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MUMBAI : The standoff between Indian regulators and the European Securities and Market Authority (ESMA) on supervisory and auditing powers over clearing corporations is likely to persist, as Indian regulators are unlikely to yield.
Officials at the Securities and Exchange Board of India (Sebi), the Reserve Bank of India (RBI) and the International Financial Services Centre Authority (IFSCA) are unwilling to relent since there is no immediate impact due to Europe’s ban on Indian clearing corporations, and that such powers to foreign regulators could undermine the authority of local regulators, said three people with direct knowledge of the matter.

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“The broad feeling within the regulator and the regulatory committee is that there is time till April. And there is a possibility of extension beyond that. Eventually, this is being taken up at the government level and may come down to government-to-government negotiations. Nobody wants a disruption. Europe and India need each other. But at the moment, it’s a standoff. Indian regulators are uncomfortable with regulatory oversight, and ESMA is miffed at India’s exception,” a senior regulatory official said, declining to be named.
The matter pertains to the European Market Infrastructure Regulation (EMIR), a framework for the authorization and supervision of central counterparties to minimize risks. This requires cooperation from overseas entities that clear and settle securities market trades. There are some 20-odd countries that are signatories to this regulation, including India. The agreement was first signed in 2017 and lapsed in March.
“India had six more months to renew the agreement. The deadline lapsed in November, which led to the ESMA announcing that India’s six clearing corporations would be de-recognized effective April. India delayed signing since the amended EMIR gave supervisory and auditing powers to European regulators over Indian entities. But others such as South Korea and Japan have already signed the amended agreement,” said the second of the two people cited above.
The ban on Indian clearing corporations effectively means European banks will not be able to clear or settle trades done on Indian exchanges. These include RBI-regulated Clearing Corp. of India; Sebi-regulated Indian Clearing Corp., Multi Commodity Exchange Clearing, and NSE Clearing; and IFSCA regulated India’s International Clearing Corp. and the NSE IFSC Clearing Corp.
If the standoff does not end by April or the deadline is not extended, it will impact Deutsche Bank, Societe Generale, BNP Paribas and Credit Suisse, among others. Deutsche Bank is one of the largest custodian banks.
“The ban would not impact foreign flows from Europe, but the European banks’ ability to settle trades. The alarm bells would be ringing at the banks as foreign portfolio investors (FPIs) have the option of switching bankers. The clients can very well go to a US bank where there is regulatory certainty. FPIs looking for an Indian exposure will find a way,” said the third of the three people quoted earlier in the story.
The first official cited above said no one wants such a situation to come. “This will not precipitate a crisis. There are two schools of thought. One is that the agreement is a memorandum of understanding (MoU), so non-binding, meaning that European regulators cannot come and inspect Indian entities. Second, the language in the agreement is making India uncomfortable. It is worded in such a way that it gives ESMA powers to inspect without prior permission from Indian regulators, and there is no reciprocity clause (to inspect European entities),” said the first of the three people cited above.
Currently, 9,000 FPIs are registered in India, and out of them, 3,000 are from Europe.
Meanwhile, foreign banks are concerned as they have to ensure they don’t fall foul of home country regulations, which have asked these banks to start unwinding their positions settled through Clearing Corp. of India before April. “RBI has asked Europe-based banks to give data on the impact of this move and whether banks have any other alternative model to clear transactions,” the treasury head at a foreign bank said.
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