Nodal central counterparty seen as a solution to ESMA-RBI tussle

Indian, EU authorities trying to resolve the issue: Officials

A nodal central counterparty (CCP) could be a solution to the stalemate between the Reserve Bank of India (RBI) and the European Securities and Markets Authority (ESMA), the financial markets regulator for the European Union (EU).

According to government officials, regulatory authorities — both in India and the EU — are working to find a solution to the issue of allowing the ESMA to inspect and audit Indian clearing corporations.

Under the nodal CCP model, an ESMA-approved body will act as a link between Indian CCPs and the European regulator. The nodal CCP will be set up in India and will oversee the domestic CCPs.

A similar arrangement was followed in the case of the US Commodity Futures Trading Commission (CFTC) in 2014-15, said a government official.

Section 7a-1 of the Commodity Exchange Act (CEA) restrains US banks from becoming members of any derivatives-clearing organisation (DCO) not recognised by the CEA.

As a result, US banks cannot become members of the Interest Rate Derivative Segment of Clearing Corporation of India.

However, there is no restriction on them becoming members of other segments like the securities segment and the forex market.

As part of the commercial decision, a “third layer” has been created to do business between the US and India, a senior government official told Business Standard.

If not for such an arrangement, Europe-based banks have to cough up 250 per cent more provision to trade, which could force these funds to exit the business, he said.

The official said the government was keen on a solution to the issue and indicated the cabinet would give clearance by this month-end or early next month.

In 2017, all domestic regulators, including the RBI, inked pacts with the ESMA for exchanging information about CCPs. 

“The RBI should agree to it the way it had approved in 2017, as there are only minor changes in the terms of the revised agreement. The Securities and Exchange Board of India (Sebi) and International Financial Services Centres Authority (IFSCA) cleared the decks in September and are in the process of seeking cabinet approval,” the official said, indicating the cabinet would give clearance by this month-end or early next month.

He said the MoU by definition was not legally binding and it could be withdrawn at a month’s notice if the Indian regulator at any point was not satisfied with the terms.

However, it wants to revise the agreement with additional supervisory powers of inspecting and monitoring Indian clearing corporations.

The RBI is taking a “principled approach” and is yet to conclude negotiations because it believes that additional conditions of the ESMA could have extra-territorial implications and data-protection issues for sensitive financial intermediaries like clearing corporations, officials said.

Among other conditions, the banking regulator is learnt to be not convinced about the huge fee of 50,000 euros for recognising the clearing corporation.

The RBI is of the view that since Indian clearing corporations are well regulated, and risk concerns are from European regulators, paying such substantially high fees is not required, another source privy to the matter said.

European funds account for almost 33 per cent of the assets under management of foreign portfolio investors, a majority of which are from Deutsche Bank and BNP Paribas, officials said, while citing fresh data.

About 3,000 funds are from Europe, they added.

Sources said 22 jurisdictions, including China, Japan, and Singapore, had signed the revised MoU with the ESMA.

On October 31, the ESMA withdrew the recognition granted to six Indian clearing corporations due to “no cooperation arrangements” between it and Indian regulators, which include the RBI, Sebi and IFSCA.

The ESMA has said to avoid any adverse impacts on EU market participants, it will defer the application of the withdrawal decisions until April 30, 2023.

The six clearing corporations — CCPs, as the ESMA calls it — are the Clearing Corporation of India, Indian Clearing Corporation Ltd, NSE Clearing Ltd, Multi Commodity Exchange Clearing, India International Clearing Corporation Ltd and NSE IFSC Clearing Corporation.