reserve Bank of India (reserve Bank of India) and the Clearing Corporation of India (CCIL), which settles large volumes of trading on bonds, derivatives and foreign exchange, are trying to resolve the impasse. bank of japan (BOJ) and the Financial Services Agency, Japan (JFSA) who wish to have oversight authority CCIL,
Similar demand has been made by European Securities and Markets Authority (ESMA) and bank of england (BOE) also.
While this inter-regulatory dialogue between India and Japan is underway, several European banks in the country have reached out to their headquarters to seek legal opinion on whether they can consider other banks in India as intermediaries and clearing members. to avoid ‘direct’ transactions. CCIL is there as a central counterparty if Indian regulators are unable to deal with ESMA and BoE.
Deals outside CCIL
“Certain trades such as foreign exchange and government securities of less than 13 months should be done through CCIL. There is no regulatory approval outside CCIL for carrying out these transactions on a bilateral basis. So, the question is: can we do further trades where we deal with one? indian bank Who approves it with CCIL? Here, instead of making CCIL a CCP, we will be dealing with a local bank that will act as an intermediary between My Bank and CCIL. We are legally and compliantly trying to ascertain whether such indirect deals with CCIL would violate BoE or ESMA regulations,” a senior official of a European bank told ET.
Unlike European banks, which have a large presence in India, the hurdles faced by Japanese banks – of which only three are operating – can be comparatively easy to overcome. BoJ and JFSA are not inclined to recognize CCIL as a ‘qualified central counterparty’ (CCP) in the absence of certain supervisory powers.
“The matter has been under discussion for two years and the regulators are firm on their respective stand. However, about a week ago, RBI and CCIL have asked BoJ and JFSA to consider giving exemption to CCIL as the transaction volume through CCIL is below a certain threshold level. Therefore, the issue here is whether the CCIL can be exempted from the conditions that Japan insists must apply to eligible CCPs whose volumes are above this threshold level… The Japanese authorities have yet to react. granted,” a regulatory official said.
According to industry chambers, due to Japan’s regulatory stance, Japanese banks in India such as MUFG, Mizuho and Sumitomo Mitsui Banking Corp are transacting intra-rate swaps (IRS) transactions on a bilateral basis with other banks outside the framework of CCIL. . acts as the counterparty.
“This is possible because the RBI never finalized a draft regulatory mandate that required CCIL to be the counterparty for IRS trades. But, Japanese banks are still using CCIL for forex forward trade (up to 13 months) as RBI regulation clearly requires them,” said a dealer of a local private bank.
‘Not much time left’
In addition to currency forwards undertaken to hedge the currency risk of customers, a bank may also use repos (or, repurchase of securities to borrow or lend money against gilts) to the treasury and the CCIL in transactions such as the purchase and sale of government bonds. is necessary to use.
While repo can be done in bilateral deals, trades should be reported to CCIL; and government bonds – traded faceless, orders for repos are settled through matching platforms such as – CCIL. Other forex trades such as ‘cash’, ‘tom’ or ‘spot’ – on the same day or the next day or after two working days respectively – are carried out bilaterally. In addition, foreign exchange above 13 months is settled bilaterally. But a portion of the bank’s dealing room volume is contributed by low maturity forex forwards, government bond trades and repos where CCIL plays an important role.
“If RBI allows all trades to happen bilaterally, we can settle deals outside CCIL, although the capital requirement will increase slightly. But I doubt whether RBI will allow it as it will be considered a regressive measure ,” said another person. Indeed, after the 2008 recession, regulators around the world, especially in advanced markets, favored regular reporting of transactions with CCPs as well as clearing and settlement of trades. Uniform rules were created for all eligible CCPs in the US and other countries.
European regulators revised the rules that will come into force from 1 May under ESMA rules and from 1 July under BoE rules. “It looks like these foreign regulators have unilaterally drafted the rules. It is one thing for the Indian CCP to share information. But if foreign regulators have the authority to impose penalties on CCPs in India, Indian authorities will not accept it. SEBI has suggested a framework for joint inspection and obtaining NOCs from foreign regulators before initiating the inspection.
Since a similar standoff with one of the US officials could not be resolved, US banks in India avoid CCIL for ‘Interest Rate Swap’ (IRS) deals. Therefore, if an Indian bank or a European bank enters into an IRS with an American bank to hedge the risks arising from adverse interest rate fluctuations, it is settled bilaterally.
“But this is not the case with forex forwards or gilts. In fact, the months from now until May 1 and July 1 are the ‘run-off period’ for these foreign regulators when European banks have to open their positions. So There is not much time left,” said a banker.
Apart from CCIL and NSE Clearing Corporation, which clear trades in India’s largest stock exchange NSE, ESMA has de-recognised four other CCPs in India. Apart from significantly impacting the treasury and custody business of banks, the move could impact some stock trades by foreign portfolio investors (FPIs) from Europe, which account for 18% of the total AUM of FPIs.
RBI and CCIL officials did not respond to ET’s queries till the time of going to press.