Scores of foreign banks operating in India are approaching the RBI to find a way out of a current stalemate relating to central counterparties (CCPs) as the Clearing Corporation of India (CCIL) and the Indian Clearing Corporation Ltd (ICCL) face the risk of derecognition by Bank of England (BoE) by July 1.

Sources familiar with the development told FE that while the CCPs regulated by Sebi and the International Financial Services Centres Authority (IFSCA) have decided to file fresh applications with the BoE for recognition, those regulated or supervised by the RBI haven’t yet done so.

The CCIL is supervised by the RBI, while the ICCL, according to its website, is regulated by Sebi and the central bank for select products.

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The BoE move follows the European Securities and Markets Authority’s (ESMA’s) October announcement that it would cancel the recognition of six Indian clearing bodies or the CCPs but deferred its implemntation until April 30, 2023. These are CCIL, ICCL, NSE Clearing Ltd (NSCCL), Multi Commodity Exchange Clearing Ltd (MCXCCL), India International Clearing Corporation (IFSC) Ltd (IICC) and NSE IFSC Clearing Corporation Ltd (NICCL).

The NSCCL, MCXCCL are supervised by Sebi, and the IICC and NICCL by the IFSCA.

Citing the latest European Market Infrastructure Regulations, the ESMA wanted to supervise these CCPs. The Indian regulators, however, were reluctant to endorse it, as they felt the domestic supervisory mechanism of these entities was already very robust and there was no need for any foreign regulator to inspect them.

A CCP in a third country is required to have the ESMA/BoE recognition to be able to provide clearing services to European/British banks.

The sources said the RBI is still sticking to its stance that foreign watchdogs must trust the credibility and the strength of Indian regulators and should not insist on supervising our entities, as such a move amounts to “unfortunate interference in the regulatory architecture in India”.

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A group of senior representatives of foreign banks in India, especially those from the UK and the EU, along with top executives of the Fixed Income Money Market and Derivatives Association of India and the Foreign Exchange Dealers’ Association of India will likely represent to the RBI for this purpose, said the sources.

The European and British banks dealing in the domestic forex, equities and commodities markets in India include Deutsche Bank, BNP Paribas, Societe Generale, Standard Chartered and Barclays.

The executives will likely convey to the RBI that a withdrawal of recognition by the ESMA and the BoE will have significant impact on liquidity management of these banks and on the broader Indian bond markets.

Given that these banks will also have to allocate higher capital as per the risk weight of the counterparty, it will make the derivatives and forex transactions handled by them more expensive.

Commenting on the derecognition of the CCPs by the European regulators, RBI deputy governor T Rabi Sankar had in November said: “This amounts to an unfortunate interference in the regulatory architecture in India, given the fact that these Indian entities meet relevant global best standards, set by the Committee on Payments and Market Infrastructures-International Organization of Securities Commissions.”

The deputy governor also warned of potentially “serious” disruptions in the forex market caused by such extraterritorial regulatory outreach. “That such disruption flows from the action of regulators is not in alignment with the post-GFC (global financial crisis) global consensus on derisking financial markets,” he had added.

Following its exit from the EU, the UK has adopted a temporary recognition regime (TRR), which enables eligible CCPs in a third country to provide clearing services up to December 2023, with provisions for extensions.