RBI-ESMA logjam: Banks turn to EU, UK regulators over trade impact concerns

Banks expressed concerns about trade impact, disruptions seen in OIS, bond markets

European banks with operations in India are in the process of making representations to regulators in their own countries to express concerns about potentially large trading disruptions that would be caused by the European regulator’s decision to withdraw recognition of the Clearing Corporation of India (CCIL).

The European Securities and Markets Authority (ESMA) in late October de-recognised six Indian clearing houses, including the CCIL, which hosts the trading platform for government bonds and overnight indexed swaps. The decision is said to have been taken after the Reserve Bank of India’s (RBI’s) refusal to permit the foreign regulator rights of audit and inspection over the CCIL.

European banks with operations in India include BNP Paribas, Credit Agricole, Credit Suisse, Deutsche Bank and Societe Generale. UK-based banks, such as Standard Chartered and Barclays, also play a large role in bond and OIS trading.

“European banks are representing to BoE directly and ESMA (European Securities and Markets Authority) as well. They are in touch with them right now on the market impact. What they have done may not be intended to kill the market but this will kill the market,” a source said to Business Standard.

“From a market perspective, ASTROID will stop functioning. We are not sure of the extent but G-sec will also get impacted. If CCIL is the only platform that can clear G-sec (government security), then G-sec trading will also stop. Some kind of a solution will have to be reached. All European banks are in touch with their regulator,” the source said.

ASTROID refers to the CCIL’s rupee derivatives dealing segment and is the platform for trades in overnight indexed swaps. OIS is a derivative product largely used for hedging exposure to government bonds as well as expressing a view on interest rates. Foreign banks play a large role in the market.

“We didn't start the fire. You should tell those who started it — this is what the RBI is telling foreign banks. The RBI said the EU regulator has taken a unilateral decision so foreign banks should go back to their host regulator and resolve the issue,” said a source privy to the discussion with the regulator.

An email to the RBI did not receive a response by the time of going to press.

“Now the foreign banks present in India will request their head offices to engage with the regulator. Whether the regulator will agree or not is a different issue, but they will most certainly take up the issue with the regulator. It is a unique problem for India because foreign banks have a sizable presence here,” the source said.

A key concern being expressed by banks is the status of outstanding contracts once the ESMA’s de-recognition of CCIL would kick in from May 1, 2023.

“What happens to the outstanding contracts? Forwards is okay because it is largely a one-year contract and G-sec also gets settled in the next day, but it is not so for OIS,” a treasury official said.

“Everyone will want an anonymous trading platform, which is what the CCIL’s platform currently is for large trades. In the direct bank-to-bank market, no one will quote large orders. The capital requirement goes up very sharply if you don’t have the counterparty,” the source said.

The ESMA’s decision would mean that financial transactions would not be settled through the CCIL, leaving only scope for bilateral transactions between banks. This would strip away advantages and benefits of netting transactions that are provided by the clearing house as well as lead to much higher capital requirements under Basel norms.

The six organisations that have been de-recognised by the ESMA are the Clearing Corporation of India (CCIL), the Indian Clearing Corporation Limited (ICCL), the NSE Clearing Limited (NSCCL), the Multi Commodity Exchange Clearing (MCXCCL), the India International Clearing Corporation (IFSC) Limited (IICC) and the NSE IFSC Clearing Corporation Ltd (NICCL). The ESMA declared its decision on October 31.

Of these, the CCIL is supervised by the RBI. The rest are supervised by the Securities and Exchange Board of India (Sebi) and the International Financial Services Centre Authority.

The Bank of England has also de-recognised the CCIL as a third-country central counterparty.

Sequence of events

• ESMA derecognises six clearing houses including CCIL, ICCL 
• and MCXCCL
• RBI said to be against ESMA’s right to inspect, audit CCIL
• Derecognition of CCIL to cause disruptions in bond, OIS markets
• Without CCIL, capital requirements to shoot up, netting advantages lost
• ESMA decision applicable from May 1, 2023