are recognized by The International Organization of Securities Commissions (IOSCO),
only some of them could be measured. Value-at-risk models used for measuring the
exposure to market risks and internal rating models to measure the credibility of
borrowers are among these tools used in measurement of the given risks.
Security lending in Turkey can be executed in either Securities Lending and
Borrowing Market (referred as OPP after the Turkish name “Ödünç Pay Piyasası”
hereafter) operated by the I
˙stanbul Settlement and Custody Bank Inc. (Takasbank) or as
over-the-counter (OTC) transactions via brokerage rms. The brokerage houses that are
eligible to operate in Turkey can execute transactions in the OPP on behalf of their
customers or themselves; the constraints on the type of securities and the collaterals
related to transactions are discussed in detail in the “Market Risk” section. Takasbank
acts as the central counterparty (CCP) in every transaction in the market: it aims to
create an effective and secure platform for lenders and borrowers, as it acts as the buyer
for every offer and as the seller for every bid in every transaction for both matched
parties. This practice practically eliminates credit risk for the lender while creating
credit risk for the CCP.
Since 2 September 2013, Takasbank has been acting as the CCP in OPP and thus,
each and every transaction in OPP creates a credit exposure to Takasbank, in addition
to other risk types. Operating a security lending market, even without the CCP role,
creates a wide variety of risks for both the market operator and the participants.
However, it would be fair to assume that the greatest risk a CCP is exposed to is the
credit risk. As is the case with every other for-prot lending institution, CCP should nd
an optimum level of credit risk to maximize its prots: it cannot avoid credit risk and
expect to make prots and it cannot be exposed to too much credit risk as defaults may
erode all prots and even capital. As such, Takasbank has an internal rating model to
assess the credibility of the market participants to set credit limits and created a
dynamic collateral system in which the haircuts of the collaterals provided by the
borrowers can change in accordance with price movements. However, this internal
rating model ignores market-wide factors that can act as incentives for borrowers to
default for higher returns. Accordingly, we aim to develop a default indicator in
organized security lending markets in Turkey that focuses on market information such
as liquidity, return and volatility of the underlying asset.
“Managing the credit risk” is an issue as old as the concept of “credit” itself. The
classical approach depends almost exclusively on the analysis of the experts who makes
use of the character, capital, capacity and the collateral of the potential debtor (Altman
and Saunders, 1998). To overcome the subjectivity of the experts involved, most
nancial institutions are now using more objective methods to assess credibility.
Methods chosen range from purely statistical models where all the limit decisions are
made by the system to expert systems where little data are available on debtors and
underwriters use models to guide or drive decisions (Anderson, 2007).
Security lending, in its essence, has differences from bank loans. A borrower who has
both the motive and the cash needed to deliver the security borrowed can still default, if
he/she cannot acquire the security in time. This leads to an interesting conundrum from
the credit risk management perspective; the very fact that debtors who are both willing
and able to pay can still default. The added incentive to voluntarily default a lending
contract, arising from the possibility of acquiring the security with a lower cost in times
of extreme price drops of the security borrowed, just further complicates the default