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ESMA’s Derecognition of Indian CCPs

Context:

The European Securities and Markets Authority (ESMA), the European Union’s financial markets regulator, has derecognized six Indian Central Counterparties (CCPs) from April 30, 2023, in accordance with the European Market Infrastructure Regulation (EMIR).

Relevance:

GS III: Indian Economy

Dimensions of the Article:

  1. Why has ESMA Derecognized Indian CCPs?
  2. Central Counterparties (CCPs)
  3. ESMA and EMIR

Why has ESMA Derecognized Indian CCPs?

  • The six Indian CCPs derecognized by ESMA are 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) and NSE IFSC Clearing Corporation Ltd (NICCL).
  • ESMA derecognized these CCPs because they did not meet all EMIR requirements.
  • Indian regulators, including RBI, SEBI, and IFSCA, did not establish “no cooperation arrangements” with ESMA.
  • ESMA aims to supervise these six CCPs, but Indian regulators believe that as they operate in India and not the EU, they should not be subject to ESMA regulations.
  • Indian regulators maintain that these CCPs have strong risk management and do not require foreign regulatory oversight.

Impact of ESMA’s derecognition of Indian CCPs

  • Following the withdrawal decisions, the six derecognized Indian CCPs cannot offer services to EU-based clearing members and trading venues.
  • European banks operating in India will be affected by this decision.
  • These banks may need up to 50 times more capital to conduct trades with Indian CCPs or will have to unwind their positions with the CCPs in the next 6 to 9 months.

Central Counterparties (CCPs)

Definition of CCPs:

  • Financial institutions that facilitate clearing and settlement process in financial markets
  • Act as intermediaries between buyers and sellers in derivatives and equities markets

Goal of CCPs:

  • Increase efficiency and stability in financial markets

Benefits of CCPs:

  • Reduce risks associated with various issues such as counterparty, operational, settlement, market, legal, and default
  • Act as a counterparty to both buyers and sellers, ensuring the terms of the trade are guaranteed
  • Collect money from each party involved in the trade

Functions of CCPs

  • Clearing and settlement are the main functions of CCPs
    • Clearing involves validating trade details and verifying sufficient funds for transaction completion
    • Settlement involves transferring ownership of the asset or security being traded from seller to buyer.

Regulators for CCPs in India

  • The Reserve Bank of India (RBI) is responsible for CCPs that clear money market instruments and foreign exchange derivatives.
  • Under the Payment and Settlement Systems Act, 2007, CCPs are authorized by the RBI to operate in India.
  • The Securities and Exchange Board of India (SEBI) regulates CCPs that clear securities and commodity derivatives.

ESMA and EMIR

ESMA:
  • ESMA is an independent EU authority.
  • Its goals include investor protection and promoting stable financial markets.
  • ESMA supervises specific financial entities, such as credit rating agencies, securitization repositories, and trade repositories.
EMIR:
  • EMIR is an EU regulation that came into effect in August 2012.
  • Its aim is to reduce systemic, counterparty, and operational risk in the OTC derivatives market.
  • EMIR sets higher prudential standards for CCPs and trade repositories.
  • It enhances risk mitigation techniques for non-cleared derivatives.
  • EMIR also establishes a framework for recognizing and supervising third-country CCPs.

-Source: Economic Times


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