In the regulatory tussle over supervision of India’s clearing houses, the European Union blinked first.
Ending a three-year standoff over supervision of the Clearing Corp. of India Ltd (CCIL), the Reserve Bank of India (RBI) and the European Securities and Markets Authority (Esma) signed a memorandum of understanding on 27 January. While the two regulators did not release the details of the agreement signed alongside the conclusion of India-EU free trade talks, Esma has dropped its demand to supervise Clearing Corp. of India Ltd (CCIL), two people familiar with the development said.
In May 2023, Esma withdrew recognition of six Indian clearing houses, including CCIL, a move which threatened to raise costs for European banks using them for their trades. The dispute originated from differences between the RBI and Esma over granting supervisory access to Indian clearing houses.
“Esma has agreed not to interfere with the supervision process of CCIL and will rely on RBI’s expertise for that,” said the first person.
Hope for more?
While five other clearing houses remain unrecognized by Esma, there may be hope for them as well. Esma said on 27 January that it is in talks with other regulators who supervise them. While the Securities and Exchange Board of India (Sebi) supervises the Indian Clearing Corp. Ltd, NSE Clearing Ltd, and Multi Commodity Exchange Clearing Corp; Gift City regulator International Financial Services Centres Authority supervises NSE IFSC Clearing Corp. Ltd and India International Clearing Corp. Ltd.
Besides, the European regulator has also agreed to address the issue of CCIL being asked to apply for recognition. The person cited above said Esma has agreed to take up India’s concern on ‘extraterritoriality’ in the next edition of the European Market Infrastructure Regulation (Emir) .
“When that happens, the process of CCIL having to apply for recognition will not arise in the coming years. This will remove a key hurdle and allow CCIL to function without the overhang of being regulated by Esma,” the person added. This, the person said, will also ensure there is no interference in the functions of a regulator in one jurisdiction by one from another jurisdiction.
Following the 2008 financial crisis, the EU implemented the Emir in 2012 to enhance transparency and reduce risks in the over-the-counter derivatives market. Article 25 of EMIR requires central counterparties or clearing houses servicing European banks abroad to be approved by Esma.
Emails sent to RBI and CCIL remained unanswered, while a spokesperson for Esma declined to comment.
Cooperation
The RBI had said on 27 January that the agreement enables the two regulators to cooperate regarding central counterparties, in line with their respective laws and regulations. “The MoU establishes a framework for Esma to place reliance on RBI’s regulatory and supervisory activities while safeguarding the European Union’s financial stability,” it said.
The concessions are seen as a win for India’s central bank.
“This should be seen in the context of India’s growing heft in the global financial system,” said Soumyajit Niyogi, director at India Ratings and Research. Many global investors are now looking at India to diversify their investments, and the inclusion of India in the bond indices is a testimony to that, he said. “Be that as it may, given our current account deficit and the pressure on the rupee, investors will weigh their options when they place their bets.”
According to the second person, the regulator and the Indian government remained firm, ensuring that supervision remains within the country’s jurisdiction. Whether these will be replicated across agreements with other Indian regulators remains to be seen.
Other regulators, Sebi and Ifsca are aiming to sign information-sharing agreements with Europe’s securities watchdog within the next 60 days. This step could allow five Indian clearing houses to seek re-recognition by the European Union, Mint reported on 30 January.
