RBI, European market regulator close to resolving bond settlement deadlock

Clearing Corporation of India is an RBI supervised entity that hosts the platform for trading domestic government bonds.

The Reserve Bank of India (RBI) and the European Securities and Markets Authority (ESMA) are close to ironing out differences over the treatment of the former’s bond trading platform, a senior government official said, adding that there will be no roadblocks to trading even as the two sides look for a resolution.

"The regulators are in talks and are working towards a solution," the official said.

The matter dates back to October 2022, when ESMA said it plans to de-recognise the Clearing Corporation of India – an RBI-supervised entity that hosts the platform for trading domestic government bonds. The European regulator cited the lack of permit rights for audit and inspection over the local clearing house as the reason behind the move.

According to ESMA regulations, any service utilised by European banks from non-European entities needs to be vetted by ESMA. However, India is said to have refused to give the European regulator supervisory powers over Indian clearing corporations.

The derecognition by ESMA that first kicked in from April 30, 2023, was confirmed on May 2, 2023. However, a few regulators in certain parts of Europe allowed their banks to trade on CCIL without imposing any penalties until October 2024.

Deadline approaches

Now with the deadline of October 2024 to stop transactions with CCIL around the corner, there is an urgency to find a solution.

"Settlement won't be harmed till a solution is reached," the official cited above said on the deadline.

A report by the Economic Times in May 2024 said that as many as four European banks have asked the RBI to approve a third-party transaction model to resolve a deadlock between their home authorities and Indian policymakers regarding audit oversight rights.

These banks – Credit Agricole, Societe Generale, Deutsche Bank, and BNP Paribas – are facing hurdles in trading Indian government bonds and derivatives since ESMA derecognised the CCIL in October 2022.

The four European banks were awaiting either central bank approval for the third-party model or a resolution to the dispute between ESMA and the RBI over audit oversight, the report had said.