“The RBI sent a draft to the ESMA in the first week of July, there are some dilutions in the language, but they have not made any relaxations on the sticking point, which is the right to audit, inspect and potentially levy fines on the CCIL,” a source aware of the development said.
“It seems that the process will be a long one with some back-and-forth because the ESMA has pointed out the difficulty in altering their language while the RBI has made it clear that they will not permit external jurisdiction over CCIL,” the source said.
The CCIL is supervised by the RBI, which over the past year has called on overseas institutions to respect the resilience of Indian regulations. An email sent to the RBI did not receive a response until the time of going to press.
THE ROAD AHEAD
The ESMA had said in March that while European banks could continue to do business with Indian clearing houses such as the CCIL, they would face a penal capital charge. With a resolution to the issue seeming unlikely in 2023, banks are considering alternate arrangements going into the next calendar year. Foreign lenders would likely accelerate efforts for such arrangements in the first half of 2024, sources said.
“European banks are gearing up for plan B, which is for them to conduct trades and clearing through a thirdparty intermediary bank instead of going to CCIL. There are many procedures to be followed before the October 2024 deadline — the CCIL by-laws state that they will need two months’ notice before the exit from guaranteed settlement,” a source said.
Sources said that foreign banks would also require leeway from the RBI on its Large Exposure Framework (LEF) norms before entering thirdparty clearing mechanisms. The LEF primarily seeks to lower risks emanating from counterparty concentration risk amongst banks by capping the amount lent to an individual counterparty or groups of counterparties.
THE TUSSLE
In October 2022, the ESMA had announced the de-recognition of six Indian clearing houses, including the CCIL, which houses the platform for trading in government bonds and overnight indexed swaps (OIS).
The origins of the matter rest in a drive by developed markets after the global financial crisis towards reducing risk in derivatives markets. In attempts to contain risks, developed economies have been looking to maintain control of regulation and risk management practices in third countries, RBI deputy governor T Rabi Sankar said in November 2022.
