ESMA in 'active' talks with RBI to resolve Clearing Corporation impasse

The European Securities and Markets Authority (Esma) is in “active” discussions with the Indian regulators for a possible pact that could end the deadlock over European banks’ participation in the domestic bond and derivatives markets.

“Esma is currently actively engaged in negotiations with the Indian authorities regarding a potential EMIR (European Market Infrastructure Regulation)-compliant MoU,” a spokesperson for the European Union's securities watchdog told Business Standard over email.

The spokesperson, however, declined to comment on the contours of negotiations, especially regarding inspection, audit, and potentially penalising domestic central counterparties, on which the RBI has reservations. “…any possible MoU will need to be compliant with the EMIR,” the spokesperson said.

The EMIR is an obligation to report all derivatives to trade repositories; a central clearing obligation for eligible OTC derivatives; measures to reduce counterparty credit risk and operational risk for bilaterally cleared OTC derivatives; as well as common rules for central counterparties (CCPs) and for trade repositories. An email sent to the RBI did not elicit any response till the time of going to the press.

Last week, the Reserve Bank of India (RBI) and the Bank of England (BoE) signed a memorandum of understanding (MoU) to end the imbroglio over British banks’ participation in the Indian bond and derivatives markets.

The MoU will enable the BoE to assess the application of Clearing Corporation of India for recognition as a third-country Central Counterparty (CCP), which is a prerequisite for UK-based banks to clear transactions through CCIL.

ESMA has recently concluded new MoUs with the Chilean, Chinese, Colombian, Indonesian, Malaysian and Taiwanese authorities and the US SEC, the spokesperson said. “25 EMIR-compliant MoUs with authorities all over the globe covering 39 TC-CCPs are currently recognised by ESMA.”

In October 2022, ESMA said it would de-recognise six Indian clearing houses, including CCIL, which hosts the trading platform for government bonds and overnight indexed swaps. The decision was taken after the RBI’s refusal to permit foreign entities the right of audit and inspection of CCIL. Some of the foreign banks got a reprieve after French and German regulators deferred the de-recognition exercise till October 2024.

Banks that will benefit if the RBI and ESMA come to an understanding are Deutsche Bank, Credit Agricole, Société Générale, and BNP Paribas.

After the global financial crisis of 2008, the European Union in 2012 had adopted new market infrastructure regulations in order to strengthen and safeguard systems. The new regulations call for third-country central counterparties to be approved by 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.

In a speech last year, RBI Deputy Governor T Rabi Sankar said there had been a tendency of developed economies to contain the risk of their entities by attempting to maintain control of regulation and risk management practices of third countries.

“This amounts to an unfortunate interference in the regulatory architecture in India, especially given the fact that these Indian entities meet relevant global standards, set by Committee on Payments and Market Infrastructures (CPMI)-IOSCO,” he had said, adding all regulated entities understood the costs and constraints of compliance.

The Indian regulator had made it clear that it considered such actions of overseas regulators as extrajudicial overreach.