EU Banks: EU banks expect India bond trades to go on

Mumbai : Four European banks are confident their national regulators will allow them to continue trading ahead of the deadline to stop transacting with India’s sovereign bond clearing house, while recent communications between domestic and Paris-based authorities have sparked hope of a resolution to a protracted regulatory standoff.

Earlier this month, senior executives from Deutsche Bank, BNP Paribas, Credit Agricole and Société Générale met Reserve Bank of India Deputy Governor T Rabi Sankar and discussed the issue of the de-recognition of the Clearing Corporation of India (CCIL) by the European Securities and Markets Authority (ESMA), sources aware of the developments told ET.

“On the question of the October 2024 deadline, based on recent communications with their national regulators, the banks are confident that the timeline to trade with the CCIL will be extended,” said one of the sources.

After the Paris-based ESMA de-recognised the CCIL in October 2022, the national regulators of the four banks — Germany’s federal financial supervisory authority BaFIN and the Autorité des marchés financiers (AMF) of France — allowed the lenders till October 2024 to transact with the CCIL.

Sources also said the RBI and the ESMA also recently exchanged correspondence seeking ways to resolve astalemate that stems from the domestic central bank’s refusal to allow the foreign regulator rights of audit and supervision over the CCIL.The issue, which first came to the fore when the ESMA de-recognised the CCIL in October 2022, threatens to derail billions of dollars via bond and derivatives trading by the four European banks in India. Some of the banks also play a key custodian role in Indian securities markets while facilitating foreign invest ment flows into the country.“The RBI has made it clear that it is not comfortable with the ESMA having the rights to audit, inspect and potentially levy fines on the CCIL. As things stand, perhaps the way out is the addition of a side letter with watered-down provisions that are agreeable to both parties in the existing agreement between the RBI and the ESMA,” a source said.

An email sent to the RBI seeking comment on the matter did not elicit a response by press time. Deutsche Bank, Credit Agricole and Société Générale also did not respond to emails, while a BNP Paribas spokesperson declined to comment on the matter.
While a third-party clearing model has been discussed as a potential alternative for the foreign banks to continue trading in India pending a resolution of the conflict bet ween the RBI and the ESMA, sources said such a model was not yet ready to be implemented.

“The third-party clearing model envisions the four foreign banks becoming clients of a couple of domestic banks for clearing operations, but there are hurdles for all parties concerned with that model including confidentiality issues for the custodians as well as the status of different government securities accounts,” another source said.

“The four banks would also be bereft of reports and access that they would have received earlier from the CCIL once they become clients instead of clearing members,” the source said.

The disagreement between the RBI and the ESMA can be traced to efforts by the developed economies to reduce counterparty risk in their markets after the global financial crisis. However, such efforts that attempt to control regulation of third countries pose risks of extra-jurisdictional overreach, the RBI has said in the past.