European Securities and Markets Authority (ESMA)

Syllabus: General Studies Paper 3

The European Union’s financial markets regulator European Securities and Markets Authority (ESMA) said it will withdraw recognition of six Indian clearing bodies or central counterparties (CCPs). 

These six CCPs are :

• 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).

As per the European Market Infrastructure Regulations (EMIR), a CCP in a third country can provide clearing services to European banks only if it is recognized by the ESMA.

What’s the role of CCP?

• CCPs perform two main functions as the intermediary in a market transaction clearing and settlement and guarantee the terms of a trade. 
• CCP is a system provider, who by way of novation 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. 
• A CCP is authorised by the RBI to operate in India under Payment and Settlement Systems Act, 2007.

The reason for derecognition

• The ESMA reviewed the recognition of all third country CCPs (TC-CCPs) that had been recognised prior to September 21, 2020, as per the European Market Infrastructure Regulation (EMIR) regime. 
• The decision to derecognise Indian CCPs came due to ‘no cooperation arrangements’ between the ESMA and Indian regulators — the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI) and the International Financial Services Centres Authority (IFSCA).
• The ESMA wants to supervise these CCPs, which the Indian regulators are not in favour of as they feel that these entities have robust risk management and there is no need for a foreign regulator to inspect them.

Timeline has ESMA given

• The EU regulator will defer the application of the withdrawal decisions until April 30, 2023 to mitigate the adverse impact of the move on EU market participants. 
• It will also give the ESMA and the Indian regulators six months’ time to negotiate and come to a consensus. 
• While Sebi has reached a fairly advanced level of understanding with the ESMA, the RBI is yet to work out any agreement.

How will the derecognition impact European banks?

• As of the date of application of the withdrawal decisions, these TC-CCPs will no longer be able to provide services to clearing members and trading venues established in the EU.
• Some of the major European banks dealing in the domestic forex, forward, swap and equities and commodities markets.
• The derecognition will impact these lenders as they will not be able to provide clearing and settlement facilities to their clients. 
• They will also have to set aside additional capital to trade in the domestic market. 
• Of the total foreign portfolio investors (FPI) registered in India, close to 20 per cent.

About ESMA

• The European Securities and Markets Authority (ESMA) is an independent European Union (EU) Authority that contributes to safeguarding the stability of the EU’s financial system by enhancing the protection of investors and promoting stable and orderly financial markets.
• ESMA is the direct supervisor of specific financial entities:

• Credit Rating Agencies (CRAs)
• Securitisation repositories (SRs)
• Trade Repositories (TRs)

• These entities form essential parts of the EU’s market infrastructure.