Indian and European regulators are clashing over whether to broaden oversight of securities settlement, a dispute that risks disrupting operations of BNP Paribas SA to HSBC Holdings Plc, or at the least bump up their costs.
The potential damage stems from the European Securities and Markets Authority’s move to withdraw recognition — effective May 2023 — to six Indian central counterparties after the Reserve Bank of India resisted ESMA’s request to be allowed to join the RBI in overseeing Indian transactions.
Recent changes in European Market Infrastructure Regulation demanded that ESMA must establish cooperation arrangements with countries that has their own central counterparties. A key clause was exchange of information, “including access to all information requested by ESMA.” The authorities also wanted countries to “develop and submit to the commission for endorsement draft regulatory technical standards” related to the class of derivatives.
This in effect meant that ESMA wanted to have full access of third country counterparty books and also specify the structure of derivatives that European banks can take exposure to. While ESMA says at least 15 other countries have agreed to its request, the RBI, according to people familiar with the matter, sees the move as deeply intrusive and impinging on the RBI’s ability to structure its own derivatives.
The stand-off means banks such as BNP Paribas and Deutsche Bank AG will need to unwind billions of rupees of trades or cough up higher capital to trade in India. “EU participants could remain participants of Indian CCPs, either through subsidiaries established in India, or as clients. In both cases they would face higher capital requirements,” an ESMA spokesperson said in an emailed response.
European banks are important market makers and their withdrawal may severely impact vital hedging tools such as currency forwards, as well some money market instruments and interest-rate derivative trading.
Even UK-based banks such as HSBC, Barclays Plc and Standard Chartered Plc risk being affected as the Bank of England has said that Clearing Corp. of India was not on its list of so-called Temporary Recognition Regime entities, and would stand to lose recognition from July 2023.
The banks are in talks with the RBI as well regulators in their home countries for a resolution, while government-level talks are also on to iron out differences. One possible option being discussed is allowing Indian lenders to act as an intermediary for trades with their European counterparts.
“No cooperation arrangements” were concluded between ESMA and the relevant Indian authorities including the RBI, ESMA said in a statement on Oct. 31, citing reason for ending recognition to Indian clearing houses. Once the restrictions kick in EU firms could remain participants of Indian clearinghouses as clients or through units set up in the South Asian country, but would face higher capital requirements in both cases, the ESMA spokesperson said.
A spokesperson for the RBI didn’t immediately reply to an email seeking comment. Standard Chartered, Barclays, Deutsche Bank and BNP Paribas declined to comment, while an email to HSBC wasn’t immediately answered.
The RBI sees the ESMA rules as impeding the development of local derivatives benchmarks such as the Mumbai Interbank Offered Rate, or MIBOR, according to people with knowledge of the matter, who asked not to be identified as the discussions are private. If RBI agrees to the ESMA rules, the fear is it may end up encompassing wider swathes of derivatives instruments, and liquidity may eventually move to European-designed contracts, killing a vibrant market riding on locally-designed contracts, they said.
If rules are relaxed for India — the only country that has raised objections — others will demand similar benefits from ESMA, the people said.
