The Reserve Bank of India (RBI) and Clearing Corporation of India (CCIL) Ltd, which settles large volumes of trades on bonds, derivatives and foreign exchange, are trying to break the logjam with Bank of Japan (BoJ) and Financial Services Agency, Japan (JFSA) which are keen on having inspection rights over CCIL.
Legal Views Sought
Even as this inter-regulatory dialogue between Indian and Japan is underway, several European banks in the country have reached out to their headquarters, seeking legal opinion on whether they can use other banks in India as intermediaries and clearing members to avoid ‘directly’ dealing with CCIL as a central counterparty in the event Indian regulators are unable to strike a deal with ESMA and BoE.
“Certain trades such as foreign exchange forwards of less than 13 months and government securities must be done through CCIL. There is no regulatory clearance to do these transactions outside CCIL on a bilateral basis. So, the question is: can we do forward trades where we deal with an Indian bank which then clears it with CCIL? Here, instead of making CCIL as CCP, we would be dealing with a local bank which will act as an intermediary between my bank and CCIL. We are trying to find out from legal and compliance whether such indirect deals with CCIL would fall foul of BoE or ESMA rules,” a senior official of a European bank told ET.
Unlike the European banks which have a large presence in India, the hurdles faced by Japanese banks – with only three of them running branches – may be comparatively easier to overcome. BoJ and JFSA have been unwilling to recognise CCIL as a ‘qualified central counterparty’ (CCP) in the absence of certain supervisory rights.
“The matter has been under discussion for two years and regulators have been sticking to their respective stands. However, about a week ago, RBI and CCIL have asked BoJ and JFSA to consider giving an exemption to CCIL as volumes of transactions through CCIL are below a certain threshold level. So, the issue here is whether CCIL could be spared of the conditions that Japan insists should apply to qualified CCP whose volumes are above this threshold level… Japanese authorities are yet to respond,” said a regulatory official.
According to industry circles, due to Japan’s regulatory stance, Japanese banks in India such as MUFG, Mizuho and Sumitomo Mitsui Banking Corp have been carrying out transactions like inter-rate swaps (IRS) on a bilateral basis with other banks outside the framework where CCIL acts as the counterparty.
“This is possible because RBI never finalised a draft regulatory mandate that required IRS trades to have CCIL as counterparty. But, for forex forwards trades (up to 13 months) Japanese banks are still using CCIL because RBI regulation clearly requires them to,” said a dealer of a local private bank.