Several banks, along with industry bodies representing money and currency market dealers, met on Wednesday to discuss the probable fallout on financial markets if the RBI and the European Securities and Markets Authority (ESMA) fail to sort out their disagreement.
ESMA has disqualified key Indian institutions which act as central counterparties (CCPs) with the Indian regulators, particularly RBI, refusing to accept their demand to inspect the CCPs like the Clearing Corporation of India (CCIL).
“Till now, only the European banks have pursued the matter with the RBI. Now, the banking industry is planning to take up the issue with the regulator. The European banks are active participants and there would be disruption if they are unable to deal in forex forwards, government bonds and interest rate swaps. This would impact local banks as well… So the issue is no longer confined to European banks,” a banker aware of the discussions told ET. “We understand and appreciate RBI’s view that ESMA’s demand is ‘extra-territorial’, but a solution has to be found,” said another person who attended the meeting.
The standoff will impact European banks in two ways: first, the inability to use CCIL as CCP (which takes the clearing and settlement risk) could disrupt their proprietary trades as well as deals on behalf of clients in the gilt, interest rate and currency derivatives; second, banks like Deutsche and BNP Paribas which act as custodians to foreign portfolio investors (FPIs), domestic mutual funds and insurers may lose their custody business to banks like Citi, ICICI, Kotak and HDFC Bank. Other European banks in India are Credit Suisse, Credit Agricole, Stanchart, HSBC and Barclays.
“Sebi, according to media reports, is trying to find a middle ground. While this would help a custodian bank to deal with a CCP like NSE Clearing Corporation for equity trades by FPIs and MFs, it would only be a partial solution… An FPI or MF buying G-secs will not be able to use the custody service if the custodian bank cannot deal with CCIL,” said a banker. “Rules on initial margin (for derivative trades) would also be triggered if deals are cut outside CCIL. With a CCP no initial margin is required for derivative deals. Without margin, notional deal amounts have to be below a certain level,” said the person.
If the differences between RBI and ESMA continue next year, European banks will have to route the trades through another non-European bank by operating a constituents’ subsidiary general ledger account (CSGL) instead of directly using a subsidiary general ledger (SGL) account for holding securities. “For this, RBI has to change regulations to allow European banks to simultaneously hold an SGL and CSGL account and freely transfer securities between the two accounts,” said a bond dealer. Currently, a bank cannot hold an SGL account and a CSGL account.
At a meeting with some of the European banks in mid-November, RBI had put the onus on these banks to resolve the stalemate caused by the ESMA rule. However, the central bank may have to find a way to address the standoff if it boils over as a concern for the entire banking industry.
