Clearing Houses Will Have To Seek ESMA Recognition Again

The European Securities and Markets Authority (ESMA) on 31 October said it plans to derecognize six Indian clearing corporations from 30 April after Indian regulators’ refusal to sign a revised agreement with European Union led to their non-compliance with certain provisions of the European Market Infrastructure Regulation (EMIR). The Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi) are uncomfortable with scrutiny and inspection by overseas market regulators over the activities of Indian clearing corporations (CCPs) and fear this could set a precedent for other countries to follow suit.

ESMA signed fresh agreements by 22 March with authorities from 15 countries, including Australia, Brazil, Canada, Hong Kong, Japan, Mexico, South Korea, Singapore, South Africa, Switzerland and the UAE, which supervise 25 central counterparties (CCPs), according to the person cited above, who spoke on the condition of anonymity.

Indian authorities are the only ones with whom a revised MoU could not be signed in time, the person said. While the previous agreement with RBI dates back to February 2017, the one with Sebi was last signed in June 2017.

After providing a six-month extension, ESMA decided to derecognize the clearing houses, a move which will affect European banks’ ability to settle trades and conduct treasury operations in India.

“We are keeping our applications ready to ensure that as and when we are asked to register, we will move quickly. The fee to apply for recognition by ESMA is 50,000 euros ( ₹42 lakh)," said a second person, also on the condition of anonymity.

The Union cabinet should take a comprehensive view of the dispute to encapsulate the opinions of all regulators involved, this person added.

The information available on ESMA’s website suggests that a fresh application process could require up to 210 days for a decision to grant or refuse recognition. Under Article 25 of the European Market Infrastructure Regulation (EMIR), ESMA will first assess the completeness of an application from a central counterparty within 30 working days of receipt of the application.

“The decision to grant or refuse the recognition of a third country central counterparty (TC-CCP) will be taken within 180 working days following the determination of completeness," as per ESMA’s guidelines on the recognition of third country clearing houses.

The domestic clearing houses listed for derecognition are Clearing Corp. of India Ltd; Indian Clearing Corp. Ltd; India International Clearing Corp. Ltd; NSE Clearing Ltd; India International Clearing Corp. Ltd; NSE IFSC Clearing Corp. Ltd; and Multi Commodity Exchange Clearing Corp. Ltd.

While ESMA wants to revise the pact, Indian regulators have not agreed to some clauses on including supervisory powers to inspect Indian clearing corporations.

“Following the 2019 EMIR review, ESMA had to review the recognition of all third-country CCPs which were recognized at the time and subject them to tiering. The deadline to finalize the review of all TC-CCPs was set on 22 March 2022," the first person said.

Emails sent to spokespeople for RBI and Sebi remained unanswered till press time.

Bloomberg reported on 18 November that RBI sees the ESMA rules as impeding the development of local derivatives benchmarks such as the Mumbai Interbank Offered Rate, or MIBOR, citing people with knowledge of the matter.

Mint reported on 19 November that foreign banks in India are likely to request European Union’s financial markets regulator to defer its decision to derecognize a clutch of Indian clearing houses from 30 April. Unless resolved, this would impact Deutsche Bank, Societe Generale, BNP Paribas and others.

After the 2008 global crisis, the EU adopted EMIR in August 2012 to increase transparency and reduce risks in financial markets. Article 25 of EMIR requires CCPs in other global jurisdictions providing services to European banks to be approved by ESMA.