CENTRAL BANK OF TURKEY
Interbank Markets Operations
Eşref Mehmet GÖKSU
Markets Department
Manager of FX Department
September 2011
1
Legislative Framework
2
Legislative Framework
“The Law on The Central Bank of the Republic of Turkey”
(Law No. 1211)
Article 4 : Fundamental duties and powers
The primary objective of the Bank shall be to achieve and maintain
price stability. The Bank shall determine on its own discretion the
monetary policy that it shall implement and the monetary policy
instruments that it is going to use in order to achieve and maintain
price stability. The Bank shall, provided that it shall not be in
confliction with the objective of achieving and maintaining price
stability, support the growth and employment policies of the
Government.
3
Legislative Framework
Article 4/I-b:
to take necessary measures in order to protect the domestic and
international value of Turkish Lira and to establish the exchange rate regime in
determining the parity of Turkish Lira against gold and foreign currencies jointly with
the Government; to execute spot and forward purchase and sale of foreign exchange
and banknotes, foreign exchange swaps and other derivatives transactions in order to
determine the value of Turkish Lira against foreign currencies,
Article 4/I-c: to determine the procedures and conditions of reserve requirements and
liquidity requirement by taking into consideration the liabilities of banks and other
financial institutions to be deemed appropriate by the Bank,
Article 4/I-g: to take precautions for enhancing the stability in the financial system and
to take regulatory measures with respect to money and foreign exchange markets,
Article 4/II-b: The Bank shall determine the inflation target together with the
Government and shall in compliance with the said target adopt the monetary policy.
The Bank shall be the ultimate body authorized and responsible to implement the
monetary policy.
Article 4/II-e : The Bank shall, as the lender of last resort, carry out the operations of
extending credits to banks,
4
Legislative Framework
Article 56: The Bank shall not, grant advance and extend credit to
the Treasury and to public establishments and institutions, and shall
not purchase debt instruments issued by the Treasury and public
establishments and institutions in the primary market.
The Bank shall not extend credits and grant advances except for the
operations authorized by this Law, and the credit to be extended and
the advance to be granted shall not be unsecured or without cover,
and in any manner whatsoever the Bank shall not, be a guarantor or
provide security other than its own direct transactions.
5
Operational Framework
6
Operational Framework
In line with its primary objective of achieving and maintaining price
stability, the Central Bank carries out monetary policy
implementations within the framework of the inflation-targeting
regime. Besides, the Central Bank, as stipulated in its law, fulfills its
duty to take measures to achieve stability in the financial system.
The Central Bank’s main policy instrument to achieve price stability
is the repo auction rate with one-week maturity. Besides, when
deemed necessary, required reserve ratios and liquidity
management can be used as supplementary instruments to enhance
the efficiency of monetary policy and to contain macro financial risks.
7
Open Market Operations
CBT has five types of instruments for the implementation of OMOs.
1. Outright Purchases
2. Outright Sales
3. Repurchase Agreement (Repo) Tenders
4. Reverse Repo
5. Liquidity bills
8
Open Market Operations
 The CBT injects liquidity into the market through repo tenders. In case of a
liquidity shortage, The Central Bank announces the amount of repo auction at
10:00 a.m. and holds at 11:00 a.m. CBT does not announce an auction on
days that there is no funding need. Auctions are held at the interest rate set
for one week repo auctions by the Monetary Policy Committee via the quantity
auction method.
 According to the law, repo and reverse repo maturity cannot exceed 91
days.
 CBT is also an active participant of Istanbul Stock Exchange (ISE) Repo
market. CBT absorbs excess liquidity by bidding at CBRT O/N borrowing
interest rate.
 PD (Primary Dealer) banks can also obtain O/N liquidity by using their daily
borrowing limits at a rate lower than the CBT lending rate till 4:00 p.m.
 In case of unforeseen excessive liquidity shortage during the day, which
may exert excessive pressure on money market interest rates, the Central
Bank may announce one-week maturity “Intra-day Repo Auctions” via quantity
auction method in addition to the regular ones announced at 11:00 a.m. Other
auctions held by the Central Bank at open market operations are held in
traditional auction method.
9
Open Market Operations
Standing Facilities:
CBT has three types of standing facilities.
1. Marginal lending facility
2. Deposit facility
3. Late overnight liquidity window (LON) facility
10
Open Market Operations
Standing Facilities:
Marginal Lending Facility: Counterparties can use the marginal
lending facility to obtain liquidity against eligible assets. The interest
rate for this facility is the CBT’s O/N lending rate.
Deposit Facility: Counterparties can use the deposit facility to make
deposits with the central bank. This facility is another way of absorbing
excess liquidity from the market. The interest rate for this facility is the
CBT’s O/N borrowing rate.
Late Overnight Liquidity Window Facility: Counterparties can use this
facility at an interest rate set currently 300 bp above the central bank’s
O/N lending rate. Borrowing rate is 0. LON facility is activated after the
marginal lending facility closes at 4:00 p.m. The closing time for LON
is 5:00 p.m.
11
CBRT Rates
CBRT Rates as of 5 August 2011
12.00
300 bp
CBRT O/N Lending
9.00
100 bp
8.00 PD Repo
400 bp
225 bp
5.75 Policy Rate
75 bp
5.00
CBRT O/N Borrowing
500 bp
0.0
10:00
11:00
Interbank+OMO
15:00
16:00
17:00
Hours
LON
12
CBRT Rates
CBRT Rates before 5 August 2011
12.00
300 bp
CBRT O/N Lending
9.00
100 bp
8.00 PD Repo
175 bp
750 bp
6.25 Policy Rate
475 bp
CBRT O/N Borrowing
1.50
0.0
10:00
11:00
Interbank+OMO
15:00
16:00
17:00
Hours
LON
13
Liquidity Level
Billion TL
70
65
60
55
50
45
40
35
30
25
20
15
10
5
0
-5
-10
-15
-20
09.11
08.11
07.11
05.11
04.11
03.11
02.11
01.11
12.10
11.10
10.10
09.10
08.10
07.10
06.10
05.10
04.10
03.10
02.10
01.10
1 Week Repo
3 Month Repo
Interbank Overnight
ISE Overnight
Net OMO
14
Interest Rates
%
9.00
CBRT Borrowing Rate
PD Repo
ISE Repo-Reverse Repo
O/N Swap
%
9.00
CBRT Policy Rate
2.00
1.00
1.00
0.00
0.00
09.11
2.00
08.11
3.00
07.11
3.00
06.11
4.00
05.11
4.00
04.11
5.00
03.11
5.00
02.11
6.00
01.11
6.00
12.10
7.00
11.10
7.00
10.10
8.00
09.10
8.00
15
Exchange Rate Policy
 Along with inflation targeting, the Central Bank implements the
floating exchange rate regime. Under the current exchange rate
regime, the foreign exchange rate is not used as a policy tool and the
Central Bank of Turkey does not have a nominal or real exchange rate
target. The foreign exchange rate is determined by supply and
demand conditions in the market.
 Operations of the CBRT in FX Market
1) Auctions
2) Direct Interventions
3) Foreign Exchange Deposit Markets
16
Exchange Rate Policy
 Even if they implement a floating exchange rate regime, a strong
foreign exchange reserve position is very important for emerging
economies like Turkey to curb the unfavorable effects of potential
internal and external shocks and to boost confidence in the country.
Therefore, the Central Bank holds foreign exchange buying auctions
to build up reserves at times where foreign exchange supply increases
relative to foreign exchange demand.
17
Exchange Rate Policy
Being meticulous to keep the impact on supply and demand
conditions in the foreign exchange market at minimum level, the
Central Bank has been buying foreign exchange via transparent
foreign exchange buying auctions with preannounced terms and
conditions. Although the aim is to conduct auctions according to the
pre-announced program, auction programs may be changed
with prior notice in the event of unexpected significant developments
related to the foreign exchange supply beyond forecasts.
In this framework;
i. It was stated in the annual monetary and exchange rate policy
announcement for 2010 that the CBT will continue to hold foreign
exchange buying auctions at a maximum daily amount of USD
60 million, with USD 30 million of auction amount and USD 30
million of optional selling amount.
18
Exchange Rate Policy
ii. However, as the capital flows to Turkey have grown more stable,
the CBT, in order to accelerate the foreign exchange reserve
accumulation, decided to increase the maximum daily amount to be
purchased in auctions to USD 80 million, with USD 40 million of
auction amount and USD 40 million of optional selling amount, starting
from 3 August 2010.
iii. Later on, taking into consideration that there may be abrupt
changes in the outlook of global financial markets and the risk
appetite, which may in turn cause significant fluctuations in capital
flows towards emerging countries, including Turkey, the CBT started
to implement a more flexible method in foreign exchange buying
auctions. With this change, it is aimed to benefit from capital inflows
more effectively with a view to strengthening foreign exchange
reserves and to enhancing resilience against volatile capital flows.
19
Exchange Rate Policy
CBRT has continued accumulating foreign exchange reserves by
purchasing USD 50 million daily, starting from 1 January 2011.
Taking into account the slowdown in capital flows, the daily amount to
be purchased in auctions was decreased from USD 50 million to USD
40 million on 31 May 2011 and to USD 30 million on 29 June 2011.
CBRT suspended the foreign exchange buying auctions on 25 July
2011.
20
Exchange Rate Policy
In case of unhealthy price formations due to a decrease in the depth of
the foreign exchange market, foreign exchange selling auctions are
held under the basic principles of the floating exchange rate regime.
Starting from 5 August 2011, the Central Bank of the Republic of
Turkey (CBRT) decided to provide foreign exchange liquidity to the
market, through foreign exchange selling auctions on the days
deemed necessary. On the days when the CBRT decides to sell
foreign exchange, based on daily market developments, the selling
amount is announced at 11:00 a.m.
In addition, the Central Bank may also directly intervene in the market
through purchase or sale, in case of any unhealthy price formations in
exchange rates due to speculative behavior stemming from a
decrease in market depth.
21
FX Operations of CBRT Since 2002
Year
Buying
Auctions
Selling
Auctions
Buying
Interventions
Selling
Interventons
Net Buyings
of CBRT
2002
795
0
16
12
799
2003
5,652
0
4,229
0
9,881
2004
4,104
0
1,283
9
5,378
2005
7,442
0
14,565
0
22,007
2006
4,296
1,000
5,441
2,105
6,632
2007
9,906
0
0
0
9,906
2008
7,584
100
0
0
7,484
2009
4,316
900
0
0
3,416
2010
14,865
0
0
0
14,865
2011*
6,450
1900
0
0
4,550
Total
65,410
3,900
25,534
2,126
84,918
*As of 19.09.2011
22
TRY and EM Currencies
1.25
Announcement of QE2
by the FED
TRY
Depreciation
1.20
1.15
1.10
1.05
Appreciation
1.00
0.95
09.2011
08.2011
07.2011
06.2011
05.2011
04.2011
03.2011
02.2011
12.2010
11.2010
10.2010
09.2010
08.2010
07.2010
06.2010
05.2010
04.2010
03.2010
02.2010
01.2010
0.90
01.2011
EM Average
*Average of EM countries: Brazil, Chile, Czech Rep. Hungary, Mexico, Poland, S.Africa, Indonesia, South Korea and Colombia.
Source: CBT and Bloomberg
23
FX Reserves of CBT (billion USD)
90
71.2
80
50.5
60
50
30
69.6
87.3
60.1
70
40
69.7
80.7
33.6
36
26.7
20
10
0
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011*
*As of 09.09.2011
24
Foreign Exchange Deposit Markets
The Central Bank used to act as intermediary in various foreign
exchange transactions performed among authorized banks. The
foreign exchange deposit market was one of the markets where the
Central Bank executed its intermediary functions. The Central Bank’s
gradual phasing out of its intermediary functions in the Foreign
Exchange and Banknotes Markets foreign exchange deposit market
that started in July 2002 was completed as of December 2, 2002.
Due to problems in global credit markets in October 2008, Central
Bank resumed its activities as an intermediary in the foreign exchange
deposit markets in a view to contributing to the enhancement of the
mobilization of foreign exchange liquidity in the Interbank Foreign
Exchange Market. In this context, banks shall be able to borrow and
lend in the foreign exchange deposit market through the
intermediation of the Central Bank.
25
Foreign Exchange Deposit Markets
The Central Bank gradually increased the transaction limits of banks
in the Foreign Exchange Deposit Market to USD 10.8 billion.
Moreover, the maturity of foreign exchange deposits borrowed within
the predetermined borrowing limits by the banks from the Foreign
Exchange Deposit Markets was extended from 1 week to 1 month,
and the borrowing rate for transactions where the Central Bank is a
counterparty was reduced from 10.0 percent to 7.0 percent for
USDollar, and 9.0 percent for Euro. In February 2009, the maturity of
the foreign exchange deposits have been extended from a maximum
of 1 month to 3 months and the foreign exchange deposit rate, for
transactions in which the Central Bank is a counterparty, was reduced
to 5.5 percent for US Dollar and to 6.5 percent for Euro.
26
Foreign Exchange Deposit Markets
The intermediary functioning of the CBRT in the Foreign Exchange
Deposit Market was suspended as of 15 October 2010. Even though
the intermediary functioning of the CBRT in the foreign exchange
deposit market was over, the banks are still able to borrow foreign
exchange deposits from the CBRT within their limits. However, the
maturity of the said transactions are again one week, as was the case
before October 2008.
CBRT decided to reduce the lending rate for transactions, which the
Central Bank is a party to, from 5.5 percent to 4.5 percent for US
Dollar and from 6.5 percent to 5.5 percent for Euro effective as of 9
August 2011.
27