The move follows the European Securities and Markets Authority’s decision to derecognize six Indian central counterparties (CCP), including Clearing Corp. of India Ltd (CCIL) and Indian Clearing Corp., from 30 April 2023. This effectively means European banks cannot settle their trade through the clearing houses and may have to look for bilateral settlement arrangements if the matter is not resolved.
CCPs offer infrastructures that contribute to safer, more efficient and transparent global financial markets.
Under the proposed arrangement, banks will need to deal with sub-custodian banks, which can trade directly on the CCIL platform to help banks which are not allowed to trade directly on the CCIL system. “In equity markets, if you have an account with a brokerage firm, then you have a relationship with the firm and not the exchange. We are looking at a similar arrangement for all fixed-income transactions," said a senior banker of a foreign bank seeking anonymity. “But we need to check whether all regulators are kosher with this arrangement," he added.
This arrangement will not only help foreign banks circumvent the process of dealing with the clearing houses directly, but they will also get access to trading and clearing platform if the sub-custodian model works out. That said, the talks are at a discussion stage, and a formal proposal is yet to be made to the Reserve Bank of India or CCIL, said the second official, also requesting anonymity.
“Currently, CCIL has a tiered structure where direct members and clients of clearing members of some segments can operate. Maybe, the banks are looking at such an arrangement," he said.
The standoff between Indian regulators and the European Securities and Market Authority over the supervisory and auditing powers of clearing corporations after the derecognition of six Indian CCPs rages on. Indian regulators, such as the Securities and Exchange Board of India (Sebi), RBI and the International Financial Services Centres Authority (IFSCA) are not comfortable letting scrutiny and inspection by overseas market regulators as it may result in ceding ground to an authority that is exercising extra-territorial jurisdiction over the activities of Indian CCPs. European banks are concerned with such actions as they will not be able to settle trades in foreign exchange, gilts, currency and interest rate derivatives done on Indian exchanges. If the matter is not resolved by 30 April 2023, then foreign lenders will have to start unwinding their positions through CCPs. The banks also stand to lose business if foreign portfolio investors look at doing business with other custodian banks where there is regulatory certainty.
Moreover, the removal of CCIL as a counterparty may result in a higher capital requirement for transactions in accordance with the Basel norms. Separately, US banks are not present in swap derivative trading on the CCIL because US Commodity Futures Trading Commission has not recognized the clearing house as a derivatives clearing organization. Therefore such transactions are done bilaterally by banks outside the framework, wherein CCIL acts as a counterparty.
