RBI, Bank of England strengthen ties; ink agreement to end CCIL logjam

Move comes as a relief to UK-based banks such as Standard Chartered and HSBC

The Reserve Bank of India and Bank of England has signed a memorandum of understanding on Friday which will end the imbroglio over British banks’ participation in Indian bonds and derivative market.

“The MoU establishes a framework for the BoE to place reliance on RBI’s regulatory and supervisory activities while safeguarding UK financial stability,” RBI said in a statement. The MoU was signed by RBI Deputy Governor T Rabi Sankar and BoE Deputy Governor for Financial Stability Sarah Breeden in London today.

In October 2022, European Securities and Market Authority (ESMA) said it would de-recognise six Indian clearing houses including the Clearing Corporation of India (CCIL), which hosts the trading platform for government bonds and overnight indexed swaps. The decision was taken after the RBI’s refusal to permit the foreign entities the right of audit and inspection of CCIL. The BoE took a similar step following the ESMA’s decision, which was scheduled to come into effect from June 30.

In January, CCIL approached BoE for recognition as a Third Country – Central Counterparty (TC-CCP). Later, the UK Treasury decided to accord equivalence to central counterparties authorised by RBI.

With this MoU in place, it is now likely that BoE will approve CCIL’s application.

The move comes as relief to UK-based banks, such as Standard Chartered, Barclays, and HSBC which play a significant role in government bond and overnight indexed swap trading and in the handling of overseas investment flows.

“The MoU also demonstrates the importance of cross-border cooperation to facilitate international clearing activities and the BoE’s commitment to deference to other regulators’ regimes,” RBI said.

According to RBI the MoU confirms the interests of both the authorities in enhancing cooperation in line with their respective laws and regulations. “It will also enable the BoE to assess the application of CCIL for recognition as a third country Central Counterparty (CCP) which is a prerequisite for UK based banks to clear transactions through CCIL,” RBI said.

In 2012, the European Union had adopted new market infrastructure regulations in order to strengthen and safeguard systems following the global financial crisis. The new regulations call for third-country central counterparties to be approved by the ESMA. US-based banks are already excluded from certain derivative products in India as the US Commodity Futures Trading Commission has not recognised CCIL as a derivatives clearing organisation.

The Indian regulator had made it clear that it considers such actions of overseas regulators as extrajudicial overreach, with governor Shakikanta Das calling on foreign institutions to trust the credibility of India’s institutions. 

What the MoU means

• Confirms interests of both authorities in enhancing cooperation
   
• BoE to place reliance on RBI’s regulatory and supervisory activities while safeguarding UK financial stability
   
• BoE can assess CCIL’s application as Third Country – Central Counterparty
   
• Demonstrates importance of cross-border cooperation to facilitate international clearing activities