PremiumA crisis is brewing for European banks in India as there is a stand-off between the European securities market regulator and Indian regulators over allowing inspection and supervision of Indian counterparty clearing corporations (CCPs). Mint explains:
A crisis is brewing for European banks in India as there is a stand-off between the European securities market regulator and Indian regulators over allowing inspection and supervision of Indian counterparty clearing corporations (CCPs). Mint explains:
The European Securities and Markets Authority (ESMA), the EU’s financial markets regulator and supervisor on 31 October said that it proposes to derecognize six Indian CCPs—including Clearing Corp. of India and the Indian Clearing Corp.—from 30 April 2023. ESMA said the decision was on account of non-compliance with certain provisions of the European Market Infrastructure Regulation. This move effectively means that European banks will not be able to clear or settle trades in foreign exchange, gilts, currency and interest rate derivatives done on Indian exchanges.
After the 2008 financial crisis, the EU adopted the European Market Infrastructure Regulation (EMIR) in August 2012 to increase transparency and reduce risks in the over-the counter (OTC) derivatives market. Article 25 of EMIR requires CCPs in other global jurisdictions providing services to European banks to be approved by ESMA. India signed the pact in 2017, which lapsed in March this year. ESMA now wants to revise the pact under EMIR 2.0, which includes additional conditions including supervisory powers to inspect Indian clearing corporations, which is not agreeable to Indian regulators.
Sebi, RBI and IFSCA are not comfortable letting scrutiny and inspection by overseas market regulators as this may result in ceding regulatory ground to an authority that is exercising extraterritorial jurisdiction over the activities of Indian CCPs. Indian regulators fear this could set a precedent for other countries to follow suit.
The stand-off will impact European banks such as the Deutsche Bank and Credit Suisse. Deutsche Bank is one of the largest custodian banks—a financial institution that holds customers’ securities for safekeeping. If not resolved before 30 April 2023, these banks will have to start unwinding their positions through the CCPs. The banks also stand to lose large businesses if foreign portfolio investors look at doing business with other custodian banks, where there is regulatory certainty.
Indian regulators say there is time till April and the deadline could get extended. The issue could be resolved through government-to-government negotiations. At least, that seems to be the hope. European banks have made representations to the Indian government and regulators to resolve the matter as they have to comply with home country regulations. But the ban will not impact foreign flows from Europe to India—it will only affect European banks’ ability to settle trades and do treasury operations.