Foreign banks consider bilateral settlement agreements

Foreign banks are considering alternative settlement arrangements and seeking to appoint sub-custodians who can handle all fixed income transactions in India, three senior officials said.

This decision follows the decision of the European Securities and Markets Authority to derecognise six Indian central counterparties (CCPs), including Clearing Corp. of India Ltd (CCIL) and Indian Clearing Corp., from April 30, 2023. This effectively means that European banks cannot settle their transactions. through clearinghouses and may have to seek bilateral settlement agreements if the matter is not resolved.

Central counterparties provide infrastructure that contributes to safer, more efficient and more transparent global financial markets.

Under the proposed arrangement, banks will have to deal with sub-custodian banks, which can trade directly on the CCIL platform to assist banks that are not permitted to trade directly on the CCIL system. “In stock markets, if you have an account with a brokerage firm, you have a relationship with the firm, not with the stock exchange. We are considering a similar arrangement for all fixed income transactions,” said a senior banker at a foreign bank seeking anonymity. “But we need to check if all regulators are kosher with this arrangement,” he added.

This arrangement will not only help foreign banks bypass the straight-through process with clearing houses, but they will also gain access to the trading and clearing platform if the sub-custodian model works. That said, the talks are in the discussion stage and a formal proposal has yet to be made to the Reserves. Bank of India or CCIL, the second official said, also requesting anonymity.

“Currently, CCIL has a tiered structure where direct members and clients of clearing members in certain segments can operate. Maybe the banks are considering such an arrangement,” he said.

The impasse between Indian regulators and the European Securities and Markets Authority over the powers of supervision and audit of clearing companies after the derecognition of six Indian CCPs is raging. Indian regulators, such as the Securities and Exchange Board of India (Sebi), RBI and the International Financial Services Centers Authority (IFSCA) are not comfortable leaving scrutiny and inspection by foreign market regulators, as this could result in a cession of land to an authority that is exercising extraterritorial jurisdiction over the activities of Indian CCPs. European banks are concerned about such actions as they will not be able to settle foreign exchange, gilts, currencies and interest rate derivatives trades made on Indian exchanges. If the issue is not resolved by April 30, 2023, foreign lenders will have to start unwinding their positions through central counterparties. Banks also risk losing customers if foreign portfolio investors consider doing business with other custodian banks where there is regulatory certainty.

In addition, the removal of CCIL as a counterparty may lead to a higher capital requirement for transactions compliant with Basel standards. In addition, US banks are not involved in swap derivatives trading on the CCIL because the US Commodity Futures Trading Commission has not recognized the clearing house as a derivatives clearing organization. These transactions are therefore carried out bilaterally by banks outside the framework, with the CCIL acting as counterparty.

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