ESMA to penalise but let EU banks deal with India CCPs

European Union’s financial market regulator, European Securities and Markets Authority (ESMA) has proposed derecognising 6 Indian counterparty clearing corporations (CCPs) from April 30, 2023. However, now ESMA has said that it will allow European banks to deal with Indian Central Counterparties (CCPs), even after its April 30 deadline, by imposing a penal capital charge.

Six Central Counterparties to be Derecognised by ESMA are:

  1. Clearing Corporation of India.
  2. Indian Clearing Corporation Limited
  3. NSE Clearing Limited.
  4. India International Clearing Corporation Limited
  5. Multi-Commodity Exchange Clearing Corporation Limited
  6. NSE IFSC Clearing Corporation.

Reasons for Derecognition

  • European Market Infrastructure Regulation (EMIR) which regulates the recognition of third country central counterparties by ESMA mandates that:
  • ESMA enter into agreement with regulators of other national jurisdictions and mandates conditions such as audits and counterparties in other countries. 
  • Regulators in India have not agreed to external audits and supervise by ESMA and want ESMA to have faith in Indian regulators.

Impact of Derecognition

  • As per the decisions these Third Country-CCPs will not be able to provide services to the clearing members and trading venues established in European Union.
  • Some of the Major Banks dealing in the domestic forex, forward, swap and equities and commodities markets include Societe Generale, Deutsche Bank and BNP Paribas (European Banks).
  • The de-recognition will impact these lenders as they will not be able to provide clearing and settlement facilities to their clients.
  • They will also have to set aside additional capital to trade in the domestic market, reports suggest. Of the total foreign portfolio investors (FPI) registered in India, close to 20 per cent are from Europe,
  • Banks would be able to continue doing business but would face increased capital costs as they would only be able to do bilateral trades and not go through the clearing houses.
  • Well India has earlier also faced such controversies wherein Europe has tried to tighten its standards across all types of markets from carbon credit, green hydrogen , which has led to improvements in Indian standards .

Central Counterparties (CCPs)

  • They are system providers who interpose between counterparties to contracts traded, becoming the buyer to every seller and the seller to every buyer. 
  • CCPs perform two main functions as the intermediary in a transaction – Clearing and Settlement – Guarantee the terms of trade.
  • Facilitates trading and works towards efficiency and stability in the financial markets. 
  • Reduces risk related to the counterparty and other risks like operational, settlement, market and legal risks.
  • Counterparty Clearing house or CCP is important in the trading world as it collects money from both the trading parties including the buyers and sellers which ensures that both parties will follow through the said agreement.
  • The money collected is enough to cover the potential losses in case any party fails to follow through the contract.
  • A CCP is authorised by RBI to operate in India under Payment & Settlement Act, 2007.
  • Clearing Corporation of India, Indian Clearing Corporation, NSE Clearing, Multi Commodity Exchange Clearing, India International Clearing Corporation and NSE IFSC Clearing Corporation. 

Clearing Corporation of India

  • Clearing Corporation of India has established in 2001 to provide guaranteed clearing and settlement functions for transactions in Money, G-Secs, Foreign Exchange and Derivative Markets. 
  • Clearing Corporation of India acts as central counterparty for all trades in G-Sec markets, Forex markets, 
  • Promoters: Commercial banks (SBI, IDBI, ICICI Bank, Bank of Baroda and HDFC Bank) have 66%, Financial Institutions etc. holding others. 

Practice Prelims MCQ:

Q.1) Consider the following statements about Central Counterparties:

  1. Central Counterparties are regulated by SEBI.
  2. They act as buyers to every seller and seller to every buyer in designated trades.

Which of the following statements given above is/are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Answer: (b)

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