The BRSA Clarified Its Derivatives Decision

Recent Development

The Banking Regulatory and Supervisory Authority ("BRSA") shared its advice dated July 20, 2022 ("Letter") with Turkish banks to clarify the implementation of its decision No. 10248 and dated June 23, 2022 regarding the application of a risk weighting of 500% to commercial cash loans made available to Turkish residents that enter into derivatives transactions with non-Turkish residents ("Decision"). You may refer to  our legal alert dated June 27, 2022 regarding the Decision.

Implementation Principles of the Decision

The BRSA clarified the following points concerning the implementation of the Decision:

• The risk weighting of 500% within the scope of the Decision will apply to all commercial cash loans of borrower that have entered into derivatives transactions with non-Turkish residents after June 23, 2022 (the "Decision Date") irrespective of whether the borrowers have utilized the loan before or after the date of the derivatives transaction.
• The augmented risk weighting will not change after the derivatives transaction has been terminated.
• The conversion of a non-cash loan to a cash loan after the Decision Date will not be considered a new loan.
• The modification/amendment to a then-existing derivatives transaction after the Decision Date will be considered a new derivatives transaction.

Scope of the Decision

The BRSA clarified the scope of the Decision as follows:

• The Decision will apply to currency swaps or forward, options and similar derivatives transactions in which one limb is in Turkish Lira and the other limb is in foreign currency (including gold).
• The Decision will not apply to derivatives transactions where only interest payments are made and no principal exchange is performed, and transactions with T+1 and T+2 value dates (transactions where only spot trading is realized on the value date and transactions for which there is no settlement obligation as of any maturity date).
• Companies located in free trade zones will also be subject to the Decision.
• The following transactions will not be exempted and will be subject to the Decision:
  1. Derivatives transactions made by the non-resident group treasury of a multinational company on behalf of the Turkish resident subsidiary.
  2. Derivatives transactions for the repayment of principal instalments under investment loans (e.g., Export Credit Agency (ECA) loans).
  3. Derivatives transactions entered into with foreign banks in respect of Turkish Treasury-guaranteed loans and project finance transactions.
  4. Derivatives transaction entered into in respect of Eurobond issuances.
  5. Derivatives transaction entered into pursuant to the terms and conditions of the International Swaps and Derivatives Association for hedging the risks arising from long-term foreign currency-denominated loans obtained from abroad.

Conclusion

With its Letter, the BRSA clarified the implementation of the Decision.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.