European Securities and Markets Authority (ESMA) [UPSC Notes]

On April 30, 2023, the European Securities and Markets Authority (ESMA) de-recognized six Indian clearinghouses for not meeting the norms set by the European Market Infrastructure Regulation (EMIR). In this context, you must know what the European Securities and Markets Authority (ESMA) is, what is the impact of this decision and the way forward for the IAS exam economy segment of GS Paper III.

ESMA De-recognises Six Clearinghouses

The six clearing houses are the Indian Clearing Corporation, NSE IFSC Clearing Corporation, Clearing Corporation of India (CCIL), India International Clearing Corporation, NSE Clearing, and Multi Commodity Exchange Clearing.

• ESMA is the European Union’s (EU) financial markets regulator and supervisor. It is located in Paris and was founded in 2011.

Indian Regulators Against Giving Supervisory Powers to a Foreign Entity:

• ESMA requested Indian regulators to sign an agreement that would give it supervisory authority over Indian clearing corporations providing services to European banks. 
• But Indian regulators are not willing to provide such powers to a foreign organization because these corporations are responsible for settling the entire cash and derivatives market in various financial markets such as equities, bonds, and forex.

European Banks Run Custodian Businesses in India:

• The ruling by ESMA affects European banks like Deutsche Bank, BNP Paribas, Credit Suisse, and Societe Generale, who operate custodian businesses in India to clear foreign portfolio investments. 
• These banks account for around 15-20% of the Indian market. 
• Meanwhile, Barclays, Standard Chartered, and HSBC must comply with regulations set by the Bank of England.

Indian Regulators Engage with ESMA and the European Commission:

• As per reports, the Reserve Bank of India and other regulators have been in talks with the European Commission and ESMA, along with other relevant parties, to come to a mutually agreeable understanding that acknowledges the territorial independence of the host regulator.

Recognition of Indian Clearing Houses Important for Foreign Banks:

• Foreign banks play a crucial role in India’s secondary stock and bond markets as they run custodian businesses in the country, which manage foreign portfolio investments and local institutional trades like mutual funds. 
• Additionally, they facilitate trading activities such as currency forwards and interest rate swaps. Therefore, it is vital for these banks that Indian clearing houses are recognized.

Central Bank Exploring Alternative Arrangements:

• India has around 9,000 registered funds that operate as foreign portfolio investors, with approximately a third of them coming from Europe. 
• The Reserve Bank of India has stated in its latest Financial Stability Report that it is currently exploring alternative arrangements and will take corrective actions in the event of market disruptions.

European Securities and Markets Authority (ESMA):- Download PDF Here