As the European Securities and Markets Authority’s (ESMA) deadline to derecognize six Indian clearing houses approaches, a stalemate persists between European and Indian regulators.
As the European Securities and Markets Authority’s (ESMA) deadline to derecognize six Indian clearing houses approaches, a stalemate persists between European and Indian regulators.
In October, ESMA withdrew the recognition of six Indian clearing houses after a previous agreement between the European Union and Indian regulators expired. ESMA has sought to revise the pact, but Indian regulators have resisted granting supervisory powers to inspect Indian clearing corporations. The prior memorandum of understanding (MoU) lapsed in March last year.
In October, ESMA withdrew the recognition of six Indian clearing houses after a previous agreement between the European Union and Indian regulators expired. ESMA has sought to revise the pact, but Indian regulators have resisted granting supervisory powers to inspect Indian clearing corporations. The prior memorandum of understanding (MoU) lapsed in March last year.
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In October, ESMA said it would defer the derecognition plan till 30 April.
“There have been discussions between the Reserve Bank of India (RBI) and ESMA, but the matter is still unresolved after six months,” said a person aware of the development, adding that ESMA is unlikely to extend the deadline any further.
According to the person cited above, a fresh memorandum of understanding (MoU) can still be signed after the deadline. However, at the moment, European banks conducting treasury operations and settling trades in India would be impacted.
Deutsche Bank, Societe Generale, and BNP Paribas are among the institutions that would be most affected by the fallout. Deutsche Bank and BNP Paribas declined to comment, and an email to an RBI spokesperson went unanswered.
In response to a query, an ESMA spokesperson confirmed the withdrawal decision for the six Indian clearing houses, effective 30 April 2023.
In February, the French financial market regulator Autorité des Marchés Financiers (AMF) granted French banks an 18-month extension. However, the ESMA spokesperson cited above said that the statement by the French regulator does not affect the application of EU law or of ESMA’s decisions to withdraw the recognitions.
“Therefore, the AMF’s statement does not constitute an extension of the timeframe or of the recognitions. The French authority simply declared that it does not prioritize enforcement over the EU banks concerned provided that the banks submit specific plans to ensure termination of their membership at the Indian central counterparties (CCPs) as soon as possible,” the spokesperson said.
After the 2008 financial crisis, the EU implemented the European Market Infrastructure Regulation (EMIR) in 2012 to enhance transparency and mitigate risks in the over-the-counter (OTC) derivatives market. Article 25 of EMIR requires CCPs or clearing houses servicing European banks in other jurisdictions to be approved by ESMA. In December, RBI deputy governor T. Rabi Sankar expressed hope that a resolution could be reached, saying the bank would be prepared to handle any potential disturbance.
“There is no disturbance as of now. We will see when it comes to that. We would prepare should there be any possibility of a disturbance. We will be well prepared to handle those,” Sankar had said on 7 December.
On 20 April, the Economic Times reported that RBI asked certain foreign lenders to contact their regulators and draft letters requesting the removal of the auditing and inspection clause for the Clearing Corp. of India (CCIL), one of the six clearing houses set for derecognition. The central bank also inquired about these banks’ preparedness for CCIL’s potential derecognition.
