India, EU standoff over clearing houses to affect BNP to HSBC

MUMBAI: Indian and European regulators are clashing over whether to broaden oversight of securities settlement, a dispute that risks disrupting operations of BNP Paribas SA to HSBC Holdings Plc, or at the least bump up their costs.

The potential damage stems from the European Securities and Markets Authority’s (ESMA) move to withdraw recognition -- effective May 2023 -to six Indian central counterparties after the Reserve Bank of India (RBI) resisted ESMA’s request to be allowed to join the RBI in overseeing Indian transactions.

Recent changes in European Market Infrastructure Regulation demanded that ESMA must establish cooperation arrangements with countries that has their own central counterparties. A key clause was exchange of information, “including access to all information requested by ESMA.” The authorities also wanted countries to “develop and submit to the commission for endorsement draft regulatory technical standards” related to the class of derivatives.

This in effect meant that ESMA wanted to have full access of third country counterparty books and also specify the structure of derivatives that

European banks can take exposure to.

While ESMA says at least 15 other countries have agreed to its request, the RBI, according to people familiar with the matter, sees the move as deeply intrusive and impinging on the RBI’s ability to structure its own derivatives.

The stand-off means banks such as BNP Paribas and Deutsche Bank AG will need to unwind billions of rupees of trades or cough up higher capital to trade in India.

“EU participants could remain participants of Indian CCPs, either through subsidiaries established in India, or as clients. In both cases they would face higher capital requirements,” an ESMA spokesperson said in an emailed response.

European banks are important market makers and their withdrawal may severely impact vital hedging tools such as currency forwards, as well some money market instruments and interest-rate derivative trading.

AFP The potential damage stems from ESMA’s move to withdraw recognition.