EU's Financial Markets Regulator Disqualifies Indian Clearing Houses

Strategic Insights -

The Reserve Bank of India (RBI) has placed the burden on European Union banks to resolve the impasse caused by the European Securities & Markets Authority's (ESMA) decision to disqualify key Indian institutions, which act as central counterparties (CCPs) in securities, money market, and forex transactions. This move by ESMA has resulted in the disqualification of six Indian clearing houses, including the Clearing Corporation of India (CCIL) and the Indian Clearing Corp, which is the CCP for trades done on the Bombay Stock Exchange. The RBI has made it clear that the new rules were not introduced by them and originated from jurisdictions outside of India.

Key Takeaways:

  • RBI has placed the onus on European Union banks to resolve the stalemate caused by ESMA's decision to disqualify key Indian institutions.
  • The disqualification of Indian clearing houses has created a risk for European banks in India, who may have to cut bilateral deals with other banks, avoiding the Clearing Corporation of India (CCIL).
  • The RBI is not comfortable with the dual regulatory arrangement and ESMA's on-site inspection of CCPs outside of its jurisdiction.
  • European banks in India may need to explore alternative plans for carrying out their regular treasury operations.
  • The risk weight for bilateral deals would be higher if the counterparty is a bank from a country with a lower sovereign rating.
  • Sebi (Securities and Exchange Board of India) is negotiating with European regulators to find a middle ground, including a joint inspection with Sebi and a no-objection certificate from the Indian regulator.
  • The government may prioritize shielding the equity market from the adverse impact of the disqualification of clearing houses.
  • Foreign banks impacted by the ESMA directive include Deutsche, BNP Paribas, Credit Suisse, and Credit Agricole, while institutions like Standard Chartered and Barclays would have to deal with the BoE (Bank of England) rules.

Statistics:

  • 6 Indian clearing houses have been disqualified by ESMA, including the Clearing Corporation of India (CCIL) and the Indian Clearing Corp.
  • The disqualification of Indian clearing houses poses a risk for European banks in India, who may have to cut bilateral deals with other banks.
  • The risk weight for bilateral deals would be higher, with a capital requirement of 100% versus the 5% required for trades cleared by CCIL.
  • The number of CCPs disqualified by ESMA includes:

+ CCIL (Clearing Corporation of India)

+ Indian Clearing Corp (CCorp)

+ NSE Clearing Corporation (NSECC)

+ MSEI Clearing Corporation (MSEICC)

+ IEX Clearing Corporation (IEXCC)

+ NCDEX Clearing Corporation (NCDEXCC)

  • The number of foreign banks impacted by the ESMA directive includes:

+ Deutsche Bank

+ BNP Paribas

+ Credit Suisse

+ Credit Agricole

+ Standard Chartered

+ Barclays

Sources:

  • ET (Economic Times)
  • RBI (Reserve Bank of India)
  • ESMA (European Securities & Markets Authority)
  • Sebi (Securities and Exchange Board of India)
  • BoE (Bank of England)
  • CCIL (Clearing Corporation of India)
  • IEXCC (IEX Clearing Corporation)
  • NCDEXCC (NCDEX Clearing Corporation)
  • NSECC (NSE Clearing Corporation)
  • MSEICC (MSEI Clearing Corporation)