Japanese banks get go-ahead to settle all trades via CCIL

CCIL has been derecognised by some of the overseas regulators such as ESMA and Bank of England (BoE).

For the first time, Japanese banks will cut interest rate derivative deals – which constitute a sizable part of a bank’s treasury operations for hedging risks from interest rate movements – with CCIL as the central counterparty (CCP).

The use of CCIL would give greater operational flexibility and lower capital requirement for Japanese bank branches in India. The trades are expected to begin within a week.

The Japanese banks having operations in India are MUFG, Mizuho and Sumitomo Mitsui Banking Corporation. Exemption Given by Regulator
Till now, these banks were using CCIL for foreign currency forwards and government bond trades as the Financial Services Agency, Japan (JFSA) made an exception due to Indian regulations. However, JFSA had certain reservations about the Indian institution and size of default fund as CCIL absorbs the clearing and settlement risks for forex, bond and certain derivative trades. As a result, CCIL could not be used by the Japanese banks for all kinds of trades.”JFSA has now given exemption, which it can give under certain circumstances. Since CCIL volumes are below a certain threshold, JFSA would not be insisting on conditions like inspection rights that ESMA and Bank of England are demanding,” said a person familiar with the matter. In early December, the Reserve Bank of India and JFSA agreed to improve mutual co-operation on the issue of CCPs.

The standoff between RBI and European financial regulators stems from the latter’s demands which the Indian central bank believes is extra-territorial.

However, bankers feel ESMA may soon have to revisit the subject in the wake of other developments besides the recent exemption that JFSA has decided to extend. First, there is a distinct possibility, said senior bankers, that BoE may defer the June 30 deadline by at least six months for CCIL and other CCPs in India to meet its conditions. Second, with RBI and ESMA yet to resolve their differences, the headquarters of several European banks in India are believed to have reached out to the European Commission, the executive arm of the European Union to find a way out.

European banks are yet to decide on the plan-B if ESMA and RBI fail to reach a middle ground. “There are multiple suggestions. First, an EU bank putting across the trades by opening a constituent account with a non-Indian or non-EU bank. Second, another bank, acting as an agent, posts the margins for the trades. And, RBI allows non-guaranteed settlement of repo and government bond trades outside CCIL,” said another banker. RBI had sounded out large local banks such as

and on whether they could play a part in the proposed plan-B that European banks finalise. “Whichever plan is chosen, it cannot be rolled out very quickly as legal and commercial agreements have to be reached and systems and processes have to be put in place,” said another banker.