Six clearing houses lose ESMA clearance as deadline lapses

The European Securities and Markets Authority (ESMA), the financial markets regulator for the European Union, has de-recognised six Indian clearing houses due to non-compliance with European Market Infrastructure Regulation norms, it said in a notification on Tuesday.

The six clearing corporations are The Clearing Corporation of India (CCIL), Indian Clearing Corporation, NSE Clearing, Multi Commodity Exchange Clearing, India International Clearing Corporation, and NSE IFSC Clearing Corporation.

ESMA had asked Indian regulators — the Reserve Bank of India, the Securities and Exchange Board of India and the International Financial Services Centres Authority — to sign an agreement giving it supervisory powers over Indian clearing corporations servicing European banks. These clearing corporations were recognised as Third Country Central Counterparty (TC-CCP) in European Union.

However, Indian regulators are against giving such powers to a foreign entity since these corporations settle the country’s entire cash and derivatives market in equities, bonds, and forex markets.

European banks such as Deutsche Bank, BNP Paribas, Credit Suisse, and Societe Generale, which are governed by ESMA’s norms, run custodian businesses in India for clearing foreign portfolio investments. According to reports, they have around 15-20% market share in the India market.

Banks like HSBC, Standard Chartered, and Barclays have to meet norms laid down by the Bank of England.

On October 31, ESMA withdrew the TC- CCP recognition of six Indian clearing corporations and announced that European entities would not be able to use the clearing and settlement services of CCIL after April 30.

“After conducting its assessment, ESMA established that not all of the cumulative conditions under EMIR for the recognition of these six TC-CCPs are met, as no cooperation arrangements (compliant with Article 25(7) of EMIR) have been concluded between ESMA and each of the relevant Indian authorities,” said an ESMA statement.

On February 17, the national regulators of French and German banks, Autorité des marchés financiers (AMF) and the Federal Financial Supervisory Authority (BaFIN), respectively, announced an additional 18 months till October 2024 for French and German banks to comply with ESMA’s decision and terminate their membership of CCIL.

As a result, some European banks will continue to use the clearing and settlement services of CCIL as of now.

According to reports, the Reserve Bank of India and other regulators have been engaging with relevant stakeholders, including ESMA and the European Commission, to arrive at a mutually acceptable arrangement that recognises the territorial independence of the host regulator.

ESMA’s norms mandate an exchange of information between the European market regulator and competent authorities of third countries, including access to all information requested with regard to clearing houses.

CCIL is supervised by the RBI, NSE IFSC Clearing Corporation under the GIFT City regulator International Financial Services Centres Authority; and the rest are regulated by the SEBI.

While all foreign branches in India operate as branches of parent organisations, they are headquartered abroad. Hence, they are bound by the norms of their respective home regulator.

The recognition of Indian clearing houses is important for these foreign banks as they run custodian businesses in India that handle secondary stock and bond market trades of foreign portfolio investors and local institutions like mutual funds.

They also conduct trades like currency forwards, where a bank hedges the currency risk of a client purchasing or selling dollars or any other foreign currency, and interest rate swaps where two entities exchange fixed interest payments through floating rate payment to cover interest rate risks.

Around 9,000 funds are registered as foreign portfolio investors in India and a third of them come from Europe.

In its latest Financial Stability Report, the central bank said it is exploring alternative arrangements and will take remedial measures in case of market disruptions.

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