EU fin regulator action may hit forex, interest swap market

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MUMBAI: The decision by the European Securities and Markets Authority (ESMA), the EU’s financial markets regulator and supervisor, to derecognise six Indian central counterparties (CCPs) could lead to disruptions in the foreign exchange and interest rate swap market. The equity market, however, will mostly remain unaffected, sources said. CCPs are mandated in some financial transactions to eliminate the risk of counterparty default.
The six disqualified intermediaries are Clearing Corporation of India, Indian Clearing Corp, NSE Clearing (formerly NSCCL), Multi Commodity Exchange Clearing, India International Clearing Corp and SE IFSC Clearing.
The ESMA, in a statement issued last week, attributed its decision to derecognise the six entities as no “cooperation agreement” have been made between ESMA andeach of the relevant Indian authorities — the RBI, Sebi and IFSC Authority. The cooperation agreement requires Indian regulators to have a mechanism for exchange of information, including requests made by ESMA. Market sources said that the draft cooperation agreement between Sebi and ESMA is pending approval from ministries.
Arecognition by ESMAis manadatory for European banks that operate as branches in India and participate in the forwards market in foreign exchange and those that deal with interest rate swaps as these deals take place through a central clearing party.
According to bankers, the derecognition could hit Indian operations of large European institutions like DeutscheBank and BNP Paribas. Bankers said that ESMA has deferred the withdrawal of recognition to April 30, 2023, to mitigate adverse impact on European banks. This gives the Indian regulator time to hold discussions with ESMA.

Sources also said that foreign equity brokerages operating in India that have their parents located in the Eurozone (that excludes the UK and Switzerland) can continue to operate in the country but will have to assign a higher risk weight to their trades in India. This risk weight could rise as high as 30% from 2% currently.
Market players also said that the operations of foreign funds in India are unlikely to be affected by the ESMA directive. For one, the directive affects a very small number of foreign brokerages. Also, if a foreign fund wants to shift their business from one brokerage to another, the process could be completed in a working day, a market source said.

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