Derecognition of six Indian central counterparties by EU regulator: What will be the impact?

Source: The post is based on the article “Derecognition of six Indian central counterparties by EU regulator: What will be the impact?” published in Indian Express on 4th May 2023

What is the News?

The European Securities and Markets Authority (ESMA), the European Union (EU’s) financial markets regulator and supervisor has derecognised six Indian central counterparties(CCPs).

What are Central Counterparties(CCPs)?

CCP performs two main functions as the intermediary in a market transaction –clearing and settlement – and guaranteeing the terms of trade. 

A CCP is authorized by the RBI to operate in India under the Payment and Settlement Systems Act, 2007.

Some of the important CCPs in India are The Clearing Corporation of India (CCIL), Indian Clearing Corporation Ltd (ICCL), NSE Clearing Ltd (NSCCL), Multi Commodity Exchange Clearing (MCXCCL) among others.

What is the issue?

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 recognised by ESMA.

ESMA has derecognised six Indian CCPs due to ‘no cooperation arrangements’ between ESMA and Indian regulators – the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI) and the International Financial Services Centres Authority (IFSCA).

While ESMA wants to supervise these six CCPs, Indian regulators are of the view that since these domestic CCPs operate in India and not in the EU, these entities cannot be subjected to the ESMA regulations. 

They feel that these six CCPs have robust risk management and there is no need for a foreign regulator to inspect them.

What will be the impact of the move?

With the withdrawal of recognition, these six CCPs will no longer be able to provide services to clearing members and trading venues established in the EU.