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Regulators in India and Europe are at loggerheads after the European Securities and Markets Authority (ESMA) withdrew recognition for six India clearing houses citing “no cooperation agreements”. The point of contention is a clause in the European Market Infrastructure Regulation under which the ESMA can supervise third-country clearing corporations (TC-CCP).
However, the idea of a foreign regulator exercising its powers on an Indian agency does not sit well with the Reserve Bank of India (RBI), which has called the ESMA rules intrusive and detrimental to market developments. If unresolved, the issue between the ESMA and Indian regulators would prevent the buying and selling of currency, commodities, bonds and equities in India by European institutions.
India clearing house logjam with EU
The India clearing houses that have been derecognised by the ESMA are Clearing Corporation of India, Indian Clearing Corporation Ltd, NSE Clearing Ltd, Multi-Commodity Exchange Clearing, India International Clearing Corporation Ltd and NSE IFSC Clearing Corporation Ltd.
The ESMA wants the power to monitor, supervise and audit the Indian CCPs, two of which are directly regulated by the RBI and the Securities and Exchange Board of India. “As of the date of application of the withdrawal decisions, these TC-CCPs will no longer be able to provide services to clearing members and trading venues established in the EU,” ESMA said in a release.
The European regulator has deferred the application of the withdrawal decision until April 30, 2023, to protect European investors in India. Post this date EU banks will either have to discontinue their business with Indian CCPs or set aside nearly 50 times more capital to carry counterparty risks themselves and set up a trade clearing mechanism.
The ESMA’s regulation stems from the 2008 financial crisis, giving it the responsibility of inspecting all the CCPs that European banks deal with around the world.
The RBI has made its stand clear and wants European banks to deal with the regulator back home, resulting in EU banks cutting bilateral ties with other banks and avoiding the Clearing Corporation of India, which as the middleman for transactions in government bond trade, foreign exchange forwards, repos and interest rate swaps.
On the other hand, SEBI is negotiating with ESMA and the Bank of England to investigate NSE Clearing Corporation’s books only in a joint capacity with SEBI.
Some of the European banks affected by this move are Credit Suisse, Societe Generale, Deutsche Bank and BNP Paribas as they would not be able to provide clearing and settlement facilities to their European clients. The derecognition move could prove detrimental to both sides, as Europe makes up 20% of the foreign investors registered in India.
The Bank of England has also taken a similar stance, and banks such as HSBC, Barclays Plc and Standard Chartered might be affected after July 2023.
Back in 2013, the ESMA tried to impose a similar ban on India clearing houses preventing European banks from dealing with India clearing houses until they were approved by the ESMA. In response, India told ESMA that Indian CCPs will derecognise European banks as custodians, which would have resulted in their business being taken other by other foreign banks. The ESMA had then stepped back on its demands.
