Türkiye's equity market is under increased scrutiny after nearly a week of investigations into several major asset management companies and funds over allegations of market manipulation and a sell-off.
Turkish authorities and regulators moved to swiftly respond to a sell-off that pushed the benchmark index lower last week by introducing several measures, including replacing more than a quarter of the constituents of the BIST 100 index.
What happened last week?
Türkiye's main share index dropped more than 8% last week, for its worst performance in months – after the sales and attempts at exit by investors concentrated in several funds – that were until then running high, promising sharp returns.
Last Monday, losses had accelerated as concerns grew over investment funds heavily exposed to thinly traded stocks. Analysts said some funds were forced to sell liquid holdings to meet redemptions, driving broader declines and triggering further investor withdrawals.
Pusula Portföy became the first asset manager to say it could not meet redemptions in some funds last Tuesday. The benchmark index fell around 5.5% the following day. Tera Portföy, which had agreed to acquire Pusula the previous Sunday, disclosed similar problems in some of its own funds after markets closed on Wednesday.
What actions were taken in response?
Turkish authorities moved to contain the fallout, with the Financial Stability Committee holding an emergency meeting and the central bank increasing repo funding from a few billion Turkish liras to TL 603 billion ($12.35 billion) while raising banks' interbank borrowing limits tenfold.
The Capital Markets Board (SPK) eased margin trading requirements until Oct. 2, filed criminal complaints over alleged market manipulation, including against executives at Pusula and Tera, and ordered the liquidation of 131 funds managed by seven asset managers.
On Tuesday, Türkiye's stock exchange, Borsa Istanbul, announced it will replace more than a quarter of the constituents of its benchmark BIST 100 index.
On Wednesday, the SPK said in a written statement that the number of individual investors in the 131 funds slated for liquidation is 455,758.
How did risks unfold?
In late August, the Capital Markets Board introduced new limits on holdings of illiquid stocks and stricter requirements for portfolio management companies.
The limits cap exposure to thinly traded stocks at between 2% and 8% and are being phased in through October, November and December.
Analysts said the changes forced some funds to reassess positions and liquidity needs, prompting selling in thinly traded stocks and helping drive last week's broader market sell-off.
Türkiye has hundreds of listed companies, but relatively few are large, and some businesses remain unlisted, tightly controlled by founding families, or have relatively small free floats.
As a result, investors are often concentrated in a relatively small pool of stocks. Critics say this can amplify volatility, complicate price discovery and distort markets when large funds build substantial positions in illiquid shares.
International index providers have earlier raised concerns about the equity market and warned that failure to make credible progress on transparency and alleged coordinated trading could lead to a review of the country's market classification.
Does this pose a systemic risk?
Market shifts are occasional, while financial stress can pressure the lira and raise borrowing costs, helping explain why authorities often respond swiftly to episodes of market turbulence.
However, analysts do not see the latest episode as a systemic threat.
"It's a mini crisis. This can be contained. It's going to hurt some retail investors, but it's not a system-wide issue," said Emre Akçakmak, senior advisor at East Capital.
"This is not a country crisis, or a macro crisis," he said.
Authorities have also underscored that risks are "temporary and manageable."