COLLETERAL RELATING TO CAPITAL MARKET INSTRUMENTS, COLLETERAL MANAGEMENT AGREEMENTS AND COLLETERAL MANAGER  

In the Capital Markets Law currently in force, assurances are regulated in four different ways, namely; to safeguard the functioning of the market and the system against risks that may arise while capital market institutions carry out their activities, assurances to be deposited with the SPK, stock exchanges, and organized markets, assurances received by clearing and settlement institutions from these institutions or natural persons, assurances regulated by the SPK in contracts where the collateralized asset is a capital market instrument in situations specified in Article 47, and finally, the collateralization of obligations related to capital market instruments specified in Article 31/B of the SPK for the purpose of ensuring their timely fulfillment.

COLLETERAL CONTRATS RELATİNG TO CAPITAL MARKETS

The provision concerning collateral contracts related to capital market instruments regulated in Article 47 of the SPK Law, which is subject to registration, or the President's authority to expand the scope mentioned in Article 137/1 of the SPK Law, is limited only to capital market instruments not subject to registration. The provisions of Article 47 of the SPK Law shall also apply to capital market instruments included in this scope through the exercise of authority. However, this law provision will not apply to those outside this scope. In other words, even if the collateral contract established on bills of exchange, cash, and receivables, which do not fall within the definition of capital market instruments, is related to the execution of capital market activities, it is not subject to Article 47 of the SPK Law.

Regardless of the nature of the legal relationship between the parties, the provisions of Article 47 of the SPK Law shall apply to all collateral contracts consisting of capital market instruments subject to registration by the Central Securities Depository Institution (MKK), regardless of whether the parties are natural or legal entities.

The registered system mentioned in the provision refers to the system in which capital market instruments (such as shares, investment fund participation certificates, etc.) and the rights related to these instruments are electronically monitored by the Central Securities Depository Institution (MKK) by issuers, investment firms, and rights holders.

In the registered system, capital market instruments are not physically printed; instead, they are monitored electronically by the MKK.

            A) FORMAL REQUIREMENT OF THE CONTRACT

As not otherwise specified by law, collateral agreements concerning capital market instruments monitored by the Central Securities Depository Institution (CSDI) must be made in writing. This formal requirement is a condition of validity.

           B) TYPES OF COLLATERAL AGREEMENTS

As stated in Article 47/1 of the Capital Markets Law(SPK): "The ownership of the capital market instruments subject to these collateral agreements can be transferred to the collateral recipient in accordance with legal procedures or may remain with the collateral provider depending on the agreement. In the absence of a provision in the contract regarding this matter, the ownership of the collateral capital market instruments shall be deemed not to have passed to the collateral recipient." It is mentioned that there are two types: those where the ownership of the capital market instruments forming the subject matter of the collateral agreements passes to the collateral recipient and those where the ownership remains with the collateral provider. In cases where there is no provision regarding the transfer of ownership in the contract, it is assumed that the ownership remains with the collateral provider.

             C) OBLIGATIONS IN THE COLLATERAL AGREEMENT

In both types of collateral agreements, the obligation to return the collateral asset itself or its equivalent upon the termination of the collateral agreement is foreseen. In cases where default or the realization of the claim from the collateral is possible, both types of collateral agreements allow for the collateral capital market instrument to be sold ex officio or its value to be offset against the claim. However, in the type where ownership passes to the collateral recipient, in the absence of a contrary provision in the contract, for the collateral recipient to be able to sell the collateral capital market instrument to cover the claim from the sale proceeds or to offset its value against the obligations of the debtor, this authority must be expressly granted to the collateral recipient in the contract (SPK Law Article 47/4).

The authority for forced sale grants the collateral recipient the power to convert the collateral capital market instrument into cash without the obligation to fulfill any prerequisites such as giving notice, granting a period, obtaining permission or approval from judicial or administrative authorities, or converting the collateral into cash through auction or any other means when the conditions for the collateral recipient are met. When exercising the authority for forced sale, the value of the collateral capital market instrument to be subject to forced sale at the maturity date of the claim shall be taken into account, and any surplus from the proceeds of the sale exceeding the claim shall also be returned to the collateral provider.

Another aspect applicable to both types of collateral is the effect of legal processes such as bankruptcy and liquidation on collateral agreements. In the event that a decision is made by judicial or administrative authorities regarding the restructuring of assets or a similar decision or liquidation decision is made concerning the collateral recipient or provider, the rights related to the capital market instruments provided as collateral and the rights of the collateral recipient and provider shall not be affected by this decision and shall remain valid against the relevant restructuring or liquidation authority. This rule applies to transactions taking place on the same day after the issuance of decisions of the mentioned nature, and in cases where the collateral was provided before such decisions, provided that the collateral recipient acts in good faith.

COLLATERAL MANAGEMENT AGREEMENTS AND COLLATERAL MANAGER (SPK Article 31)

The concept of a collateral manager is a relatively new regulation in Turkish law system, aimed at safeguarding investors by ensuring the independent custody and administration of collateral. To define the responsibilities and role of a collateral manager, it involves managing, protecting, and preserving the movement and administration of collateral assets whose ownership has been transferred to them or limited real rights have been established in their favor, to constitute collateral for obligations arising from capital market instruments. This includes resorting to legal remedies, ensuring the fulfillment of claims from collateral in the event of default or for reasons foreseen in law or contract provisions; converting collateral assets into cash, distributing the proceeds of collateral assets among investors, returning any surplus value to the collateral provider after satisfying investors' claims, returning collateral assets to the collateral provider upon the termination of the debt, and performing any other transactions and dealings, including safeguarding investors' interests, as specified in a collateral management agreement concluded in writing between the issuer and individuals or legal entities authorized before the issuance.

The Capital Markets Board is authorized to determine the principles, fundamentals, and minimum requirements applicable to collateral management agreements. A collateral management agreement must be concluded in writing between the collateral manager and the issuer.

As specified in SPK Article 31/B, capital market instruments designated by the Board may be collateralized with assets deemed appropriate by the Board to ensure the fulfillment of obligations arising from these instruments upon maturity. The ownership of collateralized assets is transferred to the collateral manager, who possesses general custody authority, or limited real rights are established in favor of the collateral manager. The transfer of collateralized assets to the collateral is recorded in the relevant register.

The collateral manager is empowered to carry out all transactions and dealings related to the establishment, abandonment, cancellation, and termination of collateral, including the registration, recording, and all necessary procedures for registering any encumbrance, mortgage, or any other real right, annotation, restriction, and claim related to collateral, in special registers including but not limited to land registry, ship registry, vehicle registry, and movable property pledge registry, on their own behalf and on behalf of investors.

The trade name of each collateral manager approved by the Board, along with the issuance they are appointed for and their authorities, shall be registered in the commercial registry of the place where the issuer's headquarters is located and published in the Turkish Trade Registry Gazette.

In the event of default or when it is possible to satisfy the claim from the collateral due to reasons foreseen in the law or contract provisions, the collateral manager may sell the collateral assets and distribute the proceeds among investors without the obligation to fulfill any prerequisites such as giving notice, granting a period, obtaining permission or approval from judicial or administrative authorities, or converting the collateral into cash through auction or any other means.

Collateral assets are separate from the assets of the collateral manager and are kept separate. Collateral assets cannot be seized, encumbered, included in the bankruptcy estate, or subject to precautionary measures or attachment for public debts due to the liabilities of the collateral manager. The types and qualities of collateral assets, the compatibility of collateral assets with capital market instruments, the maintenance of records related to collateral assets, rights and obligations, qualifications of the collateral manager, registration, abandonment, and payment for services rendered to the collateral manager, and other issues regarding the collateral structure in capital market instrument issuance are determined by the Board.

It should be noted that agreements, provisions, or expressions that relieve or eliminate the liability of the collateral manager may be deemed invalid.

In the event of the appointment of capital market institutions as collateral managers, if they fail to fulfill their obligations properly as stipulated in CML Article 31/2, the provisions of Article 96, paragraph one of the Law are applied; in case of non-compliance with paragraph six of this article, the provisions of Article 92, paragraphs one and three of the Law are applied.

CRIMINAL LIABILITY OF COLLATERAL MANAGER

In the event that the collateral manager unlawfully utilizes the assets whose ownership has been transferred as collateral for purposes other than disposal, it should be remembered that the aggravated form of the offense of misappropriation of trust, as defined in the second paragraph of Article 155 of the Turkish Penal Code, occurs when there is "handling or disposal of property entrusted for administration as a requirement of professional or business relations, trade, or service, regardless of the cause.

Attorney Tolga Güner Koncagül