The new CBDC system, used as a pilot in government security trades earlier this month, could be an option to eliminate the need for European oversight as the central bank itself is the clearing custodian here.
To be sure, the bipartisan nature of the CBDC system, lack of clarity on capital requirements and early stages of use-case applications are potential problems that need to be addressed.
While market participants expect the two to come midway during regulatory oversight, they are wary of the impact of a prolonged impasse.
European lenders such as HSBC, Deutsche, Standard Chartered, Barclays and BNP Paribas So-called negotiating systems run by the Clearing Corporation of India Limited (CCIL) make up anything between 15% and 25% of trades in the order matching segment (NDS-OM), one of the central counterparties to settlement. Business.
A senior banking executive said, “RBI does not want any foreign agency to inspect entities regulated by it, which is a fair point. But in the current situation where it has been implemented across the world, it is difficult to make exceptions here. ” , “India needs more of these institutions here and not adhering to these norms will mean a volatile capital charge on banks, which may force them to exit the country.”
Currently, banks have to set aside around 2.5% in capital, which means around ₹2.5 crore for every ₹100 crore business. If the Indian central counterparty fails to comply with the ESMA rules, it could increase by almost 50 times, making trade untenable.
The main advantage of a central counterparty like CCIL is that it allows a multilateral web of deals. Meaning, a bank can settle multiple deals with different participants through the system so that the payments and receipts become pure.
Earlier this month, an RBI-backed CBDC made its debut as a pilot; It is a real-time gross settlement system. In other words, here the transactions are settled between the banks on one-on-one basis. On the first day, around 50 government bond transactions worth around Rs 275 crore were settled on the system. But bankers are wary of whether it could replace trades on CCIL.
“Yes there is an opportunity as it is a quick settlement system, but still there is an issue of risk management, liquidity and how trades will be liquidated. There is a better solution for the regulators to come up with some sort of understanding,” said A. Another said senior banking executive.
Under CBDC, a digital currency account is maintained with the RBI and banks have to first transfer money to this account from their respective current accounts.
If Bank X is buying bonds from Bank Y, then X’s CBDC account will be debited with corresponding credit in the same account of Bank Y. But the trades will be settled on the same day as opposed to the next day settlement prevailing now. The balance in the CBDC accounts will be remitted back to the current account of the bank.
However, bankers say it is too early to use CBDCs extensively for government bond trades. The lawyers said that the government will have to take the opinion of the RBI before taking a decision.
Arka Mukherjee, partner, J Sagar Associates said, “Securities law does not override RBI and since it has forex and cross-border ramifications, the government will have to take the views of RBI as well.”