ESMA, the financial markets regulator for the EU, has de-recognized six Indian clearing corporations; answers to Ws and Hs involved therein.

Though it became news in recent weeks (i.e., the first week of May or exactly on April 30, 2023), the climax of this story was written way back in October 2022, when the ball was finally put in the court of Indian regulators by European Securities and Markets Authority (ESMA) . This article will answer to Ws and Hs involved therein

What is the news?

The ESMA, the EU financial markets regulator, has de-recognized six Indian clearing corporations. The withdrawal of recognition came into effect on May 1, 2023. These six clearing corporations are:

1.???Clearing Corporation of India, supervised by the Reserve Bank of India;

2.???Indian Clearing Corporation Limited, supervised by the Securities and Exchange Board of India (SEBI);

3.???NSE Clearing Limited, supervised by SEBI;

4.???Multi-commodity Commodity Exchange Clearing, supervised by SEBI;

5.???India International Clearing Corporation Limited, supervised by the International Financial Services Centre Authority (IFSCA); and

6.???NSE IFSC Clearing Corporation Ltd., supervised by the IFSCA

What is the reason behind de-recognition?

As per notifications issued by ESMA on October?31, 2022, and May?2, 2023, non-compliance with European Market Infrastructure Regulation (EMIR) norms is the reason.

What took place six months ago?

On October?31, 2022, the ESMA, the EU’s financial markets regulator and supervisor, announced that six central counterparties (CCPs) established in India will have their recognition decisions withdrawn in accordance with the EMIR. To mitigate the adverse impacts on EU market participants, ESMA will defer the application of the withdrawal decisions until April 30, 2023.

But why did ESMA de-recognize these? What is the root cause?

ESMA had to review the recognition of all Third Country CCPs (TC-CCPs) that had been recognized prior to September 21, 2020, in accordance with EMIR (Article 89(3c)). Among these TC-CCPs, six, as named above, are in India.

It is worth noting that there are a total of 39 TC-CCPs recognized by ESMA.

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, i.e., RBI, SEBI, and IFSCA. Therefore, the condition under point (c) of Article 25(2) of EMIR is not met.

As a result, ESMA concludes that these TC-CCPs cannot continue to be recognized in the European Union under the currently applicable EMIR regime.

It is also worth noting that ESMA now has 25 cooperation arrangements for TC-CCP supervision with supervisory authorities from 20 third countries.

Whether Indian regulators have any role to play—what and how could they do anything?

Yes, of course

ESMA had asked Indian regulators, i.e., RBI, SEBI, and IFSCA, to sign an agreement giving it supervisory powers over Indian clearing corporations servicing European banks. These clearing corporations were recognized as Third Country Central Counterparties (TC-CCP) in the 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.

According to some media reports, the RBI, SEBI, and IFSCA have been engaging with ESMA and the European Commission to arrive at a mutually acceptable arrangement that recognizes the territorial independence of the host regulator.

Why is it important to resolve?

While all foreign branches in India operate as branches of parent organizations, they are headquartered abroad. Hence, they are bound by the norms of their respective home regulators. European banks such as Deutsche Bank, Credit Suisse, and Societe Generale, which are governed by ESMA’s norms, run custodian businesses in India for clearing foreign portfolio investments and account for around 15-20% market share in the Indian market. Banks like HSBC, Standard Chartered, and Barclays that are operating in India have to meet norms laid down by the Bank of England.

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

Hence, the derecognizing will have a huge impact. To mitigate the same, some mutually acceptable arrangements need to be reached between Indian regulators and the European Commission.

Whether on or beyond May 1, 2023, no Indian clearing house will offer services to any European banks.

No, not exactly

On February 17, the national regulators of French and German banks announced an additional 18 months until October 2024 for French and German banks to comply with ESMA’s decision and terminate their membership in the Clearing Corporation of India. As a result, some European banks will continue to use the clearing and settlement services of CCIL as of now.

I hope soon the consensus will be reached by the Indian regulator and other stakeholders including ESMA and European Commission.

The small wisdom is like water in a glass: clear, transparent, pure. The great wisdom is like the water in the sea: dark, mysterious, impenetrable .... Remembering the first noble laureate of undivided India, Rabindranath Thakur (popular among masses as Gurudev and Tagore) on his 162nd Jayanti.