Foreign banks rush to find plan B as ESMA-BoE ban on CCIL looms

Foreign lenders, RBI in talks to find satisfactory alternative mechanisms

Several foreign banks are working against the clock to effective alternative mechanisms as the issue of certain European regulators’ decision to de-recognise the Clearing Corporation of India finds remains unresolved.

“The need of the hour is to solve the trading issue. It’s putting the system under stress. In another three weeks or so, the foreign banks will have to think about unwinding, packing up, and shifting out. There is not much time. There are many plan Bs, but it’s difficult to come up with an efficient one,” a source aware of the matter told Business Standard.

“A real viable plan B is the RBI and CCIL sitting together with the finance ministry and perhaps making some changes where the clearing risk is not recognised on CCIL and some banks are allowed to be clearing risk undertakers for a fee and they will place margins on the other banks’ behalf. They are talking about all this, but these are not easy things,” the source said.

An email sent to the Reserve Bank of India did not receive a response by the time of going to press.

The European Securities and Markets Authority in late October de-recognised six Indian clearing houses including the CCIL, which hosts the trading platform for government bonds and overnight indexed swaps.

The decision is said to have been taken after the RBI’s refusal to permit the foreign body rights of audit and inspection of CCIL. The ESMA’s decision comes into effect on May 1, 2023. The BoE took a similar step following the ESMA’s decision.

European banks with operations in India include BNP Paribas, Credit Agricole, Credit Suisse, Deutsche Bank, and Société Générale. Other UK-based banks and foreign lenders, such as Standard Chartered, Barclays, and HSBC, also play a significant role in government bond and OIS trading.

While an HSBC spokesperson and Standard Chartered Bank declined to comment on the matter, emails sent to other foreign banks, including Deutsche Bank.

A spokesperson from Deutsche Bank declined to comment on the matter.

If the de-recognition of the CCIL were to come into effect, the trading operations of the European banks would be severely curtailed, and, in turn, potentially lead to a drop in volumes in India’s sovereign bond market.

Sources pointed out difficulties that could emanate from the perspective of overseas investment in bonds, given that many foreign banks with operations in India act as custodians for international investment flows in domestic debt.

“There are many things to be streamlined, especially regarding custodian accounts etc. Any potential plan B will require legislative changes, RBI changes, and operational changes. The bank offering rates will have to set up systems. Essentially, you will still be dealing on CCIL’s platform but your margin and clearing is being done by someone else,” a source said.

Over the past few months, the top management of the RBI has made it clear that it considers certain actions of overseas regulators as extrajudicial overreach, with Governor Shakikanta Das recently calling on foreign institutions to trust the credibility of India’s institutions.

In November, RBI Deputy Governor T Rabi Sankar warned of potential disruptions looming over India’s foreign exchange market from similar overreach by foreign regulators.

The Indian central bank has pointed out that a probably unintended consequence of the drive by advanced economies after the Global Financial Crisis towards de-risking derivatives markets was the attempt to maintain control of regulation of third countries.

“ESMA has also been playing hardball. On the BoE front, in a couple of weeks, we should know. The BoE prima facie seems willing to be a bit more flexible,” a source said.