Capital Markets

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Turkish

2008

Capital Markets

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Turkish Capital Markets 2008

Edited by Alparslan Budak

Written by Efsun Ayça Değertekin

Ekin Fıkırkoca

Print: Printcenter Tel.: (212) 371 03 00 Fax: (212) 280 96 04 Istanbul, July 2009 TSPAKB Publication No. 42

ISBN-978-975-6483-21-3

For online version please visit TSPAKB’s website at www.tspakb.org.tr.

This report has been prepared by TSPAKB for information purposes only. TSPAKB exerts maximum effort to ensure that the information published in this report is obtained from reliable sources, is up-to-date and accurate. However, TSPAKB can not guarantee the accuracy, adequacy or integrity of the data or information. Information, comments and recommendations should not be construed as investment advice.

TSPAKB does not accept any responsibility for any losses or damages that could result from the use of any information in this report. This report may be used without prior permission, provided that it is appropriately quoted.

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ABBREVIATIONS

Term Definition

AIRCT The Association of the Insurance and Reinsurance Companies of Turkey BAT Banks' Association of Turkey

BRSA Banking Regulation and Supervision Authority CBRT Central Bank of the Republic of Turkey

CMB Capital Markets Board CRA Central Registry Agency FDI Foreign Direct Investment GDP Gross Domestic Product

ICI Investment Company Institute IFRS International Financial Reporting Standards IGE Istanbul Gold Exchange

IMF International Monetary Fund ISE Istanbul Stock Exchange

IT Information Technologies

MCap Market Capitalization

PBAT Participation Banks' Association of Turkey SPO State Planning Organization Takasbank ISE Settlement and Custody Bank TETS Takasbank Electronic Transfer System

TL Turkish Lira

TMM Takasbank Money Market

TSPAKB The Association of Capital Market Intermediary Institutions of Turkey TurkDex Turkish Derivatives Exchange

Turkstat Turkish Statistical Institute WFE World Federation of Exchanges

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TABLE OF CONTENTS ...1

EXECUTIVE SUMMARY ...3

INTERNATIONAL COMPARISON ...4

I. GLOBAL COMPARISON...4

II. EMERGING MARKETS COMPARISON ...7

BROKERAGE INDUSTRY ... 11

I. NUMBER OF BROKERAGE FIRMS ... 11

II. EQUITY MARKET ... 11

A. Listed Companies ... 12

B. Equity Trading Volume ... 12

III.BONDS & BILLS MARKET ... 14

A. Market Shares... 14

B. Bonds & Bills Trading Volume ... 14

IV. FUTURES MARKET... 16

A. Market Shares... 16

B. Futures Trading Volume ... 17

V. MONEY MARKET... 18

VI. SECURITIES LENDING/BORROWING ... 19

VII.SHORT-SELLING... 19

VIII.CORPORATE FINANCE ... 20

IX. ASSET MANAGEMENT ... 21

X. MARGIN TRADING... 22

XI. RETAIL NETWORK... 22

A. Branch Network ... 22

B. Internet Trading... 23

C. Call Centers ... 24

XII. EMPLOYEES ... 24

XIII.FINANCIAL STATEMENTS... 26

A. Balance Sheet ... 26

B. Income Statement... 29

INVESTORS ... 34

I. INVESTMENT PREFERENCES ... 34

II. NUMBER OF EQUITY INVESTORS ... 35

III.EQUITY OWNERSHIP... 36

A. Age Groups of Retail Equity Investors... 36

B. Domicile of Retail Equity Investors ... 36

C. Foreign Investors ... 37

IV. MUTUAL AND PENSION FUND INVESTORS ... 38

OVERVIEW OF THE TURKISH CAPITAL MARKETS... 40

I. MILESTONES... 40

II. REGULATORY STRUCTURE OF THE FINANCIAL SYSTEM ... 40

III.REGULATORY FRAMEWORK OF THE CAPITAL MARKETS... 43

A. Capital Market Law... 43

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B. Decree Law No. 91 Concerning Securities Exchanges ... 43

C. Other Relevant Legislation ... 44

IV. TAXATION ... 44

CAPITAL MARKET INSTITUTIONS... 46

I. CAPITAL MARKETS BOARD ... 46

A. Organization Structure... 46

B. Functions... 47

II. TSPAKB... 48

B. Objectives and Functions ... 48

C. Licensing of Market Professionals ... 49

III.ISTANBUL STOCK EXCHANGE ... 49

B. Functions... 50

C. Markets ... 50

D. Automated Disclosure Platform ... 63

IV. TURKISH DERIVATIVES EXCHANGE... 63

A. Organization and Shareholder Structure ... 63

B. Functions... 63

C. Members and Clearing House... 64

D. Trading ... 64

E. Margining ... 65

F. Clearing... 65

G. Contract Specifications ... 66

V. ISTANBUL GOLD EXCHANGE ... 67

B. Functions... 68

VI. TAKASBANK (ISE Settlement and Custody Bank) ... 68

B. Functions and Services ... 69

C. Takasbank Money Market ... 69

D. Securities Lending and Borrowing Market ... 70

E. Guarantee Fund ... 71

VII.THE CENTRAL REGISTRY AGENCY... 71

B. Functions... 72

C. Investors’ Protection Fund ... 72

KEY CONTACTS IN THE CAPITAL MARKET ... 73

TSPAKB MEMBERS ... 74

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EXECUTIVE SUMMARY

Growth expectations in emerging countries paved the way for increasing foreign investors’

interest in those countries over the last few years. Emerging markets, like Turkey, attracted capital flows which caused a sharp increase in the performance of index returns and market capitalization in 2007.

However, the looming impact of the developments in the US subprime mortgage market in 2007 turned into a global financial crisis in 2008. Bankruptcy of Lehman Brothers in September 2008 became a major turning point in spreading the financial crisis.

Although there are no mortgage-backed securities in the Turkish capital markets, Turkey was affected by the financial crisis through the deterioration in external financing conditions, weakening foreign trade and destabilized confidence.

In the wake of the deterioration in expectations of global liquidity and the contagious effect of the financial crisis, the Central Bank cut the O/N interest rates to 15% by the end of 2008, from 16.75% in July.

On the other hand, the Turkish Lira depreciated considerably in the last months of the year.

In 2008, TL lost 31% of its value against the US dollar and 25% against the Euro.

Market capitalization of the Istanbul Stock Exchange decreased by 63% to US$ 120 billion, while the trading volume dropped by 13% to US$ 261 billion.

Although Turkish brokerage industry continued to have a strong capital base in 2008, due to shrinking capital market activities, net profits of the industry declined by half to US$ 137 million despite cost-cutting measures.

This report begins with an analysis of the performance of the Turkish capital markets including international comparisons and the developments in the brokerage industry in 2008, and finally lays out the regulatory structure in Turkey, as well as the latest market regulations.

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INTERNATIONAL COMPARISON

In this section, we provide a brief analysis of where Turkish capital markets stand globally.

All ratios in this section are calculated in terms of US dollars.

I. GLOBAL COMPARISON

Gross domestic product of Turkey has increased by 12% to US$ 729 billion in 2008.

According to the IMF data, Turkey was the 17^th largest economy in the world.

Gross Domestic Product (2008)

bn. $ Share

1 United States 14,265 23.4%

2 Japan 4,924 8.1%

3 China 4,402 7.2%

4 Germany 3,668 6.0%

5 France 2,866 4.7%

6 United Kingdom 2,674 4.4%

7 Italy 2,314 3.8%

8 Russia 1,677 2.8%

9 Spain 1,612 2.6%

10 Brazil 1,573 2.6%

17 Turkey 729 1.2%

Total World 60,863 100.0%

Source: IMF, WEO April 2009

Although Turkey is ranked 17^th in terms of GDP, the depth of Turkish capital markets is limited compared to its economic size. The rankings according to the capital market indicators vary between 25^th place to 35^th, amongst the members of the World Federation of Exchanges (WFE).

Domestic Market Capitalization-2008

MCap (bn. $) Global Share MCap/GDP

1 New York SE 9,209 28.3% 65%

2 Tokyo SE 3,116 9.6% 63%

3 Nasdaq 2,396 7.4% 17%

4 Euronext 2,102 6.5% 47%

5 London SE 1,868 5.7% 70%

6 Shanghai SE 1,425 4.4% 32%

7 Hong Kong SE 1,329 4.1% 616%

8 Deutsche Börse 1,111 3.4% 30%

9 TSX Group 1,033 3.2% 68%

10 BME Spanish Exchanges 948 2.9% 59%

30 Istanbul SE 120 0.4% 16%

Total* 32,577 100.0% 60%

Source: IMF, ISE, TurkStat, WFE

*Osaka Stock Exchange and National Stock Exchange of India are excluded from total due to dual listings.

As a result of the global financial crisis, stock exchanges faced a sharp downturn in terms of market capitalization. WFE member stock exchanges’ total MCap has decreased by 46% to US$ 33 trillion. Three quarters of the global MCap is constituted by top 10 stock exchanges.

ISE’s market capitalization shrank by 63% to US$ 120 billion as of end 2008. While ISE

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ranked on 26^th place in terms of MCap in 2007, its rank fell to 30^th placein 2008.

Bombay Stock Exchange is placed on the top in terms of number of listed companies in 2008. 4.921 companies listed on the Bombay Stock Exchange have US$ 647 billion MCap.

ISE ranks 33^rd, representing 0.7% of the listed companies in the world. In 2007, ISE’s global ranking was 32^nd with 319 listed companies.

Number of Listed Companies-2008

Listed Companies

Global Share

1 Bombay SE 4,921 10.5%

2 TSX Group 3,841 8.2%

3 BME Spanish Exchanges 3,576 7.7%

4 London SE 3,096 6.6%

5 New York SE 3,011 6.4%

6 Nasdaq 2,952 6.3%

7 Tokyo SE 2,390 5.1%

8 Australian SE 2,009 4.3%

9 Korea Exchange 1,793 3.8%

10 National Stock Exchange of India 1,406 3.0%

33 Istanbul SE 317 0.7%

Total 46,705 100.0%

Source: ISE, WFE

WFE’s member stock exchanges have recorded US$ 112 trillion equity trading volume in 2008. Top 10 stock exchanges’ volume declined as compared to 2007, except Nasdaq, New York Stock Exchange and the TSX Group. Nasdaq is placed on top with an equity trading volume 15 times higher than its MCap.

Istanbul Stock Exchange’s equity trading volume has declined by 13% to US$ 261 in 2008.

Although liquidity is one of ISE’s stronger areas, it still ranks at 25^th place. Turnover ratio (trading volume/MCap) is around 220%, while the global average is 345%.

Equity Trading Volume-2008

Equity Trading

Volume (bn. $) Global

Share Equity Trading Volume/MCap

1 Nasdaq 36,446 32.5% 1520.9%

2 New York SE 33,639 30.0% 365.3%

3 London SE 6,474 5.8% 346.5%

4 Tokyo SE 5,586 5.0% 179.3%

5 Euronext 4,454 4.0% 211.9%

6 Deutsche Börse 3,881 3.5% 349.5%

7 Shanghai SE 2,587 2.3% 181.5%

8 BME Spanish Exchanges 2,439 2.2% 257.1%

9 TSX Group 1,736 1.5% 168.0%

10 Hong Kong SE 1,629 1.5% 122.6%

25 Istanbul SE 261 0.2% 218.3%

Total* 112,292 100.0% 344.7%

Source: ISE, WFE

*Osaka Stock Exchange and National Stock Exchange of India excluded from total due to dual listings.

According to debt securities data collected by the Bank for International Settlements from 49 countries, the size of global domestic debt securities are approximately US$ 61 trillion as of September 2008. U.S. owns 42% of total domestic debt securities worldwide.

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With US$ 216 billion of debt securities, Turkey is ranked 23^rd. Turkey’s debt securities-to- GDP ratio is 29%, while the global average is 109%. Turkey’s outstanding domestic debt profile is almost entirely composed by government bonds despite a meagre revival in corporate bonds in the last three years.

Domestic Debt Securities (2008/09)

Domestic Debt Securities (bn. $)

Domestic Debt Securities/GDP

Government Bonds' Share

Corporate Bonds' Share

1 U.S. 25,800 181% 28% 72%

2 Japan 9,606 195% 82% 18%

3 Italy 3,219 139% 56% 44%

4 France 2,900 101% 50% 50%

5 Germany 2,660 73% 52% 48%

6 China 2,121 48% 66% 34%

7 Spain 1,736 108% 30% 70%

8 U.K. 1,287 48% 66% 34%

9 Canada 1,083 72% 65% 35%

10 Brazil 1,018 65% 65% 35%

23 Turkey 216 29% 100% 0%

Total 60,795 109% 47% 53%

Source: BIS, IMF, TurkStat

The global mutual funds’ data is gathered from the Investment Company Institute. According to latest published September 2008 figures, the size of institutional investors in Turkey is quite limited, when compared to other countries.

Mutual Funds (2008/09)

Mutual Funds (bn. $)

Global Share

Mutual Funds/GDP

1 U.S. 10,689 49.3% 75%

2 Luxembourg 2,230 10.3% 4056%

3 France 1,723 8.0% 60%

4 Australia 1,039 4.8% 103%

5 Ireland 828 3.8% 303%

6 U.K. 655 3.0% 25%

7 Japan 623 2.9% 13%

8 Canada 606 2.8% 40%

9 Brazil 579 2.7% 37%

10 Spain 308 1.4% 19%

31 Turkey 19 0.1% 3%

Total 21,661 100.0% 44%

Source: ICI, IMF, TurkStat

The global futures and options volume is gathered from the Futures Industry Association.

CME Group is ranked at first place with 3.3 billion contracts traded. Turkey ranks 28^th according to derivatives liquidity.

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Global Futures and Options Volume (million contracts)

2007 2008

1 CME Group 3,158 3,278

2 Eurex 2,704 3,173

3 Korea Exchange 2,777 2,865

4 NYSE Euronext 1,525 1,676

5 Chicago Board Options Exchange 946 1,195

6 BM&F Bovespa 794 742

7 Nasdaq OMX 551 722

8 National Stock Exchange of India 380 590

9 Johannesburg SE 330 514

10 Dalian Commodity Exchange 186 313 28 Turkish Derivatives Exchange 25 54

Total 15,527 17,653

Source: Futures Industry Association, TurkDex

II. EMERGING MARKETS COMPARISON

In this section, rankings are among emerging markets which are comparable with Turkey.

Broad Index Returns (US$ Based)

2005 2006 2007 2008

Greece 14% 34% 31% -67%

Turkey 61% -6% 72% -63%

Poland 23% 59% 30% -60%

Hungary 19% 34% 41% -59%

South Korea 58% 13% 31% -58%

Brazil 45% 45% 72% -55%

Argentina 19% 48% 15% -53%

Italy -1% 33% 2% -51%

Thailand 1% 8% 35% -49%

Israel 25% 16% 35% -45%

Spain -2% 45% 17% -45%

Malaysia 0% 31% 41% -44%

Mexico 44% 46% 11% -40%

Source: WFE

Over the last few years, investors have gradually expanded their interest in developing countries like Turkey. In 2007, ISE ranked 2^nd in terms of index returns in US$ among the comparable countries. However in 2008, ISE-100 was amongst the worst performers.

Meanwhile, index returns of ISE between 2005 and 2008 indicate that the Turkish capital markets have a volatile feature.

Turkey’s MCap/GDP ratio has been increasing since the 2001 crisis. However in 2008, negative effect of the financial crisis caused this ratio decline from 44% to 16%.

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Market Capitalization/GDP

2004 2005 2006 2007 2008 South Africa 205% 226% 276% 292% 174%

Malaysia 146% 131% 150% 174% 85%

Israel 72% 92% 112% 143% 67%

South Korea 54% 85% 88% 107% 50%

Thailand 72% 70% 68% 80% 38%

Brazil 50% 54% 65% 103% 38%

Greece 53% 59% 78% 85% 25%

Mexico 23% 28% 37% 39% 22%

Austria 30% 41% 60% 64% 18%

Poland 28% 31% 44% 50% 17%

Turkey 25% 34% 31% 44% 16%

Argentina 27% 26% 24% 22% 12%

Hungary 28% 30% 37% 33% 12%

Source: IMF, ISE, TurkStat, WFE

By the end of 2008, the number of listed companies on the Istanbul Stock Exchange declined from 319 to 317 due to delistings and limited public offerings.

Number of Listed Companies

2004 2005 2006 2007 2008

South Korea 683 1,616 1,689 1,757 1,793 Malaysia 959 1,019 1,025 986 976 Israel 578 584 606 654 642 Thailand 463 504 518 523 525 Poland 230 241 265 375 458 South Africa 389 373 389 411 411 Brazil 388 381 350 404 392 Mexico 326 326 335 367 373 Turkey 297 304 316 319 317 Greece 341 304 290 283 285 Austria 120 111 113 119 118 Argentina 107 104 106 111 112

Hungary 46 44 41 41 43

Source: ISE, WFE

Due to the sharp decline in market capitalizations globally, equity markets’ turnover ratios increased rapidly.

Equity Trading Volume/Market Capitalization

2004 2005 2006 2007 2008 South Korea 161% 169% 161% 179% 310%

Turkey 151% 124% 140% 104% 218%

Hungary 46% 74% 74% 103% 166%

Austria 28% 37% 43% 55% 139%

Greece 36% 45% 52% 64% 127%

Brazil 31% 35% 39% 44% 127%

Thailand 101% 77% 72% 60% 113%

South Africa 36% 37% 44% 51% 83%

Israel 37% 40% 40% 43% 82%

Poland 23% 33% 37% 42% 78%

Malaysia 34% 29% 32% 52% 50%

Mexico 26% 24% 28% 31% 48%

Argentina 12% 14% 10% 13% 17%

Source: WFE

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Most of the emerging countries’ turnover ratios doubled in 2008. With a sharp decline in market capitalization, Turkey’s turnover ratio reached 218% in 2008, which is twice as high as last year.

In Greece and South Korea, the size of the domestic debt securities is almost as high as their GDP. In Turkey, the debt-to-GDP ratio is relatively low as compared to other emerging countries.

Outstanding Fixed Income Securities/GDP

2004 2005 2006 2007 2008/09

Greece 97% 89% 99% 105% 98%

South Korea 101% 97% 103% 103% 94%

Malaysia 89% 89% 93% 96% 83%

Austria 78% 69% 78% 84% 76%

Brazil 58% 62% 64% 71% 65%

Thailand 41% 45% 53% 56% 54%

Hungary 53% 45% 54% 55% 52%

Czech Republic 59% 50% 57% 60% 48%

South Africa 51% 44% 42% 43% 38%

Mexico 29% 32% 32% 34% 35%

Poland 40% 35% 38% 38% 34%

Turkey 43% 38% 34% 33% 29%

Argentina 33% 40% 36% 29% 23%

Source: BIS, IMF, TurkStat

As mentioned previously, nearly all debt securities are issued by the government in Turkey.

Since the corporate bond issues started in 2006, but the development of the market has been limited, there is virtually no corporate bond market. In 2008, 4 corporate bonds were issued amounting to US$ 208 million in total.

Sovereign Bonds/Total Outstanding Fixed Income Securities

2004 2005 2006 2007 2008/09

Poland 100% 100% 100% 100% 100%

Turkey 100% 100% 100% 100% 100%

Greece 97% 94% 92% 91% 89%

Hungary 90% 88% 90% 87% 88%

Argentina 71% 78% 79% 83% 84%

Czech Republic 90% 87% 85% 81% 79%

Thailand 67% 68% 66% 70% 71%

Brazil 80% 76% 74% 73% 65%

South Africa 73% 70% 64% 60% 59%

Mexico 54% 52% 55% 54% 55%

South Korea 43% 45% 46% 43% 40%

Malaysia 43% 42% 41% 39% 40%

Austria 47% 42% 41% 39% 35%

Source: BIS

The size of the mutual fund market relative to GDP has been declining in Turkey. Mutual funds’ total portfolio is around 3% of GDP as of September 2008, considerably below peer countries’ average. Moreover, a major portion of the portfolio consists of money market mutual funds. In other words, equity funds are negligible.

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Mutual Funds/GDP

2004 2005 2006 2007 2008/09

Brazil 33% 34% 38% 46% 37%

South Africa 25% 27% 30% 34% 28%

South Korea 25% 24% 26% 31% 26%

Austria 36% 36% 40% 37% 26%

Hungary 5% 6% 8% 9% 8%

Mexico 5% 6% 7% 7% 7%

Greece 19% 13% 10% 10% 6%

Poland 5% 6% 8% 11% 5%

Czech Republic 4% 4% 5% 4% 3%

Turkey 5% 5% 3% 3% 3%

Argentina 2% 2% 3% 3% 2%

Source: ICI, Mutual Funds Fact Book 2008, IMF, TurkStat

As it will be mentioned later, futures market has grown considerably over the last few years in Turkey. Among the comparable countries, TurkDex ranked at 5^th place with 54 million contracts traded in 2008.

Global Futures and Options Volume (thousand contracts)

2007 2008

South Korea 2,777,416 2,865,482 Brazil 794,054 741,889 South Africa 329,642 513,584 Mexico 228,972 70,144 Turkey 24,867 54,473 Hungary 18,827 13,369

Poland 9,342 12,561

Greece 6,582 7,172

Malaysia 6,203 6,120

Thailand 1,231 2,149

Austria 1,317 1,130

Argentina 178 156

Source: Futures Industry Association, TurkDex

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BROKERAGE INDUSTRY

As of end-2008, there are 41 banks and 103 brokerage firms in the Turkish capital market.

Activities of 12 brokerage firms have been temporarily suspended either voluntarily or by CMB enforcement. Given that the establishment of new brokerage firms is not allowed, fewer players have been sharing a larger market over the last years.

I. NUMBER OF BROKERAGE FIRMS

In the table below, the number of active brokers is presented according to their ownership structure. The table classifies firms according to majority ownership.

Number of Active Brokerage Firms

2004 2005 2006 2007 2008

SDIF* 6 5 1 0 0

State 4 4 4 4 4

Foreign 6 7 18 25 27

Domestic 91 85 77 70 67 Total 107 101 100 99 98 Source: TSPAKB *: State Deposit Insurance Fund

The number of foreign-owned brokerage firm continued to increase and 27 brokerage firms’

majority stake was held by foreign institutions at the end of 2008. On the other hand, domestic brokerage firms are still the major players in the sector. State owned brokerage firms are subsidiaries of the state-owned banks.

During the 2001 crisis, the bankrupt banks and their subsidiaries were overtaken by the State Deposit Insurance Fund (SDIF). The Fund gradually slowed down their activities, sold some of them and merged others. Immediately after the crisis, the SDIF became the owner of 19 brokerage firms. However, since 2007 there are no brokerage firms left within SDIF.

II. EQUITY MARKET

Major indicators of the equity market are presented in the table below.

Equity Market at a Glance

No. of

Companies¹ No. of

IPOs¹ Delistings¹

IPO Size (mn. $)

Market Cap.

(mn. $)

Trading Volume (mn. $)

No. of Brokerage Firms

2004 297 12 - 482 98,073 147,755 112

2005 306 11 - 1,803 162,814 201,763 108

2006 322 19 - 949 163,775 229,642 105

2007 319 11 2 3,389 289,986 300,842 104

2008 317 2 4 1,895 119,698 261,274 103

Source: ISE

1: Numbers may not add up due to relistings and mergers.

In 2007, ISE’s market capitalization reached a record level. Moreover, Turkey was ranked 5^th (as an exchange 7^th) in terms of index returns among the World Federation of Exchanges’

members.

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ISE-100 Index and Trading Volume

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 55,000 60,000

2004/01 2004/08 2005/03 2005/10 2006/05 2006/12 2007/08 2008/03 2008/10 02505007501,0001,2501,5001,7502,0002,2502,5002,7503,000

Trading Volume ISE-100

Points mn. $

Uptrend of the index continued until the beginning of 2008. However in 2008, the ISE-100 index posted a 50% decline in TL terms and reached 26,864 points by the end of the year.

A. Listed Companies

After a record performance in 2007, market capitalization of the ISE decreased sharply as a result of the global financial crisis. As of end-2008, 317 listed companies’ MCap measured US$ 120 billion, with an average free float of 31% (US$ 37 billion).

After the 2001 crisis, the IPO market revived in 2003, averaging 13 new listings per year until 2008. Average IPO size was US$ 125 million in the same period. In 2008, there were 3 public offerings in the market, amounting to US$ 1.9 billion in total. Almost the entire amount of total IPOs was raised by the Turk Telekom, which has been the largest IPO ever in Turkey.

It should be noted that, 58% of the IPO proceeds between 2003-2008 is raised by privatization activities.

B. Equity Trading Volume

In 2008, trading volume of the exchange declined by 13% to US$ 261 billion. Trading at the Istanbul Stock Exchange is concentrated in National Market companies.

Trading Volume in ISE Markets (2008)

Markets No. of

Companies Share in Trading Volume

National Market 284 99.1%

Second National Market 18 0.7%

New Economy 3 0.1%

Watch List 12 0.1%

Total 317 100.0%

Source: ISE

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1. Equity Trading Volume by Investor Categories

TSPAKB publishes data on the structure of trading volumes in different markets, based on the data compiled from brokerage firms.

The share of foreign investors in the equity trading volume, has increased from 13% to 26%

in the last five years. On the other hand, as will be explained in detail in the Investors section, foreign investors hold around 67% of the free-float.

Foreign corporations mainly reflect banks and brokerage firms, whereas foreign institutionals reflect funds’ trading. There is an outstanding increase in foreign corporations’ trading volume in the last few years.

In line with the increase in foreign investors’ share, domestic individual investors’ share has been declining. However, they are still the leading group generating the market liquidity.

While domestic individuals generate 57% of the total equity trading volume, domestic corporations’ share is 10%.

Breakdown of Equity Trading Volume by Investor Categories 2004 2005 2006 2007 2008 Domestic Investors 87% 80% 81% 76% 74%

Dom. Individuals 72% 65% 66% 61% 57%

Dom. Corporations 10% 12% 10% 9% 10%

Dom. Institutionals 5% 4% 5% 6% 6%

Foreign Investors 13% 20% 19% 24% 26%

For. Individual 0% 0% 0% 0% 0%

For. Corporations 7% 8% 11% 16% 18%

For. Institutionals 6% 11% 8% 8% 8%

Total 100% 100% 100% 100% 100%

Source: TSPAKB

2. Equity Trading Volume by Departments

Department breakdown of the equity trading volume shows the channels through which trading is done.

Breakdown of Equity Trading Volume by Departments

2004 2005 2006 2007 2008

Domestic Sales 26% 25% 26% 27% 28%

Branches 20% 18% 17% 16% 15%

Bank Branches 24% 20% 18% 17% 13%

Rep. Offices 3% 2% 2% 3% 2%

Internet 5% 6% 7% 7% 9%

Call Center 1% 1% 1% 0% 0%

Mutual Funds 2% 2% 1% 1% 1%

Portfolio Mngt. 1% 1% 1% 0% 0%

Prop. Trading 6% 7% 7% 5% 6%

International Sales 12% 20% 19% 23% 25%

Total 100% 100% 100% 100% 100%

Source: TSPAKB

Domestic sales refer to the headquarters of the brokerage firm. Branches are owned by the brokerage firm itself. Bank branches are owned by banks, with which brokerage firms have agency agreements. Since banks are not allowed to trade in the equity market, they serve as agents of, generally affiliated, brokerage firms. Representative offices are again owned by

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the brokerage firms, but unlike branches, they cannot open investor accounts and should only direct order flow.

The most significant change in this breakdown was observed in the trading volume of branches, bank branches and representative offices. Their total share dropped from 36% to 30% in 2008.

Domestic sales departments have the major share with 28%. Internet trading share rose from 7% to 9%.

In 2008, 35 brokerage firms have international sales department. Although international sales departments’ trading volume declined by 8%, their share increased from 23% to 25%.

III. BONDS & BILLS MARKET

A. Market Shares

Banks and brokerage firms compete in the fixed income market. 88% of T-bill trading volume, and 81% of repo trading volume is generated by banks. Banks dominate the market with almost 90% of T-bill trading and 80% of repo turnover share. Since 2004, brokerage firms have been losing the market share they had gained after the turmoil of 2001. These figures indicate the total amount of market and off-exchange volumes.

Fixed Income Market at a Glance

Number of T-Bill Trading Volume Repo Trading Volume Banks Brokerage

Firms Banks Brokerage

Firms Banks Brokerage Firms

2004 43 112 81% 19% 79% 21%

2005 41 108 82% 18% 82% 18%

2006 40 105 86% 14% 81% 19%

2007 41 104 88% 12% 81% 19%

2008 41 104 88% 12% 81% 19%

Source: ISE

B. Bonds & Bills Trading Volume

In the fixed income market, 60% of T-bill trading and 92% of repo trading was done in the organized market in 2008. T-bill trading volume declined by 16% to US$ 388 billion, while repo trading volume increased by 2% to US$ 2,422 billion.

Fixed Income Trading Volume

ISE Markets OTC Market Total

(bn.$) T-Bill

Trading Repo T-Bill

Trading Repo 2004 263 1,090 158 281 420 1,372 2005 359 1,387 174 251 533 1,639 2006 270 1,770 140 351 410 2,122 2007 279 1,993 184 375 463 2,369 2008 231 2,236 157 186 388 2,422

Source: ISE

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1. T-Bill Trading Volume of Brokerage Firms by Investor Categories

The figures in the following section reflect the structure of the brokerage firms’ trading volume only. There is no comparable data available for banks. Therefore, the following comments and figures do not cover a major portion of the market.

Breakdown of T-Bill Trading Volume by Investor Categories

2006 2007 2008

Domestic Investors 98% 98% 92%

Dom. Individuals 13% 9% 8%

Dom. Corporations 37% 45% 31%

Dom. Institutionals 48% 44% 54%

Foreign Investors 2% 2% 8%

For. Individual 0% 1% 0%

For. Corporations 2% 1% 7%

For. Institutionals 0% 0% 0%

Total 100% 100% 100%

Source: TSPAKB

The major investors in this breakdown are domestic institutions (54%), which mainly reflect the transactions of the mutual funds managed by the brokers. Domestic corporations mainly representing the proprietary trading of brokerage firms, has 31% share.

In 2008, foreign investors raised their share to 8% in T-bill trading. The increase stems mainly from the transactions of one brokerage firm which generated 96% of foreign investors’ volume.

2. T-Bill Trading Volume of Brokerage Firms by Departments

Domestic sales, mutual funds and proprietary trading generate the major portion of brokerage firms T-bill trading volume.

The share of domestic sales, which include individuals and other corporate clients of the firm, increased from 25% to 29%. Mutual funds managed by brokerage firms generate 27%

of the volume.

Breakdown of T-Bill Trading Volume by Departments

2006 2007 2008

Domestic Sales 15% 25% 29%

Branches 4% 3% 2%

Bank Branches 1% 3% 5%

Rep. Offices 0% 0% 0%

Internet 0% 0% 0%

Call Center 0% 0% 0%

Mutual Funds 42% 27% 27%

Port. Mngt. 1% 2% 3%

Prop. Trading 34% 39% 27%

International Sales 2% 1% 7%

Total 100% 100% 100%

Source: TSPAKB

27% of T-bill trading is done by proprietary trading. Proprietary trading’s high share of the volume stems from the trading system of the market. In the T-Bill market, client account trading is not possible. Therefore, when a broker receives a T-bill order from a client, it

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directs the order to the ISE on its own account. When the trade is executed, the broker sells the T-bill to the client as an OTC trade, at a small profit, instead of a brokerage commission.

3. Repo Volume of Brokerage Firms by Investor Categories

Repo trading through brokerage firms is also dominated by domestic investors. Domestic institutional investors generated 82% of brokerage firms’ repo volume in 2008. These clients are generally the money market mutual funds managed by the brokers directly or through their affiliated portfolio management companies.

Breakdown of Repo Volume by Investor Categories

2006 2007 2008

Domestic Investors 99% 99% 100%

Foreign Investors 1% 1% 0%

Total 100% 100% 100%

Source: TSPAKB

Domestic individuals are more active in repo transactions than they are in T-bill trading. The sharp rise in domestic institutionals caused a decline in domestic individual investors’ share to 12% in 2008 from 26% a year ago.

4. Repo Volume of Brokerage Firms by Departments

Domestic sales department covers 67% of repo transactions. Mutual funds represent 23% of repo volume. International sales department has less then 1% share. Moreover, there is a high level of concentration among the brokerage firms in repo market. Indeed, 44% of total repo transactions is done by a single brokerage firm.

Breakdown of Repo Volume by Departments

2006 2007 2008

Branches 10% 7% 3%

Internet 0% 0% 0%

Total 100% 100% 100%

Source: TSPAKB

IV. FUTURES MARKET

A. Market Shares

The futures market has been growing steadily since its launch in 2005. Parallel to the development of the market, the number of intermediaries increased from 79 in 2007 to 89

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by the end of 2008. The figures in the table below reflect the trading volumes of intermediaries, which is double the market volume, since it is the sum of buy and sell transactions.

Futures Market at a Glance

No. of Intermediaries Trading Volume (mn. $) Banks Brokerage

Firms Total Banks Brokerage

Firms Total

2005 14 42 56 1,482 3,037 4,519

2006 15 47 62 4,383 20,595 24,978 2007 17 62 79 19,583 161,940 181,523 2008 18 71 89 29,166 292,172 321,338

Source: TurkDex

In 2008, the growth of the futures market started to slow down and the trading volume increased by 77% reaching US$ 321 billion.

Contrary to the fixed income market, brokerage firms get the lion’s share in futures trading.

Brokerage firms’ share of trading volume increased by 2 points to 92% in 2008.

B. Futures Trading Volume

There are 6 groups of contracts, as shown in the table.

Futures Market Main Indicators

No. of Contracts Traded Trading Volume (mn. $)

2006 2007 2008 2006 2007 2008

Index 2,194,245 17,016,913 40,334,968 7,411 82,740 145,425 Currency 4,429,502 7,849,609 14,110,292 4,714 8,017 15,165

Interest Rate 1 401 420 0 3 3

Benchmark T-Bill 3,317 0 0 18 0 0

Commodity 13 110 27,155 0 0 77

Gold 1,425 0 0 3 0 0

Total 6,628,503 24,867,033 54,472,835 12,147 90,759 160,669

Source: TurkDex

Trading is concentrated only in two groups of contracts; index and currency. Index contracts are based on ISE-30 and ISE-100 equity indices. Currency contracts are based on US$/TL and €/TL exchange rates.

The breakdown of trading volume in terms of investor categories and departments includes brokerage firms’ statistics only.

1. Futures Trading Volume of Brokerage Firms by Investor Categories Domestic individual investors remained to be the main investor group of futures trading.

Moreover, domestic individuals are increasingly becoming more active. Their trading volume doubled and their share reached to 65% in 2008.

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Breakdown of Futures Trading Volume by Investor Categories

2006 2007 2008

Domestic Investors 89% 79% 82%

Foreign Investors 11% 21% 18%

Total 100% 100% 100%

Source: TSPAKB

Although the trading volume of domestic corporations increased considerably in absolute terms, their share in the total trading volume has declined dramatically to 15% in 2008.

Despite the 54% increase in foreign investors’ trading volume, their share decreased from 21% to 18% in 2008. Two thirds of foreign investors’ trading volume is generated by three brokerage firms.

2. Futures Trading Volume of Brokerage Firms by Departments

Domestic sales (headquarters of brokerage firms), international sales and branches generate around 60% of trading volume.

The most remarkable change in this breakdown took place in internet trading volume.

Indeed, the number of brokerage firms offering futures trading through internet increased from 22 to 35 in 2008. One fifth of total trading volume of futures in 2008 was generated through the internet. Note that the share of internet trading in equity was only 9% in the same period.

Breakdown of Futures Trading Volume by Departments

2006 2007 2008

Branches 16% 21% 21%

Internet 5% 11% 19%

Total 100% 100% 100%

Source: TSPAKB

V. MONEY MARKET

After two rate cuts totalling 50 basis points in the first months of the year, the Central Bank adopted a tighter stance due to mounting inflationary pressures, raising O/N rates up to 16.75% in July from 15.25% in February.

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However, amidst the global financial crisis in the last quarter of the year, the Central Bank has taken measures to support the liquidity of the financial system, and reduced O/N rates to 15% by the end of the year.

The trading volume in the money market increased by 10% to US$ 23 billion in 2008, with an average daily transaction volume of US$ 91 million.

12 13 14 15 16 17 18 19 20

01/2005 04/2005 07/2005 10/2005 01/2006 04/2006 07/2006 10/2006 01/2007 04/2007 07/2007 10/2007 01/2008 04/2008 07/2008 10/2008 0

50 100 150 200 250 300 Trading Volume Average O/N Rate 350

Takasbank Money Market

%

Source: Takasbank

mn. $

VI. SECURITIES LENDING/BORROWING

In 2008, 261 securities were subject to borrowing and lending transactions. The annual trading volume of the market decreased by 4% to US$ 1.04 billion while average daily trading volume declined to US$ 4.1 million.

Securities Lending & Borrowing (Million US$)

2005 2006 2007 2008 2008/2007

Change

No. of Securities 49 220 256 261 2%

Annual Trading Volume 20.2 537.2 1,086.1 1,041.4 -4%

Avg. Daily Trading Volume 0.8 2.1 4.3 4.1 -4%

Source: ISE

VII. SHORT-SELLING

Authorized ISE members are allowed to short-sell all equities traded in the ISE markets, except those listed on the Watch List Market. In 2008, short-selling volume rose by 35% to US$ 14 billion.

Short Selling (Million US$)

2005 2006 2007 2008 2007-2008

Change 2008

Breakdown Stock 4,015 5,841 10,259 13,893 35% 98.3%

ETF 44 138 181 243 35% 1.7%

Total 4,059 5,979 10,439 14,136 35% 100.0%

Source: İMKB

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VIII. CORPORATE FINANCE

There is no public data on the size of corporate finance transactions, except for public offerings. However, the number of corporate finance transactions is published in detail by the TSPAKB.

Corporate finance consultancy services are provided by a variety of companies. M&A consultancy companies, auditors and other independent consultants may engage in these projects. Therefore, this section does not cover all corporate finance activities in Turkey.

Corporate Finance Transactions of Brokerage Firms 2004 2005 2006 2007 2008 Initial Public Offering 10 11 18 11 3 Secondary Public Offering - - - 0 0 M&A / Buy Side 5 11 11 23 14 M&A / Sell Side 6 5 28 19 20

Private Equity 1 0 1 1 1

Capital Increases 59 54 33 54 21 Dividend Distribution 20 60 35 70 16 Privatization / Buy Side 2 16 2 4 4 Privatization / Sell Side 4 3 2 2 1 Other Consultancy 84 47 42 79 47 Total 191 207 172 263 127

Source: TSPAKB

In 2008, the number of corporate finance transactions dropped from 263 to 127. The number of completed transactions decreased in almost every type of projects.

As mentioned previously, there were 3 public offerings in 2008, including Turk Telekom.

IPOs are exclusively done through brokerage firms. In 2007, brokerage firms had completed 11 IPO projects.

34 M&A projects were finalized by the brokerage firms in 2008.

Private equity refers to sell side consultancy, for the acquisition of a company by a private equity fund. There was one transaction completed in 2008.

Listed companies may use brokerage firms for corporate actions. In 2008, 21 companies increased their paid-in capital through brokerage firms. 16 companies used brokerage firms to pay dividends. In total, the number of completed corporate actions decreased from 124 in 2007 to 37 in 2008.

Buy side privatization consultancy refers to services provided to potential buyers. A consultancy service may have been provided to a potential buyer although the transaction was not realized. Sell side privatization means consultancy services given to The Privatization Administration. Similarly, the transaction may not have been completed. Submission of a valuation report or an offering prospectus may be considered as completion of a project.

Brokerage firms completed a total of 5 privatization projects during 2008.

Other consultancy projects mainly cover valuation or restructuring consultancy services. The number of completed projects decreased from 79 to 47 in 2008.

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IX. ASSET MANAGEMENT

Asset management services can be provided by brokerage firms and portfolio management companies. Portfolio management companies have 91% share in the market, in terms of the size of assets under management in 2008. Around 95% of the managed portfolios belong to institutional investors. Therefore, institutional investors will be briefly described first.

Institutional investors’ portfolio declined by 29% to US$ 21 billion in 2008. There are two major classes of mutual funds; equity and fixed income. Although fixed income mutual funds assets fell by 30%, they continued to be the leading investor group with a 73% share in this breakdown. While there was a decrease in the number of equity funds, the number of fixed income funds increased from 173 to 200.

Private pension system was introduced towards the end of 2003 and has been growing exponentially. In 2008, pension funds assets’ share reached to 29% up from 13% in 2007.

Institutional Investors

(mn. $) 2004 2005 2006 2007 2008

Mutual Funds–Fixed Income 17,708 20,977 15,701 21,670 15,253 Mutual Funds–Equity 583 786 599 762 365 Private Pension Funds 222 913 2,048 3,813 4,193 Real Estate Inv. Trusts 752 1,864 1,487 2,723 776

Investment Trusts 220 360 280 317 152

Exchange Traded Funds - 40 88 226 128 Venture Capital Inv. Trusts 64 69 68 63 27

Total 19,548 25,010 20,271 29,574 20,895

Source: CMB

Investment trusts have to be listed on the ISE and there is no significant growth in this segment. Although real estate investment trusts (REITs) are becoming more popular in the last years, in 2008 they declined by 71% to US$ 776 million because of the global financial crisis.

Exchange traded funds (ETFs) were introduced to the market in 2005. In 2008, exchange traded funds’ portfolio decreased by 43% to US$ 128 million.

Asset Management by Brokerage Firms

2004 2005 2006 2007 2008

Number of Investors 961 1,028 708 641 813 Individual Investors 829 886 571 505 658

Mutual Funds–Equity 45 46 45 44 45

Mutual Funds–Fixed Income 50 61 59 58 63 Other Institutional Investors 14 13 10 12 16

Other Corporations 23 22 23 22 31

Assets Under Management (mn. $) 2,275 2,448 1,654 2,505 2,099

Individual Investors 84 99 83 122 111

Mutual Funds–Equity 138 111 71 123 64

Mutual Funds–Fixed Income 1,879 1,894 1,328 2,040 1,572 Other Institutional Investors 84 67 50 89 184

Other Corporations 90 278 122 131 169

Source: TSPAKB

In the table above, details of asset management services in brokerage firms are provided.

The number of individual investors receiving discretionary portfolio management services

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increased considerably from 505 to 658 in 2008. However individual investors’ managed assets fell slightly by 9% to US$ 111 million.

75% of assets managed by brokerage firms are fixed income mutual funds. Fixed income mutual funds’ assets decreased by 23% in 2008.

Other institutional investors which refer to insurance companies and trusts had an US$ 11 million average portfolio.

Asset Management by Portfolio Management Companies

2004 2005 2006 2007 2008

Number of Investors 2,283 2,603 2,629 2,402 2,232 Individual Investors 1,942 2,190 2,197 1,934 1,725 Institutional Investors 255 289 290 330 353

Corporations 86 124 142 138 154

Assets Under Management (mn. $) 18,105 22,395 18,259 25,061 20,072 Individual Investors 206 434 450 585 415

Institutional Investors 17,346 21,258 17,141 23,606 18,638

Corporations 553 703 667 870 1,019

Source: CMB

The table above presents details of asset management at portfolio management companies.

There are 23 portfolio management companies in the market, with US$ 20 billion of assets under management as of end 2008. 93% of total assets belong to 353 institutional investors.

The number of individual investors receiving services from portfolio management companies fell by 11% in 2008. Additionally, their average portfolio size decreased from US$ 303,000 to US$ 241,000.

X. MARGIN TRADING

The number of margin trading clients has been increasing steadily until 2007. Amidst the global financial crisis, total loan size decreased to US$ 167 million. While in 2007 70 brokerage firms had a margin trading customer, by the end of 2008 the number declined to 63.

Margin Trading

2004 2005 2006 2007 2008

Number of Clients 8,796 9,501 10,270 10,730 8,499 Total Loan Size (mn. $) 219 284 340 424 167

Source: TSPAKB

XI. RETAIL NETWORK

A. Branch Network

As mentioned earlier, branches and representative offices are owned and staffed by brokerage firms. Branches are allowed to open client accounts, whereas representative offices can only direct client orders.

Bank branches are used based on agency agreements between the bank and the brokerage firm. Agents are generally within the same group of companies. Since banks are not allowed to trade equities, they benefit from the opportunity of offering equity trading services through their agent broker. In return, brokerage firms get access to a wide retail network

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and client base.

With the effect of the global crisis, the total number of branches and representative offices has decreased by 19% to 229. While in 2007 63 brokerage firms had a branch or representative office, this number decreased to 54 in 2008.

Bank branches are the major channel for reaching investors. The increase in the number of bank branches stems from the increase in the banking sector’s branch network.

Retail Network

2004 2005 2006 2007 2008

Branches 224 234 246 231 185

Rep. Offices 67 69 64 52 44

Bank Branches 4,450 4,406 4,514 4,775 5,664 Total 4,741 4,709 4,824 5,058 5,893

Source: TSPAKB

B. Internet Trading

The number of brokerage firms offering internet trading services has increased to 69 as of end-2008.

Number of investors might be double counted in the below table. The figure is the sum of internet trading clients at each broker. Therefore, a client trading through two separate brokerage firms is counted twice.

Internet Transactions

2004 2005 2006 2007 2008

No. of Brokerage Firms 50 61 61 68 69

Equities

No. of Active Internet Investors 128,266 118,800 181,801 186,622 202,700 No. of Trades 9,191,243 10,858,346 13,018,098 15,339,686 18,853,084 Internet Trading Volume (mn.$) 14,155 22,587 30,275 41,922 47,601

Bonds and Bills

No. of Active Internet Investors - - 694 586 679

No. of Trades - - 2,838 2,933 3,176

Internet Trading Volume (mn.$) - - 14 24 18

Futures and Options

No. of Active Internet Investors - - 1,082 3,650 6,211 No. of Trades - - 105,989 890,513 3,325,201 Internet Trading Volume (mn.$) - - 993 18,500 56,430

Source: TSPAKB

In 2008, future trading via internet exceeded the equity trading volume for the first time.

Trading volume of futures reached US$ 56 billion in 2008.

Total equity trading volume via the internet increased by 14% reaching US$ 48 billion. On the other hand, average transaction size in equities declined from around US$ 2,750 to US$

2,525.

Internet trading for bonds and futures data has been available since the beginning of 2006.

Bond trading over the internet is not common among brokerage firms, and remained at US$

18 million in 2008.

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C. Call Centers

Call centers are losing their popularity to the internet. Brokerage firms are gradually closing their call centers. Thus, equity trading volumes are declining and futures trading does not show sustainable growth.

Call Center Transactions

2004 2005 2006 2007 2008

No. of Brokerage Firms 16 15 14 13 12

Equities

No. of Active Call Center Investors 57,876 42,359 40,244 30,129 20,719 No. of Trades 1,288,495 1,082,707 902,091 696,204 400,063 Call Center Trading Volume (mn.$) 2,973 3,503 3,001 2,729 1,795

Bonds and Bills

No. of Active Call Center Investors - - 426 407 380

No. of Trades - - 1,654 1,061 1,494

Call Center Trading Volume (mn.$) - - 46 52 77

Futures and Options

No. of Active Call Center Investors - - 304 628 716

No. of Trades - - 12,866 12,151 35,601

Call Center Trading Volume (mn.$) - - 213 311 918

Source: TSPAKB

However, compared to internet transactions, the average size of equity and futures transactions is larger in call centers. Thus, it could be inferred that the clients prefer to trade through a customer representative for larger trades. In 2008, the average size of equity transactions through call centres is US$ 4,487, while the average size of futures transactions is US$ 25,779.

XII. EMPLOYEES

In 2008, number of employees declined by 13% to 5,102 which is the lowest level recorded since 1999.

No. of Employees at Brokerage Firms

2004 2005 2006 2007 2008 5,906 5,916 5,899 5,861 5,102

Source: TSPAKB

The table below depicts staff breakdown by departments. It could also be interpreted as the organization structure of an average brokerage firm.

29% of total employees are working in the branch network. The figure for bank branches does not cover the employees of the banks, but rather the employees of the brokerage firm located at bank branches. In parallel with the decrease in the number of branches in retail network, the number of employees in branches declined. However the share of employees in representative offices and bank branches remained at the same level.

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Department Breakdown of Employees

2004 2005 2006 2007 2008

Branch, Bank Br., Rep. Office 32% 32% 32% 30% 29%

Branch 21% 21% 20% 19% 18%

Bank Branch 7% 8% 8% 8% 8%

Representative Office 4% 4% 4% 3% 3%

Financial & Admin. Affairs 15% 15% 15% 16% 16%

Broker 11% 11% 10% 9% 8%

Dealer 9% 9% 9% 9% 9%

Domestic Sales (Main Office) 5% 5% 6% 6% 6%

Research 4% 4% 4% 4% 4%

Internal Audit 3% 3% 3% 3% 3%

Treasury 2% 3% 2% 3% 2%

IT 3% 3% 3% 3% 4%

Corporate Finance 2% 2% 2% 3% 3%

Portfolio Management 1% 1% 1% 1% 1%

International Sales 1% 2% 2% 2% 3%

Human Resources 1% 1% 1% 1% 1%

Other 11% 10% 11% 10% 10%

Total 100% 100% 100% 100% 100%

Source: TSPAKB

The most densely staffed teams are Financial and Administrative Affairs. This group includes accounting, administrative affairs and back-office personnel. An average team consists of 9 people.

Brokers refer to floor traders. They are generally located at the ISE and trade through ISE terminals. As remote trading is becoming more commonly used, the number of brokers is declining. In 2008, the number of brokers declined by 26% which indicates the most dramatic change in this breakdown. Brokers’ share thus declined to 8%.

Domestic sales refer to the sales and marketing teams located at the headquarters. There are 225 researchers in the sector by the end of 2008. There are 34 brokerage firms with a corporate finance department and the total number of the corporate finance staff is around 150. Portfolio management staff is also limited, as this business line is transferred to portfolio management companies.

There are 34 brokerage firms with an International Sales department. By the end of 2008, number of employees serving foreign investors increased to 147. An average team consists of 4 to 5 people.

“Other” covers personnel not associated with a department, such as secretaries, drivers or the top management.

In the below table, employees are grouped according to their education levels. Post- graduate refers to masters or PhD. Graduate covers university graduates, and pre-bachelor refers to the group graduated from a 2-year college after high school.

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Education of Brokerage Firm Employees

2004 2005 2006 2007 2008

Post Graduate 9% 8% 9% 10% 12%

Graduate 54% 57% 58% 58% 58%

Pre-Bachelor 8% 6% 7% 6% 6%

≤High School 29% 28% 26% 26% 24%

Source: TSPAKB

In the last few years, the share of post graduate diploma has been increasing slightly and reached 12% by the end of 2008. Employees with graduate degree remained at the same level, representing 58% of the brokerage industry professionals.

The final categorization is based on age groups. This breakdown indicates that the number of employees under 35 decreased their share by 6 points to 54%. This ratio was 82% in 2000. In other words, brokerage industry hasn’t been recruiting fresh graduates in the last few years and getting aged.

Age Groups of Brokerage Firm Employees

2004 2005 2006 2007 2008

≤30 39% 34% 33% 29% 27%

31-40 48% 52% 52% 53% 53%

41-50 11% 12% 13% 15% 18%

50+ 2% 2% 2% 2% 3%

Source: TSPAKB

XIII. FINANCIAL STATEMENTS

Since 2005, International Financial Reporting Standards (IFRS) have been adopted in capital markets. In 2008, the presentation of the financial statements has been revised. Therefore, financial data prior to 2007 are not comparable. In this section, sector aggregates reflect the financial results of 98 brokerage firms in 2007 and 95 firms in 2008.

A. Balance Sheet

Due to the appreciation of the US$, brokerage firms’ total assets decreased by 17% to US$

2.7 billion by the end of 2008, while total assets increased by 9% in TL terms.

1. Assets

In 2008, intermediary institutions have maintained their liquid position. 89% of total assets is composed of current assets and 11% of non-current assets. With a 49% share, cash and cash equivalents is the major account.

In 2007, cash and cash equivalents were 36% of total assets. This ratio increased by 13 points in 2008. In this breakdown, bank deposits are the most important account with 44%

share. The remaining part of the liquid assets consists of repo transactions and money market investments.

Financial assets are the second main account under current assets. As of the end of 2008, financial assets declined by 32% to US$ 526 million due to the decline in their equity holdings.

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AGGREGATE BALANCE SHEET OF BROKERAGE FIRMS (mn. US$-IFRS)

Assets 31.12.2007 31.12.2008

I. Current Assets 2,874.1 2,423.9

A. Cash and Cash Equivalents 1,182.8 1,326.8 B. Financial Assets (Short-term) 774.5 525.9 C. Trade Receivables (Short-term) 852.6 505.4 D. Receivables from Financial Activities (Short-term) 15.1 24.5 E. Other Receivables (Short-term) 25.1 12.8

F. Other Current Assets 23.9 27.1

G. Non-Current Assets Held for Sale 0.0 1.3

II. Non-Current Assets 411.1 311.5

A. Trade Receivables (Long-term) 0.1 0.2 B. Receivables from Financial Activities (Long-term) 0.0 0.0 C. Other Receivables (Long-term) 6.0 11.6 D. Financial Assets (Long-term) 207.6 129.4 E. Investments at Book Value 60.3 56.3

F. Real Estate Investments 4.5 4.3

G. Tangible Assets 106.2 84.2

H. Intangible Assets 8.8 9.0

I. Goodwill 3.2 2.6

J. Deferred Taxes 13.1 13.1

K. Other Non-Current Assets 1.2 0.7

Total Assets 3,285.2 2,735.4

Source: TSPAKB

Brokerage firms’ portfolio breakdown can be analyzed through their holdings of cash and cash equivalents. In the following table, the portfolio allocation of brokerage firms is presented. Their financial assets decreased by 4% to US$ 1.8 billion, while in TL terms, their portfolio increased by 25%.

The portfolio allocation of brokerage firms indicates that, as compared to the end of 2007, their portfolio

By the end of 2008, brokerage firms have invested US$ 1.3 billion in deposits and repo, representing 71% of their total financial assets. On the other hand, half of the total deposits belong to one brokerage firm only. This firm borrowed from the money market and invested in bank deposits to benefit from an interest rate spread.

By the end of the year, brokerage firms’ government bonds portfolio dropped to US$ 368 million. The most remarkable change in this breakdown is the 60% fall in equities’ portfolio.

As of end 2008, brokerage firms hold 0.02% of the publicly held equities at the Istanbul Stock Exchange.

Financial Assets of Brokerage Firms

(mn. $) 31.12.2007 31.12.2008 2007

Breakdown 2008 Breakdown Deposits & Repo 1,169.5 1,306.8 61.0% 71.5%

Government Bonds 488.1 368.4 25.5% 20.2%

Equities 205.1 81.4 10.7% 4.5%

Others 53.5 70.8 2.8% 3.9%

Total 1,916.2 1,827.4 100.0% 100.0%

Source: TSPAKB

Trade receivables decreased by 41% to US$ 505 million. The major accounts in trade receivables are settlement receivables from customers and Takasbank. These two settlement

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accounts amounted US$ 257 million in total. Corresponding settlement dues are on the liability side as trade payables.

There is a significant change in receivables from margin trading customers. While this account composed half of the total trade receivables in 2007, by the end of 2008 receivables from margin trading declined by 60% to US$ 161 million. This change indicates that brokerage firms cut back on margin trading loans because of the global crisis.

Among the non-current assets, the most important item is financial assets, which basically refers to participations (US$ 91 million). In fact, brokerage firms’ record their participations in several accounts in line with IFRS principles. According to our calculation, by the end of 2008, brokerage firms’ aggregate participations decreased from US$ 249 million to US$ 157 million.

2. Liabilities

The industry continued to have a strong capital base and limited external financing.

AGGREGATE BALANCE SHEET OF BROKERAGE FIRMS (mn. US$-IFRS)

Liabilities 31.12.2007 31.12.2008

I. Short-Term Liabilities 1,388.4 1,300.9

A. Financial Liabilities (Short-term) 678.7 777.1 B. Other Financial Liabilities (Short-term) 27.8 2.9 C. Trade Payables (Short-term) 523.0 411.5

D. Other Payables (Short-term) 49.2 29.9

E. Payables from Financial Activities (Short-term) 4.1 7.6 F. Government Incentives and Grants (Short-term) 0.0 0.0 G. Current Tax Liability (Short-term) 18.1 9.9

H. Debt Provisions (Short-term) 47.2 33.1

I. Other Liabilities (Short-term) 40.2 25.7 J. Liabilities Associated with Non-Current Assets Held for Sale 0.0 3.2

II. Long-Term Liabilities 40.1 21.9

A. Financial Liabilities (Long-term) 5.3 3.4 B. Other Financial Liabilities (Long-term) 0.0 0.0

C. Trade Payables (Long-term) 2.4 0.0

D. Other Payables (Long-term) 0.0 0.2

E. Payables from Financial Activities (Long-term) 0.0 0.0 F. Government Incentives and Grants (Long-term) 0.0 0.0

G. Debt Provisions (Long-term) 6.2 0.6

H. Provisions for Employee Benefits 16.3 13.1

I. Deferred Taxes 9.7 4.6

J. Other Liabilities (Long-term) 0.0 0.0

III. Equity 1,856.8 1,412.6

A. Shareholders' Equity 1,673.8 1,294.4

1. Paid-in Capital 782.7 669.9

2. Adjustments on Equity 317.6 229.9

3. Capital Adjustments due to Cross-Ownership (-) 0.0 0.0 4. Premium on Issues of Common Stock 35.1 26.7

5. Revaluation Reserves 88.0 20.6

6. Foreign Currency Conversion Adjustments -0.4 -0.2 7. Reserves on Retained Earnings 87.0 97.7

8. Accumulated Profit/Loss 92.0 131.0

9. Net Profit/Loss 271.9 118.7

B. Minority Interest 183.0 118.2

Total Liabilities and Equity 3,285.2 2,735.4

Source: TSPAKB