It was midnight on Friday 19th March when headlines started to hit the wires that the president of Turkey, Recep Erdogan, had once again replaced the central bank governor Naci Agbal.  Mr Agbal was replaced by Sahap Kavcioglu, who is a banking professor and former parliamentarian for Erdogan’s party.

Mr Agbal had done tremendous work rebuilding the credibility of the central bank by hiking rates to contain inflation.  A move which, in the past, had drawn much ire from the president.  The week preceding his dismissal, he had surprised the market by hiking rates 200bps to 19%.  A decision which was met with much fanfare by the market and commentators.  Indeed, the increasing of rates had allowed market participants to feel Turkey had returned to orthodox monetary policy.  With nominal rates at some of the highest in the world and central banks continuing to maintain easy policy, Turkey began to attract capital inflows.

All this work was undone by the President’s decision.  The question was how bad for the markets would this be? With the markets being shut, there would be no real way of knowing until 6pm Sunday at the Wellington open.

The Turkish Lira had closed on Friday around 7.20 against the USD.  Rumours started to appear on Twitter that the currency was trading between 7.75 and 8 at off exchange markets over the weekend.

In these types of situations, experience, an understanding of risk and where to source liquidity become invaluable.  Our Trading Team was in contact with clients immediately. Over the weekend much time was spent discussing views and plotting a course of action that the investment teams would take.

The most obvious action was to immediately reduce our client’s exposure to the Turkish Lira FX. But, as always with these types of political moves, this would turn out to be much harder than anticipated.

The currency market opened at 8.50 TRY to the USD on Sunday night London time (Wellington, New Zealand, open).  For those that have traded under such circumstances before can attest, the forward market completely breaks down under these conditions.  Anything longer than 1 week in the forward space can be very difficult, if not impossible, to cover.  The Trading Team, seeing the market reaction, decided to sit out of the trading until the following morning in London, to let the flows clear and allow the larger market makers to appear.  As expected, the Asia session was filled with Japanese investors exiting long TRYJPY positions which put further pressure on prices, but more frustratingly drained even more liquidity from the market.

The decision to hold through to London open was correct.  Spot was trading fell below 8 TRY to the USD when the Trading Team started to implement the covering of positions for our clients’ portfolios.  By identifying and carefully selecting broker counterparts who had the ability to source risk from multiple venues, the Trading Team initiated the repositioning.

The bigger issue, as expected, was the forward market.  With nothing trading past 1-month, the desk looked to roll every trade to the furthest point the market had to offer, limiting the exposure to only the move in points.  By reducing the gap between the forward and the terminal date of the trade, the amount the points can move by will be significantly less.  Thus, the portfolio will benefit from the P&L on the points move between 1 month and the expiration date as supposed to the spot level and expiration.  The logic applied here is that as liquidity returns to the market, the 1-month forwards can be rolled to the forward dates of the trades to close them entirely.  There remains the risk that capital controls can be imposed by Turkey, which would close the forward market down entirely, but this is a risk that the Trading Desk will continue to monitor closely to ensure minimal impact.

Throughout this scenario, Horus, our proprietary PMS/OMS system provided us with up-to-date risk information to assist the Trading Team in closing out the risk.  The middle and back office worked closely with the Trading Team to scrutinise the risk presentation and ensured that it was reviewed and presented in line with the Trading Teams requirements.  All the while our clients were given the latitude to monitor their portfolio’s other positions, with the comfort that the Trading Team were on top of the Turkish positions.

Quay trading was able to come up with an action plan and execute it in what were difficult market circumstances.  In a situation where managers were juggling many moving parts, Quay was able to step in and take ownership of risk mitigation and manage the process effectively and efficiently.

This year will no doubt be littered with landmines.  Contact us to see how we maybe able to help you.


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 Quay Partners Group delivers bespoke investment management solutions to independent hedge fund managers and family offices.

 Supun Ekanayake, Partner, has over 15 years’ experience in trading hedge funds.