India's financial market regulators are actively engaged in crucial discussions with European authorities to resolve a longstanding regulatory impasse that has affected cross-border clearing operations. The Securities and Exchange Board of India (Sebi) and the International Financial Services Centres Authority (IFSCA) are working towards finalizing information-sharing agreements with the European Securities and Markets Authority (ESMA) within the next sixty days.
Pathway to Re-recognition
This regulatory initiative follows the recent agreement between ESMA and the Reserve Bank of India (RBI), signed on January 27, which established a framework for information exchange. According to senior officials familiar with the negotiations, Sebi is expected to announce its own pact with ESMA shortly, while IFSCA anticipates finalizing its agreement within one to two months. These developments signal a significant step toward restoring European Union recognition for Indian clearing houses.
Historical Context and Current Developments
The background to these negotiations dates back to October 2022, when ESMA withdrew recognition from six Indian clearing entities. This action affected Clearing Corporation of India Ltd, Indian Clearing Corporation Ltd, India International Clearing Corporation Ltd, NSE Clearing Ltd, NSE IFSC Clearing Corporation Ltd, and Multi Commodity Exchange Clearing Corporation Ltd. The derecognition occurred after previous agreements with Indian regulators expired, though the implementation was subsequently deferred until April 30, 2023.
This regulatory withdrawal created operational challenges for European banks utilizing these clearing houses, potentially increasing their capital requirements and complicating trade settlements. A renewed agreement would enable these institutions to reapply for EU recognition, thereby alleviating these burdens.
Broader Diplomatic and Economic Context
The regulatory push coincides with a notable warming in India-European Union relations. On January 27, India and the EU signed a comprehensive free-trade agreement, strategically positioned as a counterbalance to US influence. Prime Minister Narendra Modi emphasized that this pact would strengthen India's manufacturing and services sectors while boosting investor confidence across both regions.
Regulatory Perspectives and Expert Analysis
An anonymous senior IFSCA official revealed, "We have already discussed with ESMA and sent a proposal to the government. We expect a similar resolution as the RBI... The government will review our proposal and it should happen maybe within 1-2 months time." This statement underscores the coordinated approach among Indian regulatory bodies.
Financial experts highlight the practical benefits of these agreements. Soumyajit Niyogi, Director at India Ratings and Research, noted, "While this may not immediately translate into a surge in foreign portfolio inflows, it should meaningfully ease operational and settlement procedures for European banks and other global participants."
Jurisdictional Considerations and Future Implications
The regulatory landscape presents distinct jurisdictional challenges. While the Clearing Corporation of India, under RBI supervision, can now reapply for recognition, the other five clearing houses must await similar arrangements between ESMA and their respective regulators—Sebi or IFSCA.
An ESMA spokesperson clarified, "Other Indian central clearing counterparties (CCPs), supervised either by Sebi or IFSCA, will only be able to re-apply once ESMA and their relevant authorities conclude similar MoUs. ESMA is however currently in discussions with these authorities with the aim of reaching similar agreements than with the RBI."
The spokesperson further explained that since the recognition withdrawals in April 2023, EU banks have operated under temporary contingency arrangements when clearing through Indian houses. This status meant these CCPs no longer qualified as qualifying CCPs (QCCPs), resulting in higher capital requirements for EU clearing members.
Industry Response and Historical Framework
Banking industry representatives acknowledged that while costs increased due to the derecognition, the overall business impact remained limited. A European bank official stated, "There was an interim relaxation given by ESMA to all banks to continue to trade with CCIL or clear trades with CCIL. So locally there was not much change."
These regulatory requirements stem from post-2008 financial crisis reforms. The European Union implemented the European Market Infrastructure Regulation (EMIR) in 2012 to enhance transparency and mitigate risks in over-the-counter derivatives markets. Article 25 of EMIR mandates that clearing houses servicing European banks abroad must obtain ESMA approval.
As negotiations progress, the financial community watches closely, anticipating that successful agreements will streamline cross-border clearing operations and reinforce the growing economic partnership between India and the European Union.
