European Union banks seek RBI approval for third-party transaction model

Credit Agricole, Societe Generale, Deutsche Bank, BNP Paribas aim to resolve deadlock between their home authorities and Indian policymakers

As many as four European banks have asked the Reserve Bank of India (RBI) to approve a third-party transaction model, the Economic Times (ET) reported.

Credit Agricole, Societe Generale, Deutsche Bank, and BNP Paribas seek to resolve a deadlock between their home authorities and Indian policymakers regarding audit oversight rights.

The banks met with RBI officials last month, seeking approval for the proposed third-party model due to the absence of established protocols, ET said citing sources. The banks expect to hear the RBI's stance within the coming weeks, the report added.

The European banks face hurdles in trading Indian government bonds and derivatives since the European Securities and Markets Authority (ESMA) de-recognised the Clearing Corp of India (CCIL) in October 2022.

ESMA's decision resulted from the RBI's refusal to grant audit and inspection rights over CCIL, which oversees local government bond trading and ensures settlement.

With a deadline of October 2024 to stop transactions with CCIL, European banks are now compelled to establish an alternative third-party clearing mechanism, said ET.

These four European banks conduct substantial transactions in Indian government bonds and derivatives, with some actively involved in custody operations for foreign investments in local markets.

However, concerns have emerged, particularly regarding client confidentiality, in the context of third-party clearing, especially for custodian banks tasked with holding securities on behalf of other financial entities.

There have been discussions about the potential impact on custodial operations, with suggestions of a separate Non-Banking Financial Company (NBFC) to handle such operations distinct from rates and FX trading. The challenge lies in reconciling client confidentiality requirements when clearing through a third-party bank instead of CCIL.

The four European banks are now awaiting either central bank approval for the third-party model or a resolution to the dispute between ESMA and RBI over audit oversight. With the European holiday season in July and August, time is of the essence before the October 2024 deadline for CCIL transactions.

The banks may seek an extension of at least six months from their national regulators— the French and German authorities — to provide an extension of at least six months from the current deadline, ET said.

Reportedly, State Bank of India and ICICI Bank are poised to serve as local intermediaries for the proposed third-party clearing model.