The standoff. Germany, France soften stance on Indian Clearing Corporations

Large countries in Europe may be moving away from the diktat issued by the European Securities and Market Authority (ESMA), the region’s most powerful financial market regulator, on the issue of regulating India’s financial market clearing corporations. 

On February 17, Germany’s Federal Financial Supervisory Authority BaFin and France’s Autorite des Marches Financiers (AMF) softened their stance by extending the deadline to October 2024 for their country’s banks acting as custodians in forcing a transition of their positions in Indian financial markets. ESMA had imposed a stricter deadline of April 2023.

The whole issue started in October 2013 when ESMA de-recognised six Indian clearing corporations (CCs) on the basis that these entities were not registered in the EU. ESMA was vexed due to “no co-operation” between ESMA and the Indian regulators on the issue.

Indian regulators believe that if domestic CCs register with ESMA it would give the EU regulator a right and power to deeply supervise them. CCs in India are classified as core (also sensitive) market infrastructure institutions since they hold enormous data on Indian markets.

Hence, the RBI, SEBI and GIFT City regulator IFSCA did not strike any deal with ESMA, forcing the EU regulator to issue the diktat. Indian regulatory officials also believe that ESMA was vexed with the growth of India’s markets, which have overtaken Europe’s and most major countries in various segments.

Many foreign banks in Europe have written to the Indian regulators, government and their own country’s authorities for a settlement on the issue as they would lose business to other US and European banks.  

Europe’s large players including Deutsche Bank, BNP Paribas, Credit Suisse, Société Générale act as custodians in India for clearing FPI (foreign portfolio investor) trades and have around 25 per cent or more business.

Over 9,000 funds are registered as FPIs in India and nearly 3,000 of them come from Europe. Bank of New York Mellon, State Street Bank and Trust Company, JPMorgan Chase, Citi, HSBC and Standard Chartered are some of the US and Asian banks that act as custodians in India.

Will expose data

The six Indian CCs include Clearing Corporation of India (CCIL), supervised by the RBI; Indian Clearing Corporation and NSE Clearing MCX Clearing Corporation, supervised by SEBI; and India International Clearing Corporation and NSE IFSC Clearing Corporation, supervised by the IFSCA.

Trades in India’s entire cash and derivatives market in equities, bonds and forex are cleared and settled among the six CCs and giving a right to a regulator outside India to audit them will expose the country’s financial markets, it is felt.

On February 17, BaFin said, “(It) intends to issue administrative orders to ensure compliance as soon as possible but no later than 18 months following the date on which the relevant ESMA decisions enter into force, i.e. by October 31, 2024. BaFin will monitor the progress of the implementation of plans for remediation of compliance in a risk-based and timely manner.”

A notification from France AMF said, “Taking into account the significant impact for some French credit institutions of the withdrawal decision by ESMA of the recognition of six Indian CCPs, the AMF, jointly with the ACPR and the Banque de France, invite those credit institutions currently clearing members to provide the AMF and the ACPR with a transitional plan ensuring that the termination of their membership is effective no later than October 31, 2024.”

Effectively, two of the largest countries in the EU have pushed the issue to October 2024, which will be several months after the general elections in India.

“France and Germany have shown that ESMA is not the final world. In 2013 too, ESMA made a similar demand but it had to eat its words. 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,” said a former regulatory official involved with the 2013 move.