Why is crisis brewing for European banks in India?

What is the current standoff about?

The European Securities and Markets Authority (ESMA), the European Union’s financial markets regulator and observer, said on 31 October that it proposes to derecognise six Indian CCPs—including Clearing Corporation of India and Clearing Corporation of India—with effect from 30 April 2023. Is. Esma said the decision was taken due to non-compliance with certain provisions of the European Market Infrastructure Regulation. The move effectively means that European banks will not be able to clear or settle trades in forex, gilts, currency and interest rate derivatives made on Indian exchanges.

What was India’s agreement with ESMA?

Following the 2008 financial crisis, the European Union adopted the European Market Infrastructure Regulation (EMIR) in August 2012 to increase transparency and reduce risk in the over-the-counter (OTC) derivatives market. Article 25 of the EMIR requires CCPs in other global jurisdictions providing services to European banks to be approved by ESMA. India signed the agreement in 2017, which expired in March this year. ESMA now wants to modify the agreement under EMIR 2.0 to include additional terms, including supervisory powers to oversee Indian clearing corporations, which Indian regulators have not agreed to.

What is the stand of Indian regulators?

SEBI, RBI and IFSCA are not comfortable with scrutiny and oversight by foreign market regulators as this may result in giving regulatory basis to an authority which is exercising external jurisdiction over the activities of Indian CCPs. Indian regulators fear it could set an example for other countries to emulate.

How will this affect banks?

The impasse will impact European banks such as Deutsche Bank and Credit Suisse. Deutsche Bank is one of the largest custodian banks – a financial institution that holds securities of customers for safekeeping. If the resolution is not reached before 30 April 2023, these banks will have to start opening their positions through CCPs. If foreign portfolio investors choose to do business with other custodian banks where there is regulatory certainty, banks stand to lose out to larger businesses.

What is the way forward?

Indian regulators say that there is time till April and the deadline can be extended. This issue can be resolved through government-to-government talks. At least that’s what it looks like. European banks have made representations to the Indian government and regulators to resolve the matter as they have to comply with the rules of the home country. But the ban will not affect foreign flows from Europe to India – it will only affect the ability of European banks to settle trades and conduct treasury operations.