuation after leaving the Bretton Woods system has paved the way for new contracts to be formed in this field. In 1972, CME (Chicago Mercantile Exchange) introduced the first ever financial futures contracts in the world to investors. Those were currency futures contracts based on the following currencies; British pound, Canadian dollar, Deutsch mark, French franc, Japanese yen, Mexican peso and Swiss franc. When 1975 came, Government National Mortgage Association’s -a public enterprise- futures contracts which were issued on mortgage certificates began to be traded at CBOT. Again in the later periods, contracts based on U.S. treasury bills and treasury bonds were formed. Quick rises in product variety were observed in time. In 1982, with futures contracts based on S&P-500 Index being traded, exchange indexes have come to be included in derivatives markets. Last year, an important development took place regarding the issue. Chicago Mercantile Exchange and Chicago Board of Trade merged thus combining the power of two rival exchanges. This merger formed the largest derivatives market in the world, but this did not bring any change in transaction styles. While investors who want to carry out transactions at the CME can invest in the products that were present before the merger, the same is equally valid also for CBOT investors. 

Europe Has also a Leading Position in the Race

The London International Financial Futures Exchange (LIFFE) began to operate in 1982 in London which is the largest financial center in Europe. LIFFE was established in 1979 after the controls on foreign exchange transactions were abolished. Thanks to this exchange, market participants have attained the possibility to better manage risks they may incur due to fluctuations in interest and exchange rates. At the exchange, primarily futures and options contracts based on short-term interest rates took place. After the merger in 1992 with the London Traded Options Market (LTOM), options contracts based on shares was also added to the products of LIFFE. The name of the exchange was changed into London International Financial Futures and Options Exchange after this merger. Merging with the London Commodity Exchange (LCE) in 1996, LIFFE thus added also contracts based on grains and other agricultural commodities into its products. At the end of that same year, LIFFE became the largest in Europe in its category. LIFFE was closely followed by Paris Futures Exchange (MATIF) and DTB (Deutsche Terminbörse-German Derivatives Exchange). Transactions at LIFFE used to be done by open auction method which was widely adopted by exchanges. However, with DTB’s passing to electronic system in 1990, LIFFE began to face a strong rival. Euronext, which was formed out of the merger of Amsterdam, Brussels and Paris exchanges in 2000, added also LIFFE into its structure and brought derivatives transactions under the name Euronext.liffe. The competition between Eurex and Euronext.liffe still goes on… 

A Wide Range of Products in Brazil

At Brazilian Mercantile and Futures Exchange (BM&F) transactions can be carried out by both open auction method and also electronically. At BM&F product range is quite wide. There are futures contracts in U.S. dollar based on cotton, coffee and livestock. Besides these, contracts based on corn, soybean, cattle and coffee are also available. Among other products being traded there are futures and options contracts based on gold, interest rates and Ibovespa exchange index. BM&F ranks high among the important exchanges in the world with respect to trading volume. We can classify the reasons why the trading volume increased as; the rise in product range, novelties like electronic transactions, growing interest in developing countries in recent years and other factors. While BM&F’s trading volume was 82.9 million contracts in 2000, it was 95.9 million in 2002, 258.4 million in 2006 and 426.36 million in 2007 with a 50.35% rise as compared with that in 2006. In 2007 the products which were traded most were; futures based on interest rate, U.S. dollar futures and Ibovespa futures. Interest rate-based futures became one of the most preferred products with a rise of 37.1% and the resulting 221.63 million contracts.

 Trading Volumes Increase

Derivatives markets are in a fast growth trend worldwide… Futures and options exchanges which aim to receive a larger share in this growth are in hectic activity. Many steps like the following are being taken; creation of new products, infrastructure systems which allow investors carry out transactions more easily, cooperation agreements with exchanges of different countries, mergers with exchanges from various parts of the world and making it possible to trade almost 24 hours a day. CME Group which was formed out of CME and CBOT merger announced it will buy 10% share of Brazilian Mercantile and Futures Exchange. Additionally, CME Group and Korean Exchange concluded an agreement to trade futures contracts based on the Korean Exchange index at the electronic transaction platform named CME Globex. CME Group declared it plans with this move to diversify products and present them to investors from a wide base extending from Asia to Europe and Latin America. Many exchanges like Eurex and Euronext.liffe also conclude similar agreements. All these developments are surely reflected in trading volumes of exchanges.  According to a report by the Futures Industry Association (FIS), the overall trading volume attained worldwide at futures and options exchanges reached 11.4 billion contracts increasing by 26.6% when compared to that in previous year as of the 9-month period in 2007. 

There Are Criticisms from Markets about VOB

 VOB (Turkish Derivatives Exchange-TurkDex) official establishment of which was completed in July 4^th 2002 started its operations in February 4^th 2005 in Izmir. VOB which allows futures and options contracts to be traded electronically is the first private exchange in Turkey. There are four separate markets at VOB, namely; shares, currency, interest and commodity. When analyzed by products; within currency futures contracts YTL/dollar and YTL/euro rates are traded and within interest futures contracts DİBS 91 (Domestic Government Bonds-DGB) and DİBS 365 interest indexes and benchmark DİBS indexes come into view. Apart from these, within index futures contracts there are ISE-30 (Istanbul Stock Exchange-ISE) and ISE-100 indexes, within commodity futures contracts are cotton, grain and gold contracts. As compared to the world in general, product range at the VOB is quiet narrow. Besides, absence of options contracts at the VOB which was established for trading futures and options contracts is conspicuous.

There are positive comments on warrants which are being prepared for markets that they will bring benefits to investors since they allow for futures exchanges and that they will increase product range. However, there are also recurring criticisms in capital markets stating the VOB should establish options markets before introducing these products to capital markets. VOB has increasing the trading volume successfully in time. Starting its operations in 2005, VOB’s trading volume was around 1% of Istanbul Stock Exchange in its first year. This rate reached 10% in 2006 and approximately 60% in 2007. While the total trading volume in the 11-month period in 2005 was 3 billion YTL including closing outs, in 2006 the total trading volume including closing outs was 17 billion YTL. Having closed 2007 with a 6.5% rise as compared with 2006 and with 117 billion YTL trading volume, the number of investors at VOB in 2007 reached 50 thousand as of year end while it was around 12 thousand at the beginning of the year. In 2007, the greatest part of the trading volume was created by index futures contracts with respect to both in numbers and in YTL. Interest-based contracts, however, are among the least traded products.

When we compare all these numbers with examples in the world and with the ISE, we see there is still much way to go. For instance; VOB still lags behind many exchanges in the world with respect to trading hours. While most of the exchanges in the world keep index future markets online almost 24 hours a day, Turkey is confined only to the 09.30 am-17.10 pm time slot. It is impossible to evaluate how true time restriction is in a system in which all transactions can be carried out electronically! On the other hand, majority of domestic investors do not have sufficient information about the products traded at the VOB. Consequently, number of domestic investors who take an active interest in the VOB is quite small. With the establishment of the VOB, an important step in the development of derivatives in our country was taken. However, when global trends are analyzed it is seen there are still works to be done, decisions to be made. It is of utmost importance to work toward making the VOB known and directing domestic investors to markets. In addition to that, forming options markets and introducing new products are also sine qua non for the development of markets. Speeding the efforts to introduce contracts based on single share is also another factor which can add new dynamism to the market. Besides the positive developments, completing all those missing parts has great importance for VOB’s also attaining success like its counterparts in the world.