Why in News?

• The European Securities and Markets Authority (ESMA), the European Union (EU’s) financial markets regulator has derecognised six Indian central counterparties (CCPs) from April 30, 2023.

 What in Today’s Article?

• What is a CCP?
• What is the Issue?
• What will be the Impact of the Move?

 What is a CCP?

• It is a financial institution that perform two main functions as the intermediary in a market transaction -
  • Clearing and settlement for trades in foreign exchange, securities, options, and derivative contracts.
  • Guarantee the terms of trade.
• CCP is a system provider, who by way of novation (act of replacing an obligation with another) -
  • Interposes between system participants in the transactions admitted for settlement,
  • Thereby becoming the buyer to every seller and the seller to every buyer, for the purpose of effecting settlement of their transactions.
• CCPs are highly regulated institutions that specialise in managing counterparty credit risk.
• In India, a CCP is authorised by the Reserve Bank of India (RBI) to operate under the Payment and Settlement Systems Act, 2007.

 What is the Issue?

• The six CCPs derecognised are:
  • The Clearing Corporation of India (CCIL),
  • Indian Clearing Corporation Ltd (ICCL),
  • NSE Clearing Ltd (NSCCL),
  • Multi Commodity Exchange Clearing (MCXCCL),
  • India International Clearing Corporation (IFSC) Ltd (IICC) and
  • NSE IFSC Clearing Corporation Ltd (NICCL).
• Why are they derecognised?
  • As per the European Market Infrastructure Regulations (EMIR), a CCP in a third country (TC-CCPs) can provide clearing services to European banks only if it is recognised by ESMA.
  • The decision to derecognise Indian CCPs came due to ‘no cooperation arrangements’ between ESMA and Indian regulators - the RBI, the SEBI and the International Financial Services Centres Authority (IFSCA).
• Regulations of CCPs:
  • According to the Financial Stability Report 2022 (RBI), after the global financial crisis of 2007-09, the legislations governing CCPs were enacted in some advanced jurisdictions to give them an extra-territorial reach.
  • Such regulations created a parallel maze of laws with overlapping requirements or restrictions and showed a lack of trust in the capabilities and quality of oversight exercised by other regulators.
• Argument of Indian regulators:
  • Since these domestic CCPs operate in India and not in the EU, these entities cannot be subjected to the ESMA regulations.
  • These CCPs have robust risk management and there is no need for a foreign regulator to inspect them.

 What will be the Impact of the Move?

• On the TC-CCPs: With the withdrawal of recognition, these TC-CCPs will no longer be able to provide services to clearing members and trading venues established in the EU.
• On the lenders (European banks): They will have to set aside additional capital to trade in the domestic market.
• On the clearing members: They will also be impacted by way of higher capital requirements, enhanced credit risk, etc.
• On the Indian economy: Of the total foreign portfolio investors (FPI) registered in India, close to 20% are from Europe. However, the SEBI has said that the derecognition is unlikely to have any impact.