Contracts of Guarantee Relating to Capital Market Instruments

Guarantee contracts, which are the fundamental supporters ensuring the continuity of debtor-creditor relationships, are subject to specific principles inherited from Roman law. One of those principles is "lex commissoria," which prohibits the forfeit of the pledge if a loan is not repaid. Article 47 (Contracts of Guarantee Relating to Capital Market Instruments) of Capital Market Law numbered 6362 ("CML") offers a new and remarkable regulation that enables the guarantee taker to assume the ownership of the pledged capital market instruments under specific circumstances. This article reviews the guarantee contracts under Article 47 of the CML.

The regulation and the reasoning under Article 47 of CML

The lex commissoria rule aims to protect the guarantee provider in cases where the guarantee amount is higher than the debt amount.[1] Turkish Civil Code numbered 4721 also reflects this principle, which has been inherited from Roman law, for movable and immovable pledges. However, Article 47 of the CML enables a practice that is different from the lex commissoria rule. The reasoning of such Article states that the said Article has been drafted in compliance with the UNIDROIT (International Institut for the Unification of Private Law) rules regarding international private law principles on guarantee contracts, which protect the rights of the guarantee provider and the guarantee taker.[2] The UNIDROIT and European Union have initiated the drafting of international and national regulations in order to provide the required basis for cross-border financial transactions, and to protect the trust in the market.[3] Article 47 of the CML is one of the most remarkable provisions, which reflects the above-mentioned international principles. Another important resource of international rules in this regard is "the UNIDROIT Convention on Substantive Rules for Intermediated Securities," adopted on October 9, 2009 ("Geneva Convention").

The principles on guarantee contracts under Article 47 of CML

Pursuant to Article 47, the contracts of guarantee with underlying capital market instruments that are monitored in a dematerialized form by the Central Registry Agency Incorporation ("CRA") shall be made in written form. The ownership of the capital market instruments underlying these contracts of guarantee may be transferred to the guarantee taker according to legal procedures in the framework of the contract, or it may remain with the guarantee provider. This provision complies with the Geneva Convention, which distinguishes guarantee contracts into two groups where the ownership of the guarantee has been "transferred to guarantee taker," or "remains with the guarantee provider."[4] In cases where there is no provision about this issue in the contract, the ownership of the capital market instruments underlying the guarantee shall not be deemed to be transferred to the guarantee taker. This provision is also in compliance with the principle of clarity and definiteness in pledge law.

Under Paragraph 2 of Article 47, contracts of guarantee, where the ownership is transferred to the guarantee taker, the guarantee taker shall take over the ownership rights of the capital market instruments underlying the guarantee, by complying with legal procedures at the moment of the conclusion of the contract of guarantee. Upon the termination of the contract of guarantee, the guarantee taker shall return the ownership of the underlying capital market instruments, or their equivalents, to the guarantee provider.

The guarantee contract where the ownership remains with the guarantee provider has been regulated under Paragraph 3 of Article 47. Accordingly, the parties shall determine the scope in which the guarantee may be used. Upon the termination of the contract of guarantee, the guarantee taker shall return to the guarantee provider the underlying capital market instruments, or their equivalents, if he/she has used these instruments.

The rights given to guarantee taker under Article 47/4 of CML

Paragraph 4 of Article 47 includes a regulation that may be deemed as an exception of the lex commissoria rule, and enables the guarantee taker to receive the ownership of the pledged capital market instrument under certain circumstances, and to deduct the value of these instruments from the debts of the guarantee provider.

This paragraph may be applied in cases where a receivable would be met from the guarantee (i) in case of default, or (ii) due to reasons foreseen in the law or the provisions of the contract. In these circumstances, the guarantee taker becomes entitled to certain rights (depending on which party will have the ownership of such instruments) without the obligation to make any notification or warning, allow for any period, permission or approval from judicial or administrative authorities, without the obligation to fulfil any pre-condition, such as liquidation of the guarantee, through auctioning or another method.

In contracts where the ownership has been assigned to the guarantee taker, and unless otherwise provided in the contract, the guarantee taker may sell the capital market instruments underlying the guarantee and meet his receivables from the sale amount, provided that this value is not below their market value, or the right to deduct the value of these instruments from the debts of the guarantee provider.

In contracts where the ownership remains with the guarantee provider, the guarantee taker is entitled to sell the capital market instruments underlying the guarantee to meet his receivables, provided that this value is not below the market value, or the right to deduct the value of these capital market instruments from the obligations of the debtor, by assuming ownership of these instruments. Therefore, it is possible to say that this regulation offers a different method than the lex commissoria rule and enables the guarantee taker to take over the ownership of such instruments. However, it shall be noted that this alternative, and the evaluation method of the capital market instrument, shall be explicitly stated in the guarantee contract. This requirement also complies with the principle of clarity and definiteness under the pledge law.

Conclusion

Article 47 of the CML envisages a practice that differs from one of the main principles in the pledge law, lex commissoria, and offers special provisions for the pledge of the capital market instruments due to their complex nature. This Article offers the guarantee taker different rights depending on the assignment of ownership of pledged instruments. This Article also brings Turkish law into conformity with international rules, such as UNIDROIT.

[1] Sirmen, Lale: Eşya Hukuku, Ankara, 2016, p. 654.

[2] Reasoning of Article 47 of CML - https://www.tbmm.gov.tr/sirasayi/donem24/yil01/ss337.pdf (Access date: 29.03.2020).

[3] Benli, Erman: “Sermaye Piyasası Araçlarını Konu Alan Teminat sözleşmelerinde Yeni Düzenlemenin Gerekçeleri”, Banka ve Finans Hukuku Dergisi, No. 21, 2017, p. 218.

[4] Ergincan, Yakup; Yayla, Ümit: “Sermaye Piyasalarında Teminat ve Ödünç İşlemlerinin Hukuki Niteliği ve Sonuçları”, Maltepe Üniversitesi Hukuk Fakültesi Dergisi, V. 11, No. 2, 2012, p. 115-116.