Central Counterparty Clearing House

Recently, 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).

Details –

• 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 recognised by the ESMA.

What are ‘Central Counterparty Clearing house (CCP)’?

• A central counterparty clearing house (CCP) is an entity that helps facilitate trading in various European derivatives and equities markets.
• Typically operated by the major banks in each country, CCPs strive to introduce efficiency and stability into various financial markets.
• It reduces counterparty, operational, settlement, market, legal, and default risk for traders.
• A CCP acts as a counterparty to both sellers and buyers, collecting money from each, which allows it to guarantee the terms of a trade.
• CCPs perform two main functions as the intermediary in a market transaction —
  • clearing and settlement and
  • guarantee the terms of a trade.
• A CCP is authorised by the RBI to operate in India under Payment and Settlement Systems Act, 2007.

Reason for de-recognition –

• The ESMA said it 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 EU regulator said it will defer the application of the withdrawal decisions until April 30, 2023 to mitigate the adverse impact of the move on EU market participants.
• 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.