RBI-Esma pact likely to need reboot if India's concerns not resolved

EU regulator's demand to audit Indian central counterparties' books seen as extraterritorial

The recently signed agreement between the Reserve Bank of India (RBI) and the European Securities and Markets Authority (Esma) may have to be renegotiated if India’s concerns are not addressed adequately, sources told Business Standard. 

The Indian central bank and the Esma, the European Union’s financial markets regulator and supervisor, signed a Memorandum of Understanding (MoU) this January, which was a part of the larger India-European Union (EU) trade pact, to facilitate cooperation and exchange of information for the recognition of central counterparties (CCPs) established in India and supervised by the Indian regulator. 

While the MoU is aimed at resolving a prolonged impasse between the RBI and the Esma, after the latter had demanded to audit books of Indian central counterparties like the Clearing Corporation of India (CCIL), it was contingent on the Indian regulator’s concerns being addressed in the next iteration of the European Market Infrastructure Regulation (EMIR), according to sources. 

From India’s point of view, this demand of the EU regulator was seen as extra-territorial. CCIL is neither present nor has business outside India. But Esma wanted that power so that European banks operating in India comply with EMIR norms. 

Esma, in a press statement, had said that the MoU allows the CCIL, a CCP established in India and supervised by the RBI, to re-apply for recognition under EMIR. RBI had said that the MoU est­abli­shed a framework for Esma to place reliance on RBI’s regulatory and sup­e­r­visory activities, while safeguarding the EU’s financial stability.

 

However, if CCIL was to apply for EMIR recognition, thereby establishing a relationship, it would be governed by EMIR rules. This was seen as extra-territorial. 

From India’s perspective, it was important that efforts be made to address the issue. To this end, the EMIR norms need to be revised, whenever they come up for a review.

 

Sources said the Indian regulator expects that a resolution of the concerns would be achieved in the next iteration of EMIR. If these concerns are not addressed adequately in the upcoming revision of EMIR, the MoU with Esma may need to be renegotiated.

 

The standoff between the Esma and the RBI had begun in October 2022 when Esma said it would de-recognise six Indian central counterparties, including the CCIL, which hosts the trading platform for government bonds and overnight indexed swaps. The decision was taken after RBI’s refusal to permit foreign entities the right of audit and inspection of CCIL.

 

Apart from the CCIL, there are five other central counterparties in India – three regulated by the market regulator, the Securities and Exchange Board of India (Sebi), and two by the International Financial Services Centres Authority (IFSCA). These players are also in discussions with Esma for similar MoUs.