Several banks, along with industry bodies representing currency and money market dealers, met on Wednesday to discuss the potential fallout on financial markets if the RBI and the European Securities and Markets Authority (ESMA) fail to resolve their disagreement.
ESMA has disqualified major Indian institutions that act as central counterparties (CCPs) with Indian regulators, particularly the RBI, for their Demand To inspect CCPs like Clearing Corporation of India (CCIL).
“Till now, only European banks have taken up the matter with RBI. Now, the banking industry is planning to take up the issue with the regulator. European banks are active participants and if they are unable to deal with it there will be disruption ” foreign exchange forwards, government bonds and Rate of interest swap. This will affect local banks as well…so this issue is no longer limited to European banks. A solution has to be found,” said another person who attended the meeting.
The impasse will affect European banks in two ways: first, the inability to use CCIL as a CCP (which carries clearing and settlement risk) for their proprietary trading as well as on behalf of clients in gilt, interest rate and currency derivatives. Can block deals. , Second, banks such as Deutsche and BNP Paribas that act as custodians of foreign portfolio Investors (FPIs), domestic mutual funds and insurers may lose their custody Business For banks like Citi, ICICI, Kotak and HDFC Bank. Other European banks in India are Credit Suisse, Credit Agricole, Stanchart, HSBC and Barclays.
“According to media reports, SEBI is trying to find a middle ground. While this will help the custodian bank to deal with CCPs like NSE Clearing Corporation.” equity trading by FPIs and MFs, this will only be a partial solution… An FPI or MF buying G-Secs will not be able to access custody service if the custodian bank cannot strike a deal with CCIL,” said a banker. “But if the deals are executed outside CCIL then the initial margin (for derivative trades) will also be triggered. No initial margin is required for derivatives deals with CCP. Without margin, the token trade amount should be below a certain level,” the person said.
If the gap between the RBI and ESMA continues into next year, European banks may have to operate a subsidiary general ledger (CSGL) of one constituent instead of using the subsidiary general ledger (SGL) account directly with another non-European one. Business has to be done through the bank. holding securities. “For this, the RBI will have to tweak the rules to allow European banks to hold SGL and CSGL account simultaneously and move securities freely between the two accounts,” said a bond dealer. Presently, a bank cannot maintain SGL account and CSGL account.
In a meeting with some European banks in mid-November, the RBI put the onus on these banks to resolve the impasse caused by the ESMA rule. However, the central bank may have to find a way to break the impasse if it is to be a concern for the entire banking industry.