India’s financial sector regulators led by the Reserve Bank of India (RBI) are learnt to have refused to give the European Securities and Market Authority (ESMA) supervisory powers over Indian clearing corporations (CCs) servicing European banks, even as the April 30 deadline set by the European market regulator passed.
“The question of yielding to a foreign regulator doesn’t arise,” a senior Indian policymaker, who did not wish to be identified, told FE.
Besides RBI, the Securities and Exchange Board of India (Sebi) and the International Financial Services Centres Authority (IFSCA) also supervise some CCs in India.
ESMA had asked the Indian regulators to sign an agreement giving it the power to monitor and supervise six Indian CCs, which the European Union (EU) market regulator recognised as Third Country Central Counterparty (TC-CCP) in European Union.
Under the European Market Infrastructure Regulation (EMIR), a CCP not established in the European Union may provide clearing services to clearing members or trading venues established in the European Union only if it is recognised by ESMA.
After the global financial crisis in 2008, EMIR was implemented in 2012 to enhance transparency and mitigate risks in the derivatives market.
Indian regulators have contended that their supervised CCs are well-regulated according to global best standards. So, Indian regulators are opposed to giving the sensitive supervisory power to a foreign entity on Indian CCs which among themselves clear and settle the country’s entire cash and derivatives market in equities, bonds, and forex.
In November last year, ESMA de-recognised the Indian CCs due to “no co-operation arrangements” between ESMA and the Indian regulators. But, it allowed European banks to continue to conduct business with Indian CCs till April 2023 without penal consequences.
The CCs involved are RBI-supervised Clearing Corporation of India (supervised by RBI), Sebi-supervised Indian Clearing Corporation, NSE Clearing and MCX Clearing Corporation and IFSCA-supervised India International Clearing Corporation and NSE IFSC Clearing Corporation.
European banks may consider alternative mechanisms to circumvent ESMA’s regulations to avoid losing business in India. For clearing foreign portfolio investor trades, many European banks including Deutsche Bank, BNP Paribas and Credit Suisse run custodian businesses in India. If matters are not sorted out, Europe’s clearing and settlement business might shift to custodians from other countries such as the United States.
Fearing a significant impact on German clearing members’ Indian business activities, Germany’s Federal Financial Supervisory Authority BaFin has already extended the deadline to October 2024 for banks acting as custodians in India to comply with ESMA rules.
