French and German banks face a 500-fold increase in capital requirements for doing business in India from May after European market watchdogs said there were no talks with Indian counterparts to resolve a dispute between the two sides.
Penalty capital requirements for European banks come into effect when a permit allowing EU banks to use Indian clearing houses to clear their securities and derivatives deals expires at the end of April.
Klaus Löber, chair of the clearing counterparty oversight committee at the European Securities and Markets Authority, told the Financial Times that “we currently have no active ongoing negotiations” with Indian regulators to help extend the permit.
He added that there would be “no further extension” of a regulatory fudge from EU national regulators giving banks an extra 18 months to exit the booming Asian market, but warned it would come at huge additional costs would.
Esma’s tough stance on the deadline marks another breakdown in the consensus built after the 2008 financial crisis among global regulators on shared oversight of key market institutions. International policymakers had expected Esma and India to settle their differences as clearing was seen as one of the pillars of global financial market stability.
Indian authorities were unwilling to sign a revised regulatory agreement that would give the Paris-based authority more direct oversight of six Indian clearing houses. A clearing house stands between two parties in a trade and protects the market from contagion when there is a default.
As the market prepared for the split, French and German national regulators said they would “not prioritize enforcement action” against their banks for 18 months from May to prevent a chaotic wind-up of their operations in India.
But after the approval expires, European banks using non-recognized Indian clearing houses will face a sharp increase in capital requirements, from the current 2 percent of the bank’s trading exposure to the clearing house to 1,250 percent.
Löber described the capital burden as “rather punishable”. “That alone will be a great incentive for the banks to sort out the situation as soon as possible,” he said.
India’s equity and government bond markets are valued at around $3 trillion. $ or 1 trillion. $ valued, and trading in currency and stock index futures makes the derivatives market one of the most active in the world.
European banks and market lobby groups have warned they would have to pull out or create new legal structures that would allow them to continue trading, which they say would be more expensive than their current operations. Société Générale and BNP Paribas did not comment, while Deutsche Bank and Crédit Agricole did not respond to requests for comment.
The situation does not disadvantage other EU countries as German and French banks are the only EU banks active in the Indian markets.
“It is clear that this is a final step in allowing these banks to trade, it is not a setup that would allow further extensions,” Loeber said.
“We have a clearly defined situation with a limited time window and subject to verifiable measures on the part of the banks concerned,” said Löber. Esma recognized “the potential for disruption that it would mean not only for banks but also for their customers” if there were a sudden suspension of services, he added.
Löber said Indian clearinghouses are free to reapply for recognition from Esma at any time. However, “we currently have no active ongoing negotiations for an MoU [Memorandum of Understanding] that would be a requirement for recognition,” he said.
The MoU, which was rejected by Indian authorities, has been signed by 25 other regulators, Esma said.
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