RBI Must Stand Its Ground Against EU Regulators On Clearing Corporations

The Reserve Bank of India needs to turn the European regulators' intent to de-recognise Indian clearing houses into a prestige issue since it directly questions the central bank's oversight and regulatory capabilities.

The European Securities and Markets Authority's insistence on powers to also audit and inspect clearing corporations—such as Clearing Corp.—that does not operate outside India, is a gross overreach into the jurisdiction of the Reserve Bank of India and other Indian authorities.

To encapsulate the issue in brief, in October, the authority announced that it was de-recognising six Indian clearing houses, including the CCIL, which is regulated by the RBI, with effect from April 30.

The de-recognition was triggered as these clearing houses had not complied with ESMA's European Market Infrastructure Regulation. Under these regulations, ESMA wants to have the powers to inspect and audit Indian clearing houses because European banks that it regulates have operations that get cleared on these platforms.

So far, the RBI has engaged with the ESMA and the foreign banks whose Indian operations will get impacted by these strictures, but has not shown any alacrity to kowtow to their demands.

RBI Deputy Governor T Rabi Sankar has been succinct when he referred to ESMA's rules as an "unfortunate interference".

Sankar has still been polite as the ESMA's insistence on auditing and inspecting entities, that the RBI already regulates, is almost questioning the Indian central bank's competence to do its job in its own jurisdiction.

Even as the RBI has continued to discuss the issue through the proper channels to reach a mutual understanding on cooperation and data sharing with ESMA, the RBI top brass has expressed publicly its displeasure with the European regulator's approach on the issue.

In December, RBI Governor Shaktikanta Das made it clear that India was not the same country that it was 10–30 years ago, and that Indian institutions were robust and compliant with international standards, such as Basel's Committee on Payments and Markets Infrastructures.

"I think it is also necessary for regulators on the other side to appreciate the credibility; they must trust the credibility and strength of the Indian regulations," Das had said. "That is what we are trying to impress upon them."

This statement is telling on how the RBI is uncomfortable with allowing an external regulator to impose their regulation on entities that operate only in India. The two parties—RBI and ESMA—diverge on whether the fact that some EU-regulated transact through Indian clearing houses for local trades gives the EU regulators the right to inspect and audit local institutions.

If ESMA insists on a hard line on the issue, the appropriate regulatory response from the RBI, and by extension India, should be to insist on the same powers for the RBI over clearing houses in Europe, since Indian banks have operations there. This should be nothing but a bargaining tactic of the last resort to show the RBI's displeasure.

Also, it is a little rich that a global authority is seeking to impose its regulatory oversight over another jurisdiction, when recent developments involving banks in their backyard show how bad market bets left some banks in the need of a rescue.

And it is increasingly clear that there is little consensus within Europe and global entities on the issue as India has emerged as a key economy for people from across the globe. The banks themselves are keen to continue to operate even if ESMA imposes some form of penal capital charge.

The RBI's stance has already led Japan to accept that Indian systems and oversight are adequate to let their banks continue to clear trades through Indian clearing houses.

Even as the ESMA tries to maintain a hard line, authorities from key countries in Europe, such as France and Germany, are already showing the EU regulator that their interest lies in working with the RBI and India.

France's Autorité des marchés financiers, or AMF, and Germany's Federal Financial Supervisory Authority, or BaFin, have announced an 18-month extension till October 2024, for their banks to figure out what to do for trades cleared through such clearing houses de-recognised by the ESMA. The Bank of England has also given a similar extension to its banks.

This is reflective of the importance that they accord to continued business in India, and their hope that the RBI and ESMA will find a way to converge on a solution by then.

ESMA will do well to remember that when the U.S. and global authorities tried to use diplomatic channels to get the RBI to relent on their insistence to store Indian payments data only in India, the government backed the central bank on the issue. And to rub salt into the wounds, the RBI imposed business restrictions on those global payments players that did not comply with its deadline on data localisation.

That should act as a cautionary tale for any authority that tries to overstep their boundaries when it comes to India. 

The face-saving for ESMA would be to work with the RBI on a solution that focuses on cooperation and data sharing on trades of EU-based banks on Indian clearing houses.

There is no case for the RBI to allow ESMA to intrude on its jurisdiction by allowing them to inspect or audit local institutions. At best, the RBI will figure out a kindly-worded statement that makes it seem like the ESMA will have "some" access to audit or inspection reports generated by the Indian regulator.

Separately, the ESMA will do well to reconsider regulations that cause so much trouble with large countries like India that have their own regulatory and supervisory heft.   

The fact that the RBI has let the deadline set by the ESMA pass is a statement in itself.

The ESMA has to now look for a solution for its banks that want to continue to operate in India. This is a problem created by ESMA and while the RBI can do its bit to address any legitimate concerns raised by the EU regulator, there is no need to do anything drastic on a timeline set by some external authority.

As RBI Governor Shaktikanta Das has said, India has changed over the decades. And the world will do well to understand that this change will change how India interacts with the world.