Some of Europe’s largest banks that operate in India as custodians for clearing equity and other financial trades in the domestic markets here are in negotiations with the Reserve Bank of India (RBI) and market regulator SEBI to seek a way out after the financial market regulators in Europe banned Indian clearing corporations (CCs) from April 30, sources told Business Line.
It simply means that European banks will not be able to clear or settle trades done on Indian exchanges by their foreign portfolio investor clients based out of Europe.
Earlier this week, the European Securities and Markets Authority (ESMA), the European Union’s financial markets regulator and supervisor, said six of India’s central counterparties (CCPs) would be de-recognised in accordance with the European Market Infrastructure Regulation, following an assessment conducted by it.
But to mitigate the adverse impact on EU market participants, it has deferred implementing the decisions until April 30, 2023.
If the discussions between Indian regulators, ESMA and European banks fail, the European banks will be required to operate with levels of capital at least 40-50 times higher than today if they still wish to clear Indian market trades for their clients.
According to ESMA regulations, if any non-European entity is providing service accessed by European banks, it needs to get assessed by ESMA and get its in-principle approval. In the absence of approval, the guarantees given by the Indian CCPs for derivatives transactions will not be recognised.
Interest rate derivatives (swaps, options and swaptions) are guaranteed by CCIL. So, entities that are participating in guaranteed settlement will move to non-guaranteed settlement, said a market expert. “As a country, we are not going to be impacted,” he added.
The expert observed that the Federal Reserve did not give its approval to Indian CCPs because RBI did not allow the inspection of CCIL’s books. So, American banks do not participate in the guaranteed derivatives markets.
The six institutions on ESMA’s list are The Clearing Corporation of India (supervised by RBI); Indian Clearing Corporation, Multi Commodity Exchange Clearing, and NSE Clearing, (supervised by SEBI); and India International Clearing Corporation (IFSC) and the NSE IFSC Clearing Corporation, (supervised by the International Financial Services Centre Authority .