The Clearinghouses That Lost ESMA Recognition

The six clearing houses that lost their ESMA recognition are the Indian Clearing Corporation, NSE IFSC Clearing Corporation, Clearing Corporation of India (CCIL), India International Clearing Corporation, NSE Clearing, and Multi Commodity Exchange Clearing.

• ESMA serves as the European Union’s (EU) financial markets regulator and supervisor. The organization, founded in 2011, is based in Paris.

Indian Regulators' Stance on Supervisory Powers for Foreign Entities:

• ESMA proposed that Indian regulators sign an agreement granting it supervisory authority over Indian clearing corporations that offer services to European banks.
• However, Indian regulators have expressed reluctance to hand over such powers to a foreign entity, as these corporations handle the settlement of all cash and derivatives markets across various financial sectors, including equities, bonds, and forex.

Impact on European Banks Operating Custodian Businesses in India:

• ESMA's ruling has significant implications for European banks such as Deutsche Bank, BNP Paribas, Credit Suisse , and Societe Generale, which run custodian businesses in India to clear foreign portfolio investments.
• These banks represent about 15-20% of the Indian market.
• Other banks such as Barclays, Standard Chartered, and HSBC are required to adhere to regulations set forth by the Bank of England.

Indian Regulators Are in Talks with ESMA and the European Commission:

• Reports suggest that the Reserve Bank of India and other regulators have been engaging with the European Commission and ESMA, as well as other relevant entities, to reach a mutually beneficial agreement that respects the territorial independence of the host regulator.

Importance of Recognizing Indian Clearing Houses for Foreign Banks:

• Foreign banks hold a significant role in India’s secondary stock and bond markets because they manage foreign portfolio investments and local institutional trades such as mutual funds through their custodian businesses in the country.
• In addition to these, they also facilitate trading activities like currency forwards and interest rate swaps. As such, the recognition of Indian clearing houses is of utmost importance for these banks.

India's Central Bank Is Looking for Alternative Arrangements:

• India is home to approximately 9,000 registered funds that function as foreign portfolio investors, with roughly a third of these originating from Europe.
• In its most recent Financial Stability Report , the Reserve Bank of India stated that it is currently investigating alternative arrangements and will implement corrective measures if market disruptions occur.

For more information on the European Securities and Markets Authority (ESMA), please follow the link below.