EU banks say business as usual as ESMA de-recognises Indian clearing houses

The European Securities and Markets Authority (ESMA) deadline to derecognize Indian clearing houses ended on April 30, but for European banks operating in India, it is business as usual amid the lack of any clarifications and communications.

The Emirates Authority for Standardization and Metrology announced in October 2022 the derecognition of six Indian clearing houses, effective from May, due to “lack of cooperation arrangements”. Amid the impasse, the EU later softened its stance, saying it would not implement the ban immediately.

Foreign banks, which operate custodial business to clear FPI, can continue to settle deals on Indian counterparties, subject to penalty capital charges on transactions, according to each bank’s individual risk weights. This has seen a significant increase in the capital requirements of banks such as Deutsche Bank, BNP Paribas, Credit Suisse and Societe Generale.

However, in February, Germany’s federal financial watchdog BaFin and France’s Autorite des Marches Financiers (AMF) extended the deadline to October 2024 for their country’s banks acting as custodians. The Bank of England has also given UK-based banks a two-year extension.

Besides the fact that no penalty fee has been applied so far, European banks have continued to use clearing and settlement services without any disruptions, according to market participants.

Indian regulators, led by the Reserve Bank of India, have refused to sign up to a revised ESMA agreement that gives the offshore regulator the right to scrutinize, audit and inspect the activities or operations of Indian clearinghouses — posing risks to jurisdiction and data, among other things.

The RBI is believed to have met European banks in March 2023 and was open to a compromise if European regulators dropped the requirement to scrutinize and sanction local intermediaries.

Amendments to EMIR

On the other hand, the European Commission is unlikely to take any major steps ahead of the amendments to the European Market Infrastructure Regulation (EMIR) has been rolled out — likely in 2024. The changes, which have been proposed as EMIR 3.0, will likely see a relaxation of ESMA licensing requirements and specific concessions for India, according to reports.

The six central parties (CCPs) involved are the Clearing Corporation of India (CCIL), Indian Clearing Corporation, NSE Clearing, Multi Commodity Exchange (MCX) Clearing, India International Clearing Corporation (IFSC) and NSE IFSC Clearing Corporation.