ECB Weighs Reprieve For Banks In Indian Bond Clearing Dispute

The European Central Bank is in talks with major banks about relaxing extra capital rules for lenders working with India’s sovereign bond clearing house, after a regulatory dispute with New Delhi threatened to disrupt billions of rupees in government debt and interest-rate derivatives trading.

Lenders are discussing a potential solution with the ECB about easing charges imposed after Europe’s markets agency withdrew recognition of the Clearing Corp. of India Ltd. and other agencies three years ago, according to people familiar with the situation. The institutions affected include Deutsche Bank AG, BNP Paribas SA, Credit Agricole SA and Societe Generale SA.

The goal is to eventually agree on a “joint approach” for how Indian clearing houses provide services to Europe’s financial system, said European Securities and Markets Authority Chair Verena Ross. 

“For a few banks this is a very important issue, we are conscious of that,” she said. “That’s why we are keeping the lines open and working with the Indian authorities.” 

The banks have proposed to the ECB that they route transactions through Indian lenders to get around trading with the CCIL, the people said, asking not to be identified discussing private matters.

In October 2022, ESMA stripped several Indian clearing houses, including the CCIL, of recognition for failing to meet new regulatory requirements. A few months later, it said banks could keep working with CCIL, but warned that using unrecognized clearing houses would trigger capital charges. Those added costs have weighed on European banks, which are key market-makers in India’s bonds and derivatives.

In the interim, the ECB is evaluating banks’ request for a temporary fix, though there is no guarantee a solution can be found, the people said. The ECB declined to comment. BNP and Credit Agricole did not respond to Bloomberg’s emails, while spokespersons from Societe Generale SA and Deutsche Bank AG declined to comment.

Changes in the EU’s recently adopted market regulations demanded that ESMA must establish cooperation arrangements with countries that have their own central counterparties. This allows ESMA full access to third country counterparty books and enables it to specify the structure of derivatives that European banks can take exposure to. 

India’s central bank has maintained that such steps interfere with the country’s regulatory architecture.

In October, market regulators in France and Germany extended a deadline for their banks to continue dealing with Indian clearing houses. They told their banks to consider alternate arrangements with local lenders, with possible options including trades being settled through Indian banks.