ESMA row: EU banks likely to turn Indian entities into subsidiaries

In order to circumvent the derecognition, from Sunday, of Indian central counterparties (CCPs) by  the European Securities and Markets Authority (ESMA), European banks may explore the option of turning their Indian entities into subsidiaries.

On October 31 last year, ESMA, the European financial market regulator, withdrew recognition granted to six Indian clearing corporations that host the trading platform for government bonds and overnight indexed swaps but deferred implementation to April 30.

“One option for German banks would be to subsidarise entities in India and make them legally distinct from EU (European Union) entities. Alternatively, they could clear as clients of non-EU clearing members,” an official of German regulator BaFin said. However, the official said till a permanent solution was found, alternative mechanisms to operate in India must be examined by the banks themselves and not by BaFin.

ESMA’s decision followed the Reserve Bank of India’s refusal to grant the European regulator supervisory powers over the Indian CCPs.

Business Standard reported on March 23 ESMA would allow European banks to continue doing business with their Indian CCPs even after its April 30 deadline, but by imposing higher capital requirements.

On February 17, BaFin and AMF (France’s regulator) issued separate statements providing their clearing members located in their respective territories time till October 31, 2024, to terminate their membership with Indian CCPs and transfer their positions to a duly authorised clearing member, leading to expectations that the same thing may be extended to the European banks operating in India.

However, the BaFin official said the German regulator’s measures for the clearing members located in Germany did not prolong in any way the recognition of the Indian CCPs, which is a decision of ESMA alone.

“BaFin respects the decision taken by ESMA to refuse the recognition of six central counterparties established in India,”  the official said. 

 “The (February 17) measures are targeted to ensure compliance by the clearing members located in Germany with the requirements under section 30 (3) of the Wertpapierhandelsgesetz (WpHG – German Securities Trading Act), i.e. not to clear at a non-recognised third-country CCP as a clearing member, as soon as possible, but not later than 31 October 2024,” the official added.

The capital requirements for European banks clearing at third-country CCPs are defined in the Capital Requirements Regulation (CRR) of the EU. These requirements distinguish between CCPs recognised in the EU (qualifying CCPs) and CCPs not recognised in the EU (non-qualifying CCPs).

“The capital requirements for clearing at a non-qualifying CCP are higher than for clearing at a qualifying CCP. In this respect, no special conditions apply for Indian CCPs which will be non-qualifying as of April 30, 2023 provided that no solution which would allow ESMA to continue recognising such CCPs is found by that date,” the official said.

When asked whether European banks had appealed against the ESMA ruling of higher capital requirement for European banks dealing with Indian CCPs starting April 30, an ESMA spokesperson said capital requirements were required by law, “meaning that those banks do not have to agree”.

“The decisions to withdraw the recognition of the six Indian CCPs were adopted by ESMA’s board of supervisors on October 31, 2022, and will apply from April 30, 2023,” the spokesperson added.