MUMBAI: India’s market regulator Securities and Exchange Board of India (Sebi) and Gift City regulator International Financial Services Centres Authority (IFSCA) are aiming to sign information-sharing agreements with Europe’s securities watchdog within the next 60 days, a step that could allow five Indian clearing houses to seek re-recognition by the European Union, two people aware of the discussions told Mint.
The move follows the European Union’s financial markets regulator European Securities and Markets Authority (ESMA) signing an agreement with the Reserve Bank of India (RBI) on 27 January on information sharing. While Sebi will soon announce its deal with ESMA, IFSCA expects its pact to be finalized within one to two months, senior officials of the respective regulators said.
The regulatory push comes alongside a broader warming of India–European Union ties. India and the European Union (EU) signed a free-trade agreement on 27 January as a hedge against the US, with Prime Minister Narendra Modi saying the agreement would strengthen India’s manufacturing and services sectors and boost investor confidence.
In October 2022, ESMA withdrew recognition of six Indian clearing houses—Clearing Corp. of India Ltd, Indian Clearing Corp. Ltd, India International Clearing Corp. Ltd, NSE Clearing Ltd, NSE IFSC Clearing Corp. Ltd, and Multi Commodity Exchange Clearing Corp. Ltd—after a prior agreement with Indian regulators expired. The decision was later deferred until 30 April 2023.
The derecognition threatened to raise costs for European banks that use these clearing houses for their trades. A new agreement would allow these clearing houses to reapply.
RBI’s pact with ESMA came more than three years after a standoff began over domestic clearing houses, with Indian authorities resisting provisions that would give ESMA supervisory powers to inspect Indian clearing corporations.
“We have already discussed with ESMA and sent a proposal to the government. We expect a similar resolution as the RBI…The government will review our proposal and it should happen maybe within 1-2 months time,” a senior IFSCA official said on condition of anonymity.
An email sent to Sebi and IFSCA did not elicit any response till press time.
Experts said European banks are likely to benefit through easier settlement of trades.
“While this may not immediately translate into a surge in foreign portfolio inflows, it should meaningfully ease operational and settlement procedures for European banks and other global participants,” Soumyajit Niyogi, director at India Ratings and Research.
While one clearing house—Clearing Corporation of India—falling under the ambit of RBI can now reapply, the other five, since they fall outside its jurisdiction, will have to wait for their regulators to reach similar arrangements.
“Other Indian central clearing counterparties (CCPs), supervised either by Sebi or IFSCA, will only be able to re-apply once ESMA and their relevant authorities conclude similar MoUs. ESMA is however currently in discussions with these authorities with the aim of reaching similar agreements than with the RBI,” a spokesperson for ESMA said in response to an emailed query.
The spokesperson said that following the withdrawals of recognition on 30 April 2023, EU banks could continue clearing at Indian clearing houses only under temporary contingency arrangements. “The withdrawals also meant that these CCPs no longer qualified as qualifying CCPs (QCCPs), leading to higher capital requirements for EU clearing members when clearing through them.”
Emails sent to all six clearing houses did not receive any response till press time.
Bankers said that while costs did rise, the impact on business was limited.
“There was an interim relaxation given by ESMA to all banks to continue to trade with CCIL or clear trades with CCIL. So locally there was not much change,” a European bank official said.
Following the 2008 financial crisis, the EU had implemented the European Market Infrastructure Regulation (EMIR) in 2012 to enhance transparency and reduce risks in the over-the-counter derivatives market. Article 25 of EMIR requires CCPs or clearing houses servicing European banks abroad to be approved by ESMA.
