Reserve Bank of India (RBI) has put the onus on European Union banks to resolve the stalemate caused by the European Securities & Markets Authority’s (ESMA) decision to disqualify key Indian institutions which act as central counterparties (CCPs) in securities, money market, and forex transactions.
This was conveyed at a meeting between senior officials of the MNC banks and RBI deputy governor T Rabi Sankar on November 11.
“RBI’s stand is clear. The new rules which have become a bone of contention were not introduced by RBI. They did not originate in India but have emanated from jurisdictions and countries where these MNC banks are headquartered,” said an official of a large European bank.
Need for a Plan B
“So, the foreign banks should sort out (the matter) with their respective regulators and authorities to find a way out,” said the official.
“RBI is expected to hold more meetings on the subject,” said another banker.
According to banking circles, as of now it is evident that RBI is not comfortable with the dual regulatory arrangement; and under the circumstances European banks in India would have to think of a plan B to carry out their regular treasury operations.
The RBI spokesman did not comment on the matter.
As part of risk mitigating measures laid down in the wake of the 2008 financial meltdown, ESMA would carry out on-site inspection of all CCPs that European banks deal with anywhere in the world – a rule that RBI finds unacceptable as it boils down to a foreign regulator exercising supervisory power in CCPs which are outside its jurisdiction.
If RBI sticks to its stand, EU banks will have to cut bilateral deals with other banks, avoiding the Clearing Corporation of India (CCIL) which serves as a CCP that takes over the clearing and settlement risk in transactions like government bond trade, foreign exchange forwards, repos, and interest rate swaps.
“The advantage of putting trades through CCIL is that the counterparty risk is taken over by the CCIL which lowers the capital requirement for the bank. But bilateral deals would mean higher capital as the counterparty will be a bank carrying a higher risk weight. The risk weight will be higher if it’s from a country with a lower sovereign rating,” said a banker.
SHIELDING EQUITY MARKET
However, while it’s possible to do bilateral trades in bonds and currency and interest rate derivatives, a CCP is unavoidable in trades done on stock exchanges. For instance, Deutsche Bank, which is a large custodian for foreign portfolio investors, has to deal with NSE Clearing Corporation for share transactions by offshore funds. NSE Clearing is one of the six CCPs, which includes CCIL, derecognised by ESMA.
Under the circumstances, Sebi (unlike RBI) is currently negotiating to find a middle ground and may be open to letting European regulators like ESMA and Bank of England (BoE) look into NSE Clearing Corp’s books as long it carries out a joint inspection with Sebi and takes no-objection certificate from the Indian regulator before initiating any inspection. BoE has disqualified CCIL and Indian Clearing Corp, the CCP for trades done on Bombay Stock Exchange.
“Probably, the government’s priority is to see that there is no adverse impact on the stock market. So, it may be comparatively more concerned about the derecognition of the stock clearing houses than the disqualification of CCIL. Thus Sebi may arrive at a solution quicker than RBI,” said a senior official with a large brokerage.
Among the foreign banks impacted by the ESMA directive are Deutsche, BNP Paribas, Credit Suisse, and Credit Agricole while institutions like Standard Chartered and Barclays would have to deal with the BoE rules.
