Why has the EU financial markets regulator derecognized six Indian clearinghouses?

On October 31, the European Union’s financial markets regulator, the European Securities and Markets Authority (ESMA), said it withdraw the recognition of six Indian clearing organizations or central counterparties (CCP). These six central counterparties are Clearing Corporation of India (CCIL), Indian Clearing Corporation Ltd (ICCL), NSE Clearing Ltd (NSCCL), Multi Commodity Exchange Clearing (MCXCCL), India International Clearing Corporation (IFSC) Ltd (IICC) and NSE IFSC Clearing Corporation Ltd (NICCL).

In accordance with the European Market Infrastructure Regulation (EMIR), a central counterparty from a third country can only provide clearing services to European banks if it is recognized by ESMA.

What is the reason for derecognition?

ESMA said it reviewed the recognition of all third-country central counterparties (TC-CCPs) that had been recognized before September 21, 2020, in accordance with the European Market Infrastructure Regulation (EMIR) regime. The decision to derecognize Indian central counterparties is due to the “lack of cooperation agreements” between ESMA and Indian regulators – the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI) and the International Financial Services Centers Authority (IFSCA) .

ESMA wants to oversee these CCPs, which Indian regulators do not favor as they believe these entities have strong risk management and there is no need for a foreign regulator to inspect them, sources said. .

What deadline has ESMA set?

The EU regulator said it would postpone the application of the withdrawal decisions until April 30, 2023 to mitigate the negative impact of this decision on EU market participants. This, sources say, will also give ESMA and Indian regulators a six-month deadline. negotiate and reach consensus. While Sebi has reached a fairly advanced level of understanding with ESMA, the RBI has yet to reach an agreement.

What will be the impact of derecognition on European banks?

From the date of application of the withdrawal decisions, these TC-CCPs will no longer be able to provide services to clearing members and trading venues established in the EU, ESMA said in a statement. . Some of the major European banks operating in the national forex, futures, swaps, stocks and commodities markets include Societe Generale, Deutsche Bank and BNP Paribas. The derecognition will impact these lenders as they will not be able to provide clearing and settlement facilities to their customers. They will also have to set aside additional capital to trade in the domestic market, according to reports. Of the total foreign portfolio investors (REITs) registered in India, almost 20% are from Europe, bankers said.

What is the role of the CCP?

Central counterparties perform two main functions as intermediaries in a market transaction – clearing and settlement – ​​and guarantee the terms of a transaction. CCP is a system provider which, by novation, interposes itself between system participants in transactions accepted for settlement, thereby becoming the buyer vis-à-vis each seller and the seller vis-à-vis each buyer. , for the purpose of settling their transactions. A central counterparty is licensed by the RBI to operate in India under the Payments and Settlement Systems Act 2007.