Introduction

The reliable functioning of collective investment schemes in capital markets depends not only on the professional management of the portfolio, but also on the effective protection, monitoring and control of the assets comprising such portfolio. In this respect, portfolio custody service constitutes one of the key mechanisms ensuring investor protection, segregation of fund assets and the secure execution of capital market transactions in relation to investment funds and investment companies.

Portfolio custody service is regulated under the Capital Markets Board’s Communiqué No. III-56.1 on Principles regarding Portfolio Custody Services and Institutions Providing Such Services (“Communiqué”). The Communiqué sets forth the scope of portfolio custody service, the institutions authorised to provide such service, the duties and liabilities of portfolio custodians, the portfolio custody agreement, use of sub-custodians, independence and confidentiality obligations, and the principles relating to internal control, risk management and audit.

Although portfolio custody service may at first appear to be a technical service concerning the safekeeping of assets, it is, in essence, a central capital markets law institution in terms of protecting fund assets, monitoring the compliance of transactions with applicable legislation and fund documentation, controlling cash flows and safeguarding investors’ interests.

I. Legal Nature of Portfolio Custody Service

Pursuant to Article 4 of the Communiqué, assets included in the portfolios of collective investment schemes that are capable of being kept in custody must be held with portfolio custodians in accordance with the principles set out under the Communiqué. Within this framework, portfolio custody service is defined as the safekeeping of financial assets belonging to collective investment schemes or the keeping of their records, verification and monitoring of the ownership of other assets, maintenance of relevant records, control of the execution of transactions relating to asset and cash movements, and performance of the other duties prescribed under the Communiqué.

As follows from this definition, portfolio custody service is not limited to a passive safekeeping function. The portfolio custodian not only monitors where and how the assets belonging to the collective investment scheme are held, but also controls the ownership of such assets by the relevant collective investment scheme and the compliance of transactions with the fund rules, prospectus, articles of association and capital markets legislation.

In this respect, the portfolio custodian performs a supervisory and control function alongside, yet independently from, the portfolio management company. Accordingly, portfolio custody service operates as a complementary legal safeguard mechanism for investor confidence, protection of fund assets and transparency of capital market transactions.

II. Institutions Eligible to Act as Portfolio Custodian

Under Article 3 of the Communiqué, a portfolio custodian is defined as Takasbank and banks or intermediary institutions authorised by the Capital Markets Board to provide portfolio custody service. Pursuant to Article 6 of the Communiqué, Takasbank and banks or intermediary institutions authorised by the Board may provide portfolio custody service, provided that they satisfy the conditions set out under the Communiqué.

Banks and intermediary institutions wishing to provide portfolio custody service must apply to the Board and meet the organisational, technical, operational and financial adequacy requirements prescribed under the Communiqué. In this regard, the relevant institution must be a custody member of Takasbank and the Central Securities Depository of Türkiye, namely Merkezi Kayıt Kuruluşu A.Ş. (“MKK”), have established internal control procedures and a risk management system, have an organisational structure capable of minimising conflicts of interest and ensuring the required independence, possess adequate technical equipment, software and personnel, and establish secure information technology systems.

Pursuant to Article 6 of the Communiqué, banks and intermediary institutions that will act as portfolio custodians must also be authorised to provide general custody services under the Capital Markets Board’s regulations on investment services and activities. As regards intermediary institutions acting as portfolio custodians, the Communiqué further provides that such institutions may not provide share trading brokerage services to the collective investment scheme to which they provide portfolio custody service. This rule is significant in terms of mitigating conflicts of interest.

III. Principle of Segregation of Fund Assets

The principle that assets belonging to a collective investment scheme must be kept separate from the assets of the portfolio management company, the portfolio custodian and other persons lies at the core of portfolio custody service. Pursuant to Article 4 of the Communiqué, financial assets eligible for custody must be held in accounts opened in the name of the relevant collective investment scheme, separately from the portfolio custodian’s own accounts, in a manner clearly identifying their ownership by such collective investment scheme.

Article 7 of the Communiqué further supports this principle by requiring the portfolio custodian to ensure that assets belonging to collective investment schemes are kept separately, in a manner that clearly identifies their ownership by the relevant collective investment scheme and prevents loss or damage. The portfolio custodian may not hold assets belonging to collective investment schemes in its own possession or in its own accounts held with other institutions, nor may it associate such assets with its own balance sheet.

This segregation principle is of critical importance for the protection of fund assets. Clear identification of the ownership of assets in the records ensures both investor protection and the segregation of fund assets from other assets in the event of disputes, attachment, insolvency or operational risk.

IV. Principal Duties of the Portfolio Custodian

Article 5 of the Communiqué sets out the duties of the portfolio custodian in detail. Accordingly, the portfolio custodian is responsible for ensuring that the issuance and redemption of participation units on behalf of investment funds comply with applicable legislation and the fund rules; that the issuance and redemption of shares of variable capital investment companies comply with applicable legislation and the articles of association; that the unit participation value or unit share value is calculated in accordance with the relevant regulations; and that portfolio transactions comply with applicable legislation and fund documentation.

The duties of the portfolio custodian are not limited to safekeeping of assets. The portfolio custodian also controls asset purchase and sale transactions, portfolio composition, transactions, transaction limits, portfolio restrictions and compliance with the investment strategy of collective investment schemes. In particular, the supervisory function of the portfolio custodian is significant in respect of transactions that may be contrary to the investment strategy and limitations set out in the fund rules, prospectus or articles of association.

Pursuant to Article 5 of the Communiqué, if the portfolio custodian identifies a non-compliant transaction, it must request the relevant collective investment scheme or portfolio management company to remedy such transaction. If the breach is not remedied, the portfolio custodian must notify the Board without delay. If loss is incurred by the collective investment scheme due to the portfolio custodian’s failure to fulfil this obligation, the portfolio custodian will also be liable for compensation of such loss.

V. Monitoring of Cash Flows and Reconciliation Obligation

One of the key elements of portfolio custody service is the regular monitoring of the cash flows of the collective investment scheme. Pursuant to Article 5 of the Communiqué, the portfolio custodian is required to ensure that all cash flows of the collective investment scheme are properly monitored, that payments made by holders of participation units or shares during subscription are transferred to the portfolio of the collective investment scheme, and that all cash belonging to the collective investment scheme is monitored in accounts opened in the name of such collective investment scheme.

In this context, the portfolio custodian must establish the necessary procedures for reconciling all cash flows and ensure that such reconciliations are conducted at appropriate intervals. It must also implement procedures enabling the timely detection of significant cash flows or cash flows that are inconsistent with the operations of the collective investment scheme.

Pursuant to Article 7 of the Communiqué, the portfolio custodian must carry out, on a daily basis, reconciliation of the assets subject to custody with the institutions providing central custody services for such assets and with the portfolio management company or investment company. This daily reconciliation obligation demonstrates that portfolio custody service is not a periodic control activity, but rather a continuous supervisory function.

VI. Portfolio Custody Agreement between the Portfolio Management Company and the Portfolio Custodian

Pursuant to Article 9 of the Communiqué, a portfolio custody agreement must be executed between the portfolio custodian and the portfolio management company or investment company. This agreement must include the powers and responsibilities of the parties, the manner in which the information flow necessary for the portfolio custodian to perform its duties will be ensured, and the minimum elements set out in the annex to the Communiqué.

The portfolio custody agreement should not be regarded merely as a commercial service agreement. It is the primary legal document regulating the information flow, reporting mechanism, operational processes, allocation of responsibilities and coordination between the parties, all of which are necessary for the portfolio custodian to effectively perform its statutory duties.

Pursuant to Article 9 of the Communiqué, the portfolio custody agreement may not include any provision contrary to the Capital Markets Law or the Communiqué. Therefore, the parties may not, by relying on freedom of contract, restrict the responsibilities of the portfolio custodian arising from the Communiqué or circumvent the mandatory framework envisaged for investor protection.

VII. Replacement of the Portfolio Custodian

The replacement of the portfolio custodian is also specifically regulated under the Communiqué. Pursuant to Article 10 of the Communiqué, in the event that the portfolio custody agreement terminates or the portfolio custodian ceases to satisfy the conditions required under the Communiqué, the portfolio management company or investment company must execute an agreement with another portfolio custodian meeting the qualifications set out in the Communiqué and approved by the Board.

The responsibility of the former portfolio custodian continues until the new agreement enters into force. Furthermore, if the portfolio management company or investment company wishes to replace the portfolio custodian with which it has executed an agreement, or if the portfolio custodian wishes to terminate the agreement, such situation must be notified to the counterparty and the Board, together with the relevant reasons, 90 days in advance.

This rule is important for ensuring continuity of custody services. An abrupt or unplanned interruption in portfolio custody service may create significant risks in terms of fund operations, investor transactions and monitoring of assets.

VIII. Liability of the Portfolio Custodian

Article 11 of the Communiqué regulates liability arising from portfolio custody service. Accordingly, the institution providing portfolio custody service is liable for losses caused to the portfolio management company and participation unit holders in investment funds, and to the investment company in investment companies, due to its failure to fulfil its obligations.

However, the liability of the portfolio custodian is not unlimited. Pursuant to Article 11 of the Communiqué, the portfolio custodian is not liable for losses arising from the management of the portfolios for which it provides custody service or from market price movements. This distinction is important. The portfolio custodian is not responsible for investment decisions or market risk, but for breach of its obligations concerning custody, record-keeping, control, reconciliation and compliance monitoring.

The Communiqué further provides that the portfolio custody agreement may not include provisions narrowing the scope of the portfolio custodian’s responsibilities as determined under the Capital Markets Law and the Communiqué. This provision prevents the statutory liability of the portfolio custodian from being excluded or restricted through contractual arrangements.

IX. Use of Sub-Custodians

Article 12 of the Communiqué regulates the principles applicable to the use of sub-custodians. Portfolio custodians other than banks may keep the assets held in their custody with other portfolio custodians authorised by the Board, provided that there is an objective reason, the approval of the portfolio management company or investment company is obtained, and effective supervision is ensured.

However, the use of a sub-custodian does not eliminate the primary obligations of the portfolio custodian under the Communiqué. The portfolio custodian may not transfer its duties under Article 5 of the Communiqué. In addition, the sub-custodian is jointly and severally liable with the portfolio custodian for losses caused, in respect of the assets for which it provides custody service, to the portfolio management company and participation unit holders in investment funds, and to the investment company in investment companies.

This regulation aims to prevent sub-custody arrangements from weakening investor protection. The portfolio custodian must ensure that the accounts and records of the sub-custodian are segregated, that regular reconciliations are performed, and that an adequate organisational structure is established to minimise risks arising from misconduct, fraud, mismanagement, incomplete records or negligence.

X. Independence and Confidentiality

In order for portfolio custody service to be performed effectively, the portfolio custodian must act independently from the portfolio management company and the investment company. Pursuant to Article 13 of the Communiqué, the managers of the portfolio custodian and the persons authorised to represent and bind the portfolio custodian may not be shareholders, managers or representatives of the portfolio management company managing the portfolio of the relevant collective investment scheme. Likewise, shareholders, managers and representatives of the portfolio management company may not act as managers or representatives of the portfolio custodian.

Article 13 of the Communiqué further provides that, while performing its duties, the portfolio custodian must act independently from the portfolio management company and the investment company and solely in the interests of participation unit holders and shareholders.

In addition, pursuant to Article 14 of the Communiqué, the officers and employees of the portfolio custodian may not disclose any confidential information obtained in the course of their duties regarding the collective investment schemes to which they provide portfolio custody service, nor may they use such information for their own benefit or for the benefit of third parties. This obligation is of particular importance with respect to fund strategies, investor information, portfolio composition and transaction information.

1. Exercise of Administrative and Financial Rights

Pursuant to Article 15 of the Communiqué, the portfolio custodian may, subject to the authority granted under the portfolio custody agreement and in accordance with the instructions of the portfolio management company or investment company, provide certain services relating to the exercise of administrative and financial rights on behalf and for the account of the collective investment scheme.

Within this scope, the portfolio custodian may provide services such as collection or payment of principal, interest, dividends and similar income arising from financial assets, exercise of pre-emptive rights and exercise of voting rights attached to shares.

However, the role of the portfolio custodian in the exercise of such administrative and financial rights is determined within the framework of the instructions of the portfolio management company and the authorisation granted under the portfolio custody agreement. Therefore, both the fund documentation and the portfolio custody agreement should be carefully reviewed in relation to the exercise of administrative and financial rights.

XII. Internal Control, Risk Management and Audit

The reliable performance of portfolio custody service requires a robust internal control, risk management and audit structure. Pursuant to Article 18 of the Communiqué, the internal control system must be established in a manner ensuring that all business and transactions relating to portfolio custody service are carried out regularly, efficiently and effectively in accordance with applicable legislation and workflow procedures.

The internal control system must ensure the integrity of accounts and records, the timely and accurate availability of information in data systems, and the prevention and detection of errors, fraud and irregularities. The Communiqué expressly adopts the principle of segregation of duties by providing that the operation and control of custody transactions may not be performed by the same person.

Pursuant to Article 19 of the Communiqué, the risk management system must include the identification, updating, assessment, measurement and control of the principal risks covered by portfolio custody service. The risk management system must be established in accordance with the size and structure of the collective investment scheme to which portfolio custody service will be provided, as well as the nature and risk level of the assets subject to custody.

Article 20 of the Communiqué regulates the inspection system. Accordingly, the activities of the portfolio custodian within the scope of custody service must be audited by the inspection unit at least once a year, particularly in terms of compliance with legislation and the functioning of the internal control system, and the results must be documented in a report submitted to the board of directors of the portfolio custodian.

XIII. Independent Audit and Board Supervision

Pursuant to Article 16 of the Communiqué, an independent audit must be conducted at least once a year to determine the existence of the assets included in the portfolios of collective investment schemes for which the portfolio custodian provides service. A copy of the audit report must be submitted to the Board within six business days.

Article 17 of the Communiqué provides that the activities of the portfolio custodian under the Capital Markets Law and the Communiqué are subject to supervision by the Board. The Board is authorised to request from the portfolio custodian all information obtained in the course of the performance of its duties.

These audit and supervision mechanisms demonstrate that portfolio custody service is not left solely to the contractual relationship between the parties, but is subject to a public law control regime supported by Board supervision, independent audit and internal audit processes.

XIV. Role of Takasbank

The Communiqué also assigns a specific role to Takasbank. Pursuant to Article 22 of the Communiqué, Takasbank has certain control obligations even in respect of collective investment schemes for which it does not provide portfolio custody service. In this context, Takasbank checks whether the unit participation value of an investment fund or the unit net asset value of an investment company is calculated in accordance with the relevant legislation and fund documentation, and whether portfolio transactions comply with the applicable legislation.

If Takasbank detects any non-compliance, it informs the portfolio custodian so that the necessary measures may be taken and notifies the Board. If the portfolio custodian fails to take the required measures, Takasbank reports its findings to the Board.

This rule shows that Takasbank is not merely part of the custody infrastructure within the portfolio custody system, but also performs a complementary supervisory function in relation to valuation, transaction control and regulatory compliance.

Conclusion

Portfolio custody service is a fundamental institution for the protection of investors, segregation of fund assets and secure execution of capital market transactions in collective investment schemes. The Communiqué regulates portfolio custody service not merely as the safekeeping of assets, but as a broad set of obligations encompassing record-keeping, control, reconciliation, valuation supervision, monitoring of cash flows, control of portfolio restrictions and notification of non-compliance.

The portfolio custodian is an important actor that acts independently from the portfolio management company, safeguards investor interests and monitors the compliance of fund operations with applicable legislation. In this respect, portfolio custody service constitutes a complementary control mechanism that promotes trust, transparency and accountability within the fund management ecosystem.