This

article will address major amendments and novelties stipulated for foreign

exchange and foreign exchange denominated loans.

In the

first quarter of 2018, taking into consideration the current foreign exchange

risks, the Council of Ministers announced a decree and a communiqué amending

Decree No. 32 on Protection of the Value of Turkish Currency (published in the

Official Gazette dated August 11, 1989, No. 20249) (the "Decree No. 32") and the Communiqué on Decree No. 32 on Protection

of the Value of Turkish Currency (published in the Official Gazette dated

February 28, 2008 and numbered 26801) (the "Communiqué No. 2008-32/34"), in the Official Gazette dated January

25, 2018, which will be put into force on May 2, 2018.

Following

these amendments, the Central Bank of the Republic of Turkey (the "Central Bank") introduced the

Regulation on the Principles and Procedures regarding Monitoring of the

Transactions Affecting Foreign Exchange Position (published in the Official

Gazette dated February 17, 2018, No. 30335) (the "Monitoring Regulation") in order to regulate the principles

for gathering information from the companies having foreign exchange and

foreign exchange denominated loans in the amount of at least USD 15 million as

of the last business day of the relevant accounting period.

II. Amendments to Decree 32 and Communiqué No.

2008-32/34

Pursuant to

the recent amendment, individuals residing in Turkey will no longer be able to

obtain FX loans from banks and financial institutions in Turkey, in addition to

the previous restriction on obtaining FX loans from abroad.

Once

the amendment to Decree 32 enters into force, it will not be possible to extend

FX loans to a legal entity having residency in Turkey unless such entity has

foreign currency income or meets certain exceptions provided by the decree.

According to the amendment to Decree 32, it is possible

to obtain FX loans without generating foreign currency revenue if:

(a)

the borrower is public authority and institution,

bank and financial leasing company, factoring company or financing company;

(b)

the outstanding loan balance of the legal entities

having residency in Turkey is at least USD 15 million at the time of the utilization;

(c)

the FX loans are extended to finance an

internationally announced domestic tender or a public private partnership

project, to carry out a defense industry project approved by the

Undersecretariat for Defence Industries, to acquire certain machines and

devices or for a transaction within the scope of an investment incentive

certificate; or

(d)

the FX loan does not exceed the expected foreign

exchange revenue of legal entities having residency in Turkey, as certified by

such entity; or

(e)

the borrowing Turkish legal entities fulfill other

criteria to be subsequently determined by the Ministry in charge of the

Undersecreteriat of Treasury.

Other conditions

provided for foreign exchange loans (regardless of the source these were

obtained from, Turkey or abroad) of the borrowing legal entities having

residency in Turkey are as follows:

If

the loan balance of a borrower is less than USD 15 million on the utilization date

of the loan, the sum of the loan amount requested and the current loan balance of

the borrower shall not exceed the sum of its foreign exchange revenues pertaining

to the last 3 fiscal years.

If

the loan balance of a borrower is less than USD 15 million, the borrower shall prove

its foreign exchange revenues pertaining to the last 3 fiscal years with

applicable documents as certified by the public accountants.

If

it is determined at a later stage after utilization date of the loan that the loan

balance of the borrower exceeds the sum of its foreign exchange revenues

pertaining to the last 3 fiscal years, the exceeding part of the loan used through

the banks, financial leasing companies, factoring companies or financing

companies located in Turkey or their foreign branches shall be recalled and

converted into a Turkish Lira-denominated loan.

As another

novelty; banks, financial leasing companies, factoring companies and financing

companies having residency in Turkey have been authorized to provide foreign

exchange loans to each other or by way of attending to an international

syndication without any maturity limit. Previously, only banks were entitled to

engage in such transactions between each other.

In

addition, previously, banks were entitled to provide foreign exchange loans to

the individuals or legal entities having residency in Turkey for their business

needs, up to one third of their foreign exchange loans already provided for

financing of the export pertaining to investment goods. However, with the

recent changes, this practice has been revoked.

Before the

amendment, financing companies were allowed to provide foreign exchange

denominated loans to legal entities and individuals for commercial and

occupational purposes. However, the amendment entirely prohibits legal entities

and individuals residing in Turkey from obtaining foreign exchange denominated

loans from abroad or within Turkey.

III. The Monitoring Regulation

1. Purpose of the Monitoring Regulation

The main

purpose of the Monitoring Regulation is to follow up the relevant companies' transactions

affecting foreign exchange positions by the Central Bank by way of gathering

relevant documentation and laying a burden of certain notification liability on

those companies. With the Monitoring Regulation, the Central Bank aims to raise

effectiveness in the foreign exchange risk management.

2. Companies subject to the Notification Liability

The

Monitoring Regulation stipulates that if a company's sum of the foreign

exchange loans and the foreign exchange denominated loans obtained from Turkey

or abroad exceeds USD 15 million as of the last business day of the relevant accounting

period, such company shall be subject to notification liability before the

Turkish Central Bank starting from the following accounting period. In order

for calculation of the aggregate loan amount, the latest and applicable annual

financial statements of the company shall be taken into consideration. In this

respect, loan calculations will be based on the foreign exchange buying rates published

in the Official Gazette, on the last business day of the relevant accounting

period. If the aggregate loan amount of the company goes down the foregoing

threshold (i.e. USD 15 million), the company's notification liability shall end

as of the following fiscal year.

3. Notification Procedure and Timing

A company

subject to the notification liability should convey the relevant data to the

Central Bank's Systemic Risk Data Monitoring System (the "System") in line with the financial reporting framework within the

scope of data form. Exact content of the data form is specified and explained

in detail within the disclosure form and user guidelines of the Central Bank.

Notifications

to the Central Bank should be made as follows; (i) by the end of the first

month following each quarterly interim account period, and (ii) by the end of

third month following the annual accounting period.

4. Accuracy Check and Timing

The

Monitoring Regulation also stipulates an accuracy check mechanism for the data

conveyed by the companies to the System. In this respect, the accuracy check is

conducted by (i) duly authorized independent auditors and (ii) the Central Bank

separately.

For the

accuracy check to be conducted by duly authorized independent auditors, a company

under the notification liability should enter into an audit agreement with an

independent auditor. This agreement should be signed within 60 days as of

commencement date of the company's notification liability (i.e April 18, 2018).

Within the scope of accuracy check, the independent auditor assesses accuracy

of the data conveyed by the company to the System based on the company's

notification liability. The audit should be completed until May 31 of the

following year. During the audit, in

case the independent auditor detects any mistake other than any insignificant

discrepancies regarding the data, it may request from the company to make the necessary

revisions. This being the case, the company should complete the necessary

revisions within 5 business days upon the independent auditor's request. If so,

the independent auditor will prepare the audit report with a positive opinion. However,

if the company does not complete the necessary revisions within 5 business

days, then the independent auditor will prepare the audit report with a

negative opinion. If the independent auditor cannot audit the mandatory data

for any reason, it should not proceed with the audit duty and explain the

reason(s) of such leave in written. All of the correspondence pertaining to the

foregoing process should be conducted over the System.

In addition

to the audit to be conducted by independent auditors, the Central Bank also conducts

cross check of the data conveyed by the companies to the System.

5. Applicable Sanctions in case of Non-compliance

If

companies do not duly comply with the requirements of the Monitoring

Regulation, the relevant individuals and/or executives of the companies may be

imposed judicial monetary fine from TRY 20,000 to TRY 200,000.

The Central

Bank will notify the independent auditors who prepare the audit report with a positive

opinion despite the fact that there is inaccurate and missing data or fail to comply

with the required timings stipulated in the Monitoring Regulation, to the

Public Oversight Accounting and Auditing Standards Authority.

6. Effective Date of the Monitoring Regulation

The

Monitoring Regulation shall be in force as of its publication date, February

17, 2018.

IV. Conclusion

In the

light of the foregoing, considering current needs of the free market economy, relevant

public authorities of the Republic of Turkey aim to protect the Turkish

borrowers' foreign currency positions and projections, particularly small and

medium sized enterprises, and to monitor various foreign exchange risks of

Turkish borrowers by constituting a local database.