The European Union (EU) market regulator, European Securities and Market Authority (ESMA), wants Indian regulators to sign an agreement that will give it the power to monitor, supervise or audit Indian clearing corporations. Indian financial market regulators including the RBI, SEBI, and IFSC, which regulate GIFT City trades, don’t want to give such powers to the ESMA.

In November 2022, ESMA de-recognised six Indian CCs due to “no co-operation arrangements” between ESMA and the Indian regulators and set April 2023 deadline for the European banks to stop doing business with them.

What is the latest development in this issue?

Indian regulators are standing their ground in ignoring ESMA’s threat. ESMA has blinked first by stating that European banks will continue to conduct business with Indian Clearing Corporations after April 2023 but there will be a penal capital charge on these transactions.

The impact of this charge could be that European banks reconsider acting as custodians in India. The business from Europe could shift to custodians from other countries such as the US. Funds flowing into India are likely to find other channels.

Germany and France have already backtracked. On February 17, Germany’s Federal Financial Supervisory Authority BaFin and France’s Autorite des Marches Financiers (AMF) extended the deadline to October 2024 for their country’s banks acting as custodians in India.

What is the stance taken by Indian regulators?

They think that ESMA’s threat is unreasonable since all CCs are well-regulated in India. SEBI is a member of IOSCO (International regulators body) and signatory to several multilateral agreements. Indian regulators have stood the test of time and hence ESMA’s demand for inspection, supervision of India’s CCs is unnecessary.

Experts agree that India’s CCs are far more advanced in risk management and investor protection than in Europe. Indian markets have T+1 and net basis settlement for nearly two decades. T+2 came to Europe only in 2014 and they still settle trades on a gross basis. CCs here are separate legal entities with robust settlement guarantee funds, comparatively better than some in the EU.

Is sharing of sensitive data also an issue?

Yes, between these six CCs, trades in India’s entire cash and derivatives market in equities, bonds, and forex are cleared and settled. Hence, Indian regulators will not strike any deal with the ESMA that gives it control over this data.

Which are the clearing corporations involved in the dispute?

The six CCs include Clearing Corporation of India (CCIL), supervised by RBI, Indian Clearing Corporation, NSE Clearing, MCX Clearing Corporation, supervised by SEBI, and India International Clearing Corporation and NSE IFSC Clearing Corporation, supervised by the IFSCA. Between these six CCs, trades in India’s entire cash and derivatives market in equities, bonds and forex are cleared and settled. 

What happened in 2013?

In 2013, ESMA imposed a similar ban on Indian CCs and declared that Europe’s banks will not deal with Indian CCs till they are recognised by the ESMA. Then, the regulators in India and the government told ESMA that even Indian CCs would stop recognising European banks as custodians, and their entire clearing and settlement business can move to others including the US banks. This made ESMA go cold on its demands then. 

If India does a tit-for-tat this time too, will it hurt European banks?

That will hurt European entities since large European banks including Deutsche Bank, BNP Paribas, Credit Suisse, and Société Générale run custodian businesses in India for clearing FPI (foreign portfolio investor) trades. These banks have over one-fifth share in a fast-growing Indian market.

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