Esma to penalise but let European Union banks deal with India CCPs

Though April 30 deadline stands, EU regulator gives a breather to European banks

The European Securities and Markets Authority (Esma), financial markets regulator of the European Union, will allow European banks to continue doing business with their Indian central counterparties (CCPs), even after its April 30 deadline, by imposing a “penal capital charge”.
 

Replying to e-mail queries from Business Standard, an Esma spokesperson said: “The decisions will apply from April 30, 2023. In the absence of recognition by Esma, there will be penal capital charges for dealing with non-recognised (Indian) CCPs.” The Esma spokesperson didn’t clarify the nature and extent of the capital that the European financial institutions need to set aside to deal with their Indian CCPs.
 

On February 17, the financial regulators of Germany (BaFin) and France (AMF) issued separate statements providing their financial institutions 18 more months until October 31, 2024, to terminate their membership with Indian CCPs and transfer their positions to a duly authorised clearing member.
 

Following the statements by BaFin and AMF, Esma issued a statement on the same day taking note of the “significant” impact on some EU market participants and consequently of the intent of AMF and BaFin to not prioritise enforcement actions for the time being “in order to facilitate the implementation of adaptation plans by the credit institutions concerned which should be finalised as soon as possible”.
 

Replying to a Business Standard query, the Esma spokesperson said the regulator issued the February 17 statement in reaction to the statements published by BaFin and AMF, and that there is no extension of the April 30 deadline.
 

“The statements by Esma, BaFin and AMF concern the non-prioritisation of enforcement actions against EU banks participating in Indian CCPs and do not constitute an extension or a postponement of the deadline,” the spokesperson added.
 

“The decisions to withdraw the recognition of the six Indian CCPs were adopted by Esma’s Board of Supervisors on October 31, 2022, and will apply from April 30, 2023. This means the decisions still stand. The delayed entry into application provided in the withdrawal of recognition decisions constitutes an ‘adaptation period’ to mitigate any adverse impacts on EU market participants,” the spokesperson further said. 
 

Esma’s decision in late October is said to have been taken after the Reserve Bank of India’s refusal to permit the foreign body rights of audit and inspection of Indian financial infrastructure entities, such as Clearing Corporation of India which hosts the trading platform for government bonds and overnight indexed swaps.

The non-prioritisation of enforcement action by Esma would provide reprieve to Europe-based banks, including HSBC, BNP Paribas, Credit Suisse, Deutsche Bank, and Société Générale, which are active players in India and deal in the domestic currency, commodity and equities market.

RBI Deputy Governor T Rabi Sankar in November last year termed the derecognition of Indian CCPs by the European regulator as “unfortunate interference”, as such Indian entities meet the global best standards. “The potential disruption to the foreign exchange markets, both onshore and non-deliverable forward, can be rather serious. That such disruption flows from the action of regulators are not in alignment with the post-GFC (global financial crisis) global consensus on de-risking financial markets,” he had cautioned.

RBI Governor Shaktikanta Das in December last year said that it is necessary for overseas regulators to appreciate the credibility of Indian rules. “We comply with all international standards. Our market infrastructure is very robust. They must trust the credibility and the strength of Indian regulations. That is what we are trying to impress upon them,” Das had said at a press conference, following the announcement of the RBI’s monetary policy statement.