European banks operating in India seek 2-year breather for ESMA deadline

Resolution between ESMA, RBI before May 1, 2023 seen as unlikely

European banks operating in India have requested regulators in their home countries and the European Securities and Markets Authority (ESMA) to extend the deadline by two years for de-recognising the Clearing Corporation of India (CCIL), sources said.

It seems highly unlikely that a solution could be found by the ESMA and the Reserve Bank of India (RBI) before the existing deadline of May 1, 2023, sources told Business Standard.

“Now the European Commission has been involved. It’s not just the ESMA and the RBI anymore. The European banks and the people who are in charge of regulatory affairs have been talking to the respective regulators in their home countries,” a source aware of the developments said.

“It is unlikely that the MoU (Memorandum of Understanding) signing is happening unless something drastically changes between now and May 1. What the banks have been asking for is a two-year extension. The preferred option is to have a two-year gestation period to figure out what is the strategy,” the 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 (OIS). The decision is said to have been taken after the RBI refused to give the foreign body rights to audit and inspect CCIL. The ESMA’s decision will come into effect on May 1, 2023.

European banks that operate in India include Societe Generale, Deutsche Bank, BNP Paribas and UBS. De-recognition of CCIL would severely curtail the operations of these banks in the Indian government bond and OIS markets.

While a similar regulatory framework was also in place in the UK, amendments discussed last month in the UK Financial Services and Markets Bill included the country’s treasury considering an extension to the deadline for de-recognising third-country central counterparties like the CCIL.

The amendment would permit the Bank of England (BoE) to extend the period during which third-country central counterparties that have fallen out of a temporary recognition regime can continue to offer services. From an earlier maximum period of one year, the amendment proposes a maximum period of 3 years and 6 months, sources said.

Amid the alternative strategies being discussed for European banks is the possibility of launching subsidiaries in India, as well as routing trades through a domestic primary dealer or non-banking financial company. Neither of these plans is feasible for the European banks, especially given that the existing deadline is just a couple of months away, the sources said.

 “Some of these banks don’t have a subsidiary anywhere. At most they could have a subsidiary under the branch in some jurisdictions for some divisions. Right now, it would just be a method to circumvent regulations and that’s not a viable business model,” a source said.

“The sub-clearing is an option but the moment a bank enters that, risk-weighted assets (RWA) go for a toss. RWA will go up multiple times. Forget two months, hypothetically even six months or a year is too less a period to establish these structures. The banks are hoping for what the BoE has done,” the source said.

Moreover, even if the European banks were to undertake trading operations through Indian banks, the matter would require enabling steps by the RBI, sources said.

De-recognition of the CCIL implies that financial transactions will not be settled through CCIL, allowing only bilateral transactions between banks. This would strip away the advantages and benefits of netting transactions that are provided by the clearing house, and would lead to significantly higher capital requirements under Basel norms. Traders said the increase in capital requirement could be as high as 50 times.

STORY SO FAR

• RBI not in favour of permitting rights to audit CCIL
• On Oct 2022, ESMA notified de-recognition of central counterparties like CCIL
• UK norms also imply de-recognition of CCIL