The issue stems from the European Securities and Markets Authority (ESMA) reviewing the status of six Indian clearing houses and deciding to derecognize them. The step will affect European banks’ ability to settle trades and conduct treasury operations in India. The ones listed for derecognition are the Clearing Corp. of India Ltd; Indian Clearing Corp. Ltd; India International Clearing Corp. Ltd; NSE Clearing Ltd; India International Clearing Corp. Ltd; NSE IFSC Clearing Corp. Ltd; and Multi Commodity Exchange Clearing Corp. Ltd.
ESMA said on 31 October, “not all of cumulative conditions under EMIR for recognition of these six central counterparties are met, as no cooperation arrangements...have been concluded". Following the 2008 global crisis, the EU adopted the European Market Infrastructure Regulation (EMIR) in August 2012 to increase transparency and reduce risks in over-the-counter derivatives market. Article 25 of EMIR requires CCPs in global jurisdictions providing services to European banks to be approved by ESMA.
Mint reported on 11 November that India signed a pact with ESMA in 2017, which lapsed in March. While ESMA now wants to revise the pact, Indian regulators have not agreed to some clauses on including supervisory powers to inspect Indian clearing corporations.
“We will have to approach the regulators abroad and request them to defer this by a year or so. Right now, our local regulators do not seem quite flexible about the issue, which would cause foreign banks a lot of difficulties," said the person cited above.
According to the person, who spoke on condition of anonymity, the Reserve Bank of India (RBI) has washed its hands off the matter and asked banks to take it up with their respective regulators abroad. Bankers Mint spoke to said it seems like local regulators are flexing muscles to make a point, but the disruption it will cause will be challenging to manage. “These are not templated agreements but are negotiated. Our regulators should also see if there is scope for negotiations," the person said.
A foreign banker said these lenders were certainly taken by surprise by the whole derecognition issue and are taking legal opinion to discuss it with regulators in the jurisdiction of their parent entities. Unless resolved, this would impact Deutsche Bank, Societe Generale, BNP Paribas and others.
Interestingly, the 2017 agreement between ESMA and RBI, which has now lapsed, already has a clause that said ESMA does not intend to conduct any on-site inspection of the covered central counterparties as part of its monitoring of the ongoing compliance. That apart, it said given that ESMA relies on the supervision and enforcement capabilities of the local authorities, on-site inspections by ESMA officers will only be considered in “exceptional circumstances and subject to the prior agreement of the local authorities". Mint has seen a copy of the 2017 agreement.
