India’s financial market regulators — the RBI and SEBI in Mumbai and IFSC, which regulates GIFT City trades — don’t want the European Securities and Market Authority (ESMA) to have the power to monitor, supervise or audit Indian clearing corporations (CCs). Therefore, they are unlikely to agree with the European Union (EU) market regulator’s demand to sign an agreement, sources told businessline. Last week, ESMA de-recognised six Indian CCs due to “no co-operation arrangements” between ESMA and the Indian regulators and set April 2023 deadline for the European banks to stop doing business with them. But the view in India is that an agreement with the ESMA would give it the power to deeply supervise Indian CCs, which have a status of core (also sensitive) market infrastructure institutions.
The six CCs include Clearing Corporation of India (CCIL), supervised by RBI, Indian Clearing Corporation, NSE Clearing MCX Clearing Corporation, supervised by SEBI and India International Clearing Corporation and NSE IFSC Clearing Corporation, supervised by the IFSCA. Between these six CCs, trades in India’s entire cash and derivatives market in equities, bonds and forex are cleared and settled. Hence, Indian regulators will not strike any deal with the ESMA that gives it authority over these CCs, the sources said. In fact, in 2013 ESMA had imposed a similar ban on Indian CCs and had declared that Europe’s banks will not deal with Indian CCs till they are recognised by the ESMA. Then, the regulators in India and the government told ESMA that even India CCs would stop recognising European banks as custodians and their entire clearing and settlement business can move to others including the US banks. This made ESMA go cold on its demands then. Europe’s few large players include Deutsche Bank, BNP Paribas, Credit Suisse, Société Générale among others act as custodians in India for clearing FPI (foreign portfolio investor) trades and have around 25 per cent or more business. “ESMA’s threat is unreasonable since all CCs are well regulated in India. SEBI is a member of IOSCO (International regulators body) and signatory to multilateral agreements. Indian regulator’s have stood the test of time and our country’s financial market is amongst the best. Hence ESMA’s demand for inspection, supervision of India’s CCs is unnecessary. Will regulator’s in other countries allow such inspection is a question,” said Rajeev Agarwal, former Whole Time Member, SEBI, who was involved in handling ESMA issue in 2013. “It’s an attempt by ESMA to establish supremacy. But it should be rejected again as it was in 2013. Instead, the custodian business of European banks will shift elsewhere. India’s CCs are far more advanced in risk management and investor protection than in Europe. Indian markets have T+2 and net basis settlement for nearly two decades. T+2 came to Europe only in 2014 and they still settle trades on a gross basis. CCs here are a separate legal entity with robust settlement guarantee funds, comparatively better than some in EU,” said Viraj Kulkarni, ex-country head of foreign custodian bank. Over 9,000 funds are registered as FPIs in India and nearly 3,000 in them come from Europe. Experts say the European banks will lose custodian business to these FPIs if Indian regulators ask CCs to cut out EU banks. Bank of New York Mellon; State Street Bank and Trust Company; JPMorgan Chase, Citi, HSBC; Standard Chartered are some of the US and Asian banks that act as custodians in India.