India and Japan exchanged letter of cooperation pursuant to Europe derecognized Indian Clearing Houses

The Reserve Bank of India (RBI) and the Financial Services Agency (FSA), Japan on Wednesday exchanged letters of cooperation in the field of Central Counter Parties (CCPs) with the objective of improving mutual cooperation.

The exchange of letters takes place pursuant to the European and the UK regulators having derecognised various Indian clearing houses, including the Clearing Corporation of India (CCIL), which hosts the trading platform for government bonds and overnight indexed swaps (OIS).

“With this exchange of letters, RBI and FSA are committed to deepening relations between the two countries and strengthening the exchange of information,” said RBI.

The banking regulator of India and FSA Japan further expressed their willingness to hold a dialogue or exchange views about matters of common interest and concerns as appropriate.

“The letters confirm the interest of both the jurisdictions in enhancing cooperation in line with their respective laws and regulations”, the RBI said. It would be a strong foundation for promoting mutual understanding and cooperation pertaining to CCP activities in a cross-border context, the Central Bank said. The cooperation will be mutually beneficial and ensure the soundness of the financial markets in both jurisdictions”, it added.

RBI and the FSA also expressed their willingness to hold a dialogue or exchange views on matters of common interest and concern as appropriate. The letters confirm the interest of both jurisdictions in enhancing cooperation in line with their respective laws and regulations.

Background:

The European Securities and Markets Authority (ESMA) in late October derecognised six Indian clearing houses, including CCIL effective from May 1, 2023. The Clearing Corporation of India (CCIL) is supervised by the RBI. The Bank of England also took a similar step, following ESMA’s decision. ESMA’s decision is said to have been taken after the RBI’s refusal to permit the foreign body the rights of audit and inspection over CCIL.  According to news reports, Japanese authorities had also sought the right to inspect CCIL’s data – the main bone of contention with the European regulators.

De-recognition of CCIL will mean that financial transactions will not be settled through CCIL, leaving room for just bilateral transactions between banks. The action would deprive advantages and benefits of netting transactions that are provided by the clearing house, as well as lead to much higher capital requirements under Basel norms. Consequently, trading operations would take a huge hit.