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SBI and ICICI Bank to serve as Local Intermediaries for European Banks in Third Party Clearing


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According to sources, the State Bank of India (SBI) and ICICI Bank, two of India’s top three lenders, are expected to act as local intermediaries for European banks in a plan for third-party clearing. This development follows a meeting between high-ranking officials from the Reserve Bank of India (RBI) and certain European banks last month.

The proposal for local banks to handle third-party clearing for European banks stems from the European Securities and Markets Authority’s (ESMA) decision in October 2022 to de-recognize the Clearing Corporation of India (CCIL). The ESMA took this step after the RBI declined to grant the foreign body inspection and audit rights over the CCIL. The CCIL is responsible for hosting the trading platform and providing guaranteed settlement for Indian government bonds and interest rate derivatives. Foreign banks have been given a deadline of October 2024 to cease transacting with the CCIL until the matter is resolved.

It is understood that the plan involves SBI and ICICI Bank taking on the role of third-party clearing, as European banks will no longer be able to transact with the CCIL if the October deadline is enforced. The RBI expressed concerns about having only one local bank fulfill this role, hence the involvement of both SBI and ICICI Bank.

In the case of derivatives trades, the CCIL will remain the counterparty, but the clearing role will be performed by SBI and ICICI Bank.

The four European banks affected by the ESMA’s de-recognition of the CCIL are Credit Agricole, Societe Generale, Deutsche Bank, and BNP Paribas. These banks conduct significant trade in Indian government bonds and derivatives, with some playing key roles in custody operations for foreign investments in local markets.

While the proposed third-party clearing model for derivatives trades has been largely finalized, certain aspects related to bond clearing are still under discussion. One important matter being discussed is the treatment of different accounts for holding government securities.

Under the new model, foreign banks can be clients of SBI or ICICI Bank for bond trade clearing. However, there is a question regarding how foreign banks will handle Subsidiary General Ledger (SGL) and Constituent Subsidiary General Ledger (CSGL) accounts. CSGL accounts are used when banks hold bonds through entities like primary dealers or other banks, whereas SGL accounts are required by banks for maintaining reserve requirements such as Cash Reserve Ratio and Statutory Liquidity Ratio.

The regulatory dispute between the RBI and the ESMA over the treatment of the CCIL can be traced back to efforts by developed economies to reduce risk in their markets following the global financial crisis. However, the RBI has argued that such efforts, which aim to exert control and regulation over third countries, carry the risk of extra-jurisdictional overreach. The RBI has called on foreign bodies to respect the resilience of Indian rules.

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