The lack of progress threatens to hobble a clutch of European banks operating in India, providing an edge to rivals from other jurisdictions. Deutsche Bank, Société Générale and BNP Paribas are among the institutions that would be affected the most.

While the banks have received a reprieve from French and German regulators until 31 October 2024, experts warned that without Indian regulators signing a new agreement with ESMA, the banks would cease to be able to use clearing houses in India.

Beyond October next year, foreign banks under ESMA jurisdictions will need to use local Indian banks as a go-between, raising their cost of operations.

A spokesperson for ESMA said the previous agreement signed in 2017 cannot form the basis for continued engagement. “ESMA is not permitted to make any concessions; it needs to follow the law,” the spokesperson said when asked if it has agreed to let India use the old agreement.

The Economic Times on 22 September reported that ESMA proposed to the Reserve Bank of India (RBI) to continue with the expired 2017 agreement.

Domestic clearing houses listed for derecognition by ESMA are Clearing Corp. of India Ltd, Indian Clearing Corp. Ltd, India International Clearing Corp. Ltd, NSE Clearing Ltd, NSE IFSC Clearing Corp. Ltd and Multi Commodity Exchange Clearing Corp. Ltd.

While a spokesperson for BNP Paribas declined to comment, separate emails sent to spokespeople for Deutsche Bank, Société Générale and RBI remained unanswered till press time.

Four years after the 2008 global financial crisis, the EU rolled out the European Market Infrastructure Regulation (EMIR) to increase transparency and reduce risks in over-the-counter derivatives. Under the EMIR, central counterparties—also called clearing houses—servicing European banks in other jurisdictions must be approved by ESMA. The EU signed the EMIR with a host of countries, including India. The agreement expired in March 2022, but India has refused to sign a revised agreement since it allows ESMA to inspect Indian entities. In October last year, ESMA said it would derecognize six Indian clearing houses but later deferred it till 30 April.

“Most foreign banks work as branches in India and not separate local subsidiaries, which means they also have to follow norms that apply to their parent. If the deadlock is not resolved before October next year, Plan B is to use other local banks for their trade,” a market expert said on condition of anonymity.

The ESMA spokesperson said the regulator is legally required to apply all requirements set out in EMIR, including new requirements introduced by EMIR 2.2.

“This is why ESMA had to discontinue the old MoUs (memorandums of understanding) and negotiate new MoUs compliant with EMIR 2.2 with all relevant authorities. This was acceptable to all third-country authorities except for India,” the spokesperson said, adding that ESMA has concluded 25 EMIR-compliant MoUs with authorities from 20 countries.

Another treasury expert said that if unresolved, this would create an unequal market in India among foreign banks since those from jurisdictions other than the EU could trade at a lower cost.

“From what I have heard in the market, RBI has not conceded and nor has ESMA,” the expert cited above said.

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Updated: 02 Oct 2023, 10:54 PM IST