In Friday’s monetary policy statement, Reserve Bank of India Governor Shaktikanta Das referred to the agreement signed with the Bank of England for exchanging information relating to Clearing Corporation of India. The MoU is a victory of sorts for India as it recognises the RBI as the principal regulator of Clearing Corporation of India. The agreement is “based on mutual respect for each jurisdiction’s current regulatory regime and each authority’s supervisory practices.” It would help bring to an end the regulatory ambivalence on this score, as well as the needless doubts being raised on India’s regulatory capabilities.

The agreement, by affirming the regulatory role of the RBI, will help the Bank of England assess if UK based banks can use Clearing Corporation of India for settling transactions in Indian government bonds, foreign exchange and derivative market. It shows other regulators, including the European Securities Markets Association, the way to amicably settle the contentious issue relating to external supervision of Indian clearing corporations. Over the past year, ESMA and Bank of England had set a deadline for derecognising Indian clearing corporations regulated by the RBI, SEBI and IFSCA because they wanted the power to monitor, supervise and audit Indian clearing corporations. The RBI and other regulators had understandably been offended by the aspersion cast on their capabilities. Indian clearing corporations are superior to their European counterparts in risk management and investor protection. They are independent entities with robust settlement guarantee funds. Indian regulators are also concerned about unlimited access to data provided by these rules.

While the European regulators including ESMA and BoE are bound by the European Market Infrastructure Regulation, which stipulates supervision of central counterparties in other countries which provide services to their banks and exchanges, it is time they recognise that other jurisdictions will not be willing to toe their line. If European banks are not allowed to act as clearing members for fixed income and forex transactions of foreign portfolio investors, the investors are likely to shift their businesses to US or Asian banks.

Many European banks and clearing members have appealed to European regulators to reconsider their view on Indian regulators. In February this year, Germany’s Federal Financial Supervisor, BaFin and France’ Autorite des Marches Financiers had extended the deadline for their banks acting as custodians in India for closing their positions in Indian markets to October 2024, from the stricter deadline imposed by ESMA of April 2023. The European regulator has also backtracked by stating that the European banks can continue acting as custodians beyond April 2023, but some penal charges would be levied on them. The RBI has done well to call the bluff of European regulators. The agreement signed with BoE should act as a model for similar agreements with other regulators in future.

comment COMMENT NOW