Bank of England in talks to defer deadline for CCIL de-recognition

ESMA under pressure after de-recognising in October six Indian clearinghouses including the CCIL

In recent talks with foreign banks operating in India, Bank of England (BoE) is said to be strongly considering deferring the de-recognition of the Clearing Corporation of India (CCIL), with the overseas regulator mulling at least a two-year extension of the deadline, sources said.

 

“It seems very likely that the June 30 deadline that was given by BoE will now be postponed, based on the latest discussions with overseas regulators. That could also put some pressure on the ESMA (European Securities and Markets Authority) regarding the issue,” a source aware of the developments told Business Standard.

 

Documents surveyed by Business Standard showed that amendments being discussed in the UK Financial Services and Markets Bill included the UK treasury considering an extension to the deadline for de-recognition of third country central counterparties like the CCIL.

 

The amendment would permit BoE to extend the period during which third country central counterparties that have fallen out of the temporary recognition regime can continue to offer services to firms in the United Kingdom, from a maximum period of one year to a maximum period of 3 years and 6 months, sources said.

 

According to the BoE’s norms, any non-UK Central Counter Party that was under a temporary recognition regime — such as the CCIL — and had not applied to the UK regulator for recognition by June 30, 2022, would have automatically entered into a run-off regime.

 

“We are hearing of a two-year extension by BoE on the issue of de-recognising CCIL. Yesterday (on Wednesday) there was a meeting with some banks and the update was that a two-year extension was being mulled. BoE’s intent is not to have a conflict,” another source said.

 

In October 2022, the ESMA 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. The BoE took a similar step following the ESMA’s decision.

 

UK-based banks, such as Standard Chartered, Barclays, and HSBC, play a significant role in government bond and overnight indexed swap trading and in the handling of overseas investment flows.

 

An email sent to BoE did not receive a response by the time of going to press. Standard Chartered Bank, Barclays, and HSBC declined to comment on the matter.

 

If the de-recognition of the CCIL were to be implemented, it implies that financial transactions will not be settled through CCIL, leaving only scope for bilateral transactions between banks. This will strip away the advantages and benefits of netting transactions that are provided by the clearing house, as well as lead to much higher capital requirements under Basel norms. Traders said the increase in capital requirement could be as high as 50 times.

 

Consequently, trading operations of the European banks would be severely curtailed, and in turn lead to a drop in volumes in India’s sovereign bond market, which is the pricing reference for a vast variety of credit products.

 

In 2012, the European Union had adopted new market infrastructure regulations in order to strengthen and safeguard systems following the global financial crisis. The new regulations call for third-country central counterparties to be approved by ESMA. US-based banks are already excluded from certain derivative products in India as the US Commodity Futures Trading Commission has not recognised CCIL as a derivatives clearing organisation.

 

Over the past few months, 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 2022, RBI Deputy Governor T Rabi Sankar also warned of potential disruptions looming over India’s foreign exchange market from similar over-reach by foreign regulators.