Another move, another confusion (at least speaking for myself)

TURKEY - In Brief 19 Dec 2019 by Murat Ucer

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In a surprise move yesterday after market-close, Turkey’s banking watchdog, the BRSA, introduced a new regulation/restriction on some derivative transactions. As explained in the BRSA statement (link here), this entails the following: “Total notional amount of banks' currency swaps, forwards, options and other similar products with non-residents with remaining maturity of seven days or less where at the maturity date, local banks pay TRY and receive FX in exchange (right way) should not exceed 10% of the bank’s most recently calculated regulatory capital.”Because the restriction came at a time of lira weakness yet on the lira sell-side leg of the transaction, it led to some confusion initially, but the move does not seem directly linked to lira weakness or targeted at addressing lira weakness, as far as we can see. There may surely be some ulterior motives here that I, admittedly, may be missing --which I will keep investigating – but the regulator’s chief objective seems to be to divert local banks’ F/X liquidity from London market to the CBRT, possibly to dress-up net reserves (click here and here for some media coverage along similar lines.) This was confirmed in a way today with the opening of a three-month swap auction by the CBRT for $1 billion. In fact, if anything, because the London market was left flushed with lira liquidity, interest rates in the offshore O/N market collapsed, which seems to have partly contributed to further lira weakness today.Bottom line? To me – well, I am a macro economist or a generalist after all -- these sorts of interventions may perhaps work to achieve a very specific and targeted purpose in the short-term, but they often come with...