Borsa Istanbul Fund Scandal: Turkey's Regulator Is Prosecuting the Collapse Its Own Rule Set Off
Turkey’s Capital Markets Board spent Wednesday and Thursday doing two jobs at once. It filed criminal complaints against dozens of people over alleged share-price manipulation, handed two-year trading bans to fund managers at Pusula Portfoy and Tera Portfoy, and then watched police detain four senior figures, among them Pusula chairman Muhammed Yariz and Destek Holding chairman Altunc Kumova. At the same time it tried to talk the market down off a ledge. Those jobs pull against each other. The second is harder than it looks because the first one caused it.
Start with the sequence. On August 28 the board told investment funds to cut their exposure to small, illiquid stocks and to assets sitting under the same ownership structure as the fund’s own group. Most developed markets have some version of that concentration rule, so on paper it was housekeeping. In practice it ordered a cluster of funds to sell the same kind of paper at the same moment into a market where the natural buyer for that paper was, quite often, the funds themselves. Nobody else was bidding. Prices fell, and by Wednesday almost half the shares on the blue-chip index had been suspended at some point in the session.
The mechanism is worth spelling out, because it explains why a liquidity rule turned into a criminal case within three weeks. A fund holding a thinly traded stock marks it at the last trade. If that fund, or a related one, is also the marginal buyer, the mark is more or less whatever the buyer decides it is. The fund’s net asset value looks healthy; strong returns pull in fresh money; the fresh money buys more of the same stock and pushes the mark higher. It all holds together right up to the point where somebody has to sell. The August rule made selling compulsory. If the prosecutors’ case holds up, the prices Borsa Istanbul discovered in September for names like Katilimevim, Gundogdu Gida and Destek Finans Faktoring were the first honest prints those stocks had seen in a long while.
So why pull the pin now? The answer is the benchmark. Back in August, managers running some of Turkey’s largest mutual funds were pressing the regulator and the finance ministry for tougher action, warning that the odd trading in parts of the market had put the country at risk of being dropped from major equity indices. Index providers care about one thing above the rest: can passive money buy the market at size and get out again. A market where a visible slice of the small-cap tape trades in a circle fails that test. Faced with a choice between its benchmark status and a boutique corner of its fund industry, the board picked the benchmark. That’s defensible. The execution wasn’t. Rule first, enforcement three weeks later meant the unwind hit before anyone had sorted the manipulated names from the ones that were merely illiquid, and circuit breakers don’t read charge sheets.
That is the contagion problem. Clean small caps with thin books got sold alongside the dirty ones, because the funds needed cash and took it wherever a bid existed. Thursday’s open showed the split clearly. The BIST 100 rose more than 1 percent, and yet trading still stopped briefly in over 50 companies on the all-share index as circuit breakers tripped. Large caps are finding buyers. The bottom of the market is still in price discovery, and it will stay there as long as funds are either frozen or selling to meet redemptions.
Then there’s the household. Turkish savers have spent years hunting for anything that beats lira inflation, and fund units were one of the easier answers on offer. A fund that is frozen or being liquidated is a poor place for that money to be stuck, and the political cost of retail losses tends to land on the regulator long before it lands on the managers now in custody. Expect pressure on the board to soften the tone quickly.
The number to watch isn’t the BIST 100. It’s whether the board gives funds more time to comply with the August 28 limits. Stretching the deadline would slow the forced selling and look like a retreat in front of the same index providers it was trying to reassure. Holding the line keeps pressure on fund values and on everything those funds still own. Either way the clean-up was overdue.
It’s just arriving all at once.