Sebi, RBI yet to reach pact with EU on action against clearing bodies

Mumbai, November 9, 2022 

Sources, however, said the Reserve Bank of India (RBI) — also one of the regulators for clearing bodies — is yet to reach any agreement with ESMA, which has sought to inspect these six Indian clearing corporations or central counterparties (CCPs).

The Securities and Exchange Board of India (Sebi) is at a fairly advanced stage of negotiation with the European Securities and Markets Authority (ESMA) to iron out the differences in the supervision of six Indian clearing corporations, which were de-recognised by the European Union’s financial markets regulator last week.

Sources, however, said the Reserve Bank of India (RBI) — also one of the regulators for clearing bodies — is yet to reach any agreement with ESMA, which has sought to inspect these six Indian clearing corporations or central counterparties (CCPs). On October 31, ESMA had said it will withdraw the recognition of six Indian central counterparties (TC-CCPs) — the Clearing Corporation of India (CCIL), the Indian Clearing Corporation Ltd (ICCL), NSE Clearing Ltd (NSCCL), Multi Commodity Exchange Clearing (MCXCCL), India International Clearing Corporation (IFSC) Ltd (IICC) and NSE IFSC Clearing Corporation Ltd (NICCL) — under the European Market Infrastructure Regulation (EMIR) regime.

“Sebi has fairly reached an advanced level of understanding with ESMA but the RBI is yet to finalise the clause (to inspect CCPs),” said an official. While several options are being considered, one of the solutions to sort out the issues between ESMA and the Indian regulators – Sebi, RBI and International Financial Services Centres Authority (IFSCA) – could be setting up a nodal CCP.

CCPs perform two main functions as the intermediary in a transaction — clearing and settlement — and guarantee the terms of a trade. CCP is a system provider that, by way of novation, interposes between system participants in the transactions admitted for settlement, thereby becoming the buyer to every seller and the seller to every buyer, for the purpose of effecting settlement of their transactions. A CCP is authorised by the RBI to operate in India under Payment and Settlement Systems Act, 2007.

Some of the major European banks dealing in the domestic forex, forward, swap, equities and commodities markets include Societe Generale, Deutsche Bank and BNP Paribas.

Derecognition of these six CCPs will pose a threat to the existence of European banks as they will not be able to provide any clearing and settlement facilities to their clients in India. In the absence of this arrangement, the European lenders will have to set aside a huge capital to trade, market source said.

When contacted, Sebi and RBI did not comment on the ESMA action.

“After conducting its assessment, ESMA established that not all of the cumulative conditions under EMIR for the recognition of these six TC-CCPs are met, as no cooperation arrangements (compliant with Article 25(7) of EMIR) have been concluded between ESMA and each of the relevant Indian authorities, i.e. RBI, SEBI and IFSCA,” ESMA had said in a release. The regulator, however, said it will defer the application of the withdrawal decisions until April 30, 2023, to mitigate the adverse impacts on EU market participants.

“Some solution will come out before April 2023. We are a country where ESMA also wants its banks to be available,” said a source. Of the total foreign portfolio investors (FPI) registered in India, close to 20 per cent come from Europe.

Under the RBI rules, a foreign CCP can also apply to the RBI for approval as a recognised CCP for its operations including clearing and settlement in India.

[The Indian Express]