Mumbai: The Reserve Bank of India and regulators in the UK have made significant headway in crafting a new agreement to govern the treatment of the Clearing Corporation of India (CCIL), with both sides moving closer to swiftly removing a hurdle that had threatened to stall British banks’ activity in Indian government bonds and derivatives.
People aware of the developments said the new Memorandum of Understanding being worked upon by the RBI and UK authorities, including the Bank of England, would essentially communicate a “hands-off” approach towards the CCIL on potentially contentious issues such as rights of audit over the Indian clearing house.
“The UK authorities don’t want to get involved beyond a point as long as the local setup is working fine. There is a view that too many regulatory standpoints can cause complications. There is also unlikely to be any provision for inspection of CCIL, which has been the source of the conflict between the RBI and the European Securities and Markets Authority,” said one of the persons cited above.
The CCIL, which houses the trading platforms for Indian government bonds and overnight indexed swaps, is supervised by the RBI. Emails sent to the RBI remained unanswered till press time on Monday. An official from the Bank of England declined to comment.UK-based banks with a significant presence in Indian bond and derivatives markets include Standard Chartered Bank, Barclays, and HSBC.
These banks handle transactions worth billions of dollars. Foreign banks are also custodians of foreign investment flows into India. Lack of access to the CCIL would severely curtail such trade.
In October 2022, the CCIL was de-recognised by the European Securities and Markets Authority as the RBI had refused to permit the overseas body rights of inspection and audit over the domestic clearing house. Subsequently, the CCIL was also placed on a runoff regime in the UK pending a fresh application for recognition to the Bank of England in a post-Brexit UK.
According to British norms, a non-UK clearing house placed under the temporary recognition regime would receive recognition for up to a year from the day on which the central counterparty — the CCIL in this case — ceased to be recognised. For the CCIL, the date of exit was July 1, 2023, according to the BoE’s website.
QUICK RESOLUTION
Unlike the issue between the ESMA and the RBI, which is yet to show any meaningful sign of a resolution, the UK authorities have moved swiftly to enable recognition of the CCIL.
Taking a major step in that direction, the UK Treasury in June accorded equivalence to central counterparties authorised by the RBI, the first such step after Brexit.
The CCIL also said in June that it had made an application to the Bank of England for recognition as a third-country central counterparty on January 31 2023.
“Unlike the ESMA issue, the UK issue was not really about imposing a fresh set of demands on the CCIL. The CCIL entered the runoff regime purely as a technicality because fresh applications were to be made after Brexit. Moreover, all parties involved have moved quickly to make sure that trading operations can carry on unhindered,” a second person said.
After the Global Financial Crisis, developed markets took steps towards reducing risk in derivatives markets. In attempts to contain those risks, they have been looking to maintain control of regulation and risk management practices in third countries, RBI deputy governor T Rabi Sankar said last year.
