Why has ESMA derecognised six Indian central counterparties

Why has ESMA derecognised six Indian central counterparties

Subject: Polity

Context:

• The EU’s financial markets regulator and supervisor, the European Securities and Markets Authority (ESMA), had de-recognised six of India’s central counterparties (CCPs) in accordance with the European Market Infrastructure Regulation.

Who are the six of India’s central counterparties (CCPs):

• Clearing Corporation of India (CCIL)
• Indian Clearing Corporation Ltd (ICCL)
• NSE Clearing Ltd (NSCCL)
• Multi Commodity Exchange Clearing (MCXCCL)
• India International Clearing Corporation (IFSC) Ltd (IICC)
• NSE IFSC Clearing Corporation(NICCL)

What’s the role of CCP:

• CCPs perform two main functions as the intermediary in a market transaction

1. Clearing and settlement
2. Guarantee the terms of a trade.

• CCP is a system provider, who by way of novation interposes between system participants in the transactions admitted for settlement, thereby becoming the buyer to every seller and the seller to every buyer, for the purpose of effecting settlement of their transactions.
• A CCP is authorised by the RBI to operate in India under Payment and Settlement Systems Act, 2007.

What’s the reason for derecognition:

• The decision to derecognise Indian CCPs came due to ‘no cooperation arrangements’ between the ESMA and Indian regulators e. the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI) and the International Financial Services Centres Authority (IFSCA).
• As per the European Market Infrastructure Regulations (EMIR), a CCP in a third country can provide clearing services to European banks only if it is recognized by the ESMA.
• The ESMA wants to supervise these CCPs, which the Indian regulators are not in favour.

What timeline has ESMA given:

• The EU regulator will defer the application of the withdrawal decisions until April 30, 2023 to mitigate the adverse impact of the move on EU market participants.

How will the derecognition impact European banks:

• Third country CCPs(TC-CCPs) will no longer be able to provide services to clearing members and trading venues established in the EU.
• Some of the major European banks dealing in the domestic forex, forward, swap and equities and commodities markets include Societe Generale, Deutsche Bank and BNP Paribas 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. Of the total foreign portfolio investors (FPI) registered in India, close to 20 per cent are from Europe.