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An attempt by the home regulator of European Banks to maintain control of regulation and risk management practices of financial infrastructure entities amounts to an unfortunate interference in the regulatory architecture in India, according to RBI Deputy Governor, T Rabi Sankar.
He noted that a probably unintended consequence of the post-GFC (global financial crisis) drive towards de-risking OTC (over-the-counter) derivatives markets has been the tendency of developed economies to contain the risk of their entities by attempting to maintain control of regulation and risk management practices of third countries.
“Thus, for example, European banks may not be able to operate through Indian financial infrastructure entities (Central Counter Parties, benchmark administrators), unless their home regulator accords equivalence treatment to the Indian infrastructure entities or these entities are endorsed or recognised,” said Sankar at a recent seminar organised by Financial Benchmarks India Private Limited (FBIL).
The Deputy Governor observed that such treatment involves ability to call for information, supervise, inspect and (at least potentially) impose penalty on Indian entities.
Unfortunate interference
“This amounts to an unfortunate interference in the regulatory architecture in India, especially given the fact that these Indian entities meet relevant global best standards, set by Committee on Payments and Market Infrastructures (CPMI)-IOSCO,” said the Deputy Governor.
Potential disruption to fx markets
Sankar said similar extrajurisdictional overreach is hanging over FBIL as well. He cautioned that the potential disruption to forex markets, both onshore and NDF (non-deliverable forward), can be rather serious.
“That such disruption flows from the action of regulators is not in alignment with the post-GFC global consensus on de-risking financial markets.
“All regulated entities understand the costs and constraints of compliance. It cannot be anyone’s argument that replicating such obligations for every regulator in every jurisdiction is an efficient arrangement,” he said.
The Deputy Governor emphasised that a satisfactory solution to this impending complication needs to be found quickly.
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