Europe Imposed Strong Rejection for Indian Clearing House

Indian Clearing Houses Rejected by Europe On October 31, European Union’s Financial Market Regulator European Securities and Markets Authority (ESMA) said it will withdraw recognition of six Indian Clearing Bodies or Central Counterparties.

These six Indian Clearing Bodies are

Clearing Corporation of India
Indian Clearing Corporation Ltd
NSE Clearing Ltd
Multi Commodity Exchange Clearing
India International Clearing Corporation (IFSC) Ltd
NSE IFSC Clearing Corporation Ltd

As per European Market Infrastructure Regulations Limited, a Central Counterparties in a third country can provide clearing services to European Banks only if it is recognized by ESMA.

So, Why Derecognition Drama by Europe?

The decision to recognize came when there was no cooperation between ESMA and Indian Regulators which includes Reserve Bank of India, Securities Exchange Board of India and the International Financial Services Centers Authority (IFSCA).
ESMA wants to supervise all Central Counterparties but Indian Regulators are not in favor of this decision.
Well India is very much confident about its Management and have said clearly that these entities are robust and no foreign regulator has to inspect further.
ESMA has said it will wait to defer the Withdrawal Application till April 30, 2023.
This will give India and ESMA six months’ time to negotiate and come to a conclusion.
SEBI seems to have reached a fair level of Understanding but RBI is still tough to deal with.

So here we all know the Reason behind the Tug of War.

But what we need to know is Why Clearing Houses are Important and what will be the impact of such DeRecognition.

Let’s understand the concept

Central Counterparties (CCPs)

Central Counterparties has two main major Functions – Clearing and Settlement, – Guarantee the Terms of Trade.
It facilitates Trading and works towards establishing efficiency and stability in the financial markets.
It reduces Risk Related to the Counterparty and other risks like operational, settlement, market and Legal Risks.
The Counterparty Clearing house or CCP is important in the trading world as it collects money from both the trading parties including the buyers and sellers which ensures that both parties will follow through the said agreement.
The money collected is enough to cover the potential losses in case any party fails to follow through the contract.
Therefore, Central Counterparty Clearing house or CCP is an important factor in the trading industry, which helps to determine and guarantee the terms of the trade even if one of the trading parties which includes the buyers and the sellers, fails to follow through with the initial contract or agreement made between them.
A CCP is authorized by the RBI to operate in India under Payment and Settlement Systems Act, 2007.

So How Will this Decision Impact European Banks in India

As per the decisions these TC-CCPs will not be able to provide services to the clearing members and trading venues established in European Union.
Some of the Major Banks dealing in the domestic forex, forward, swap and equities and commodities markets include Societe Generale, Deutsche Bank and BNP Paribas.
The DE recognition will impact these lenders as they will not be able to provide clearing and settlement facilities to their clients.
They will also have to set aside additional capital to trade in the domestic market, reports suggest. Of the total foreign portfolio investors (FPI) registered in India, close to 20 per cent are from Europe,
Banks would be able to continue doing business but would face increased capital costs as they would only be able to do bilateral trades and not go through the clearing houses.
Well India has earlier also faced such controversies wherein Europe has tried to tighten its standards across all types of markets from carbon credit, green hydrogen , which has led to improvements in Indian standards .
Here We can hope this controversy too would end on a positive note.