UK’s LCH eyes a slice of India’s derivatives pie

“It (LCH) has been in talks with the RBI recently regarding the setting up of a QCCP here and is awaiting the RBI approval,” a source aware of the development said.

“There has been a huge pick-up in offshore derivatives activity in India with a lot of large corporates looking to use that route for hedging. Therefore, it makes sense to directly be a part of that market,” said the market source.

Emails sent to the RBI and LCH remained unanswered until Sunday press time.

A central counterparty enables trades between different entities for contracts in various segments of financial markets. The LCH, one of the largest players in the global interest-rate swap market, facilitates transactions in more than a dozen international government debt markets.

If the LCH receives approval from the RBI, the UK-based clearing house group would be regulated by the RBI’s Department of Payment and Settlement Systems (DPSS), which supervises all clearing services in the country.

Indian clearing houses include the Clearing Corporation of India (CCIL), which hosts the trading platform for government bonds and derivatives, Indian Clearing Corporation, and NSE Clearing.GIFT City
At present, many offshore derivatives transactions are carried out through units at IFSC-GIFT City, which is regulated by the International Financial Services Centres Authority (IFSCA).

“There are complex regulations surrounding how offshore exposures are to be treated via the IFSCA. Having a direct presence here would enable greater access. There is a lot of scope in the market, which is why the LCH has shown interest,” a source said.

The LCH’s application to function as a QCCP in India comes amid significant progress in clearing up a months-long regulatory tussle between the RBI and the UK regulator regarding the supervision of the CCIL. Earlier this month, the UK Treasury granted financial equivalence to RBI-authorised clearing houses, papers accessed by ET showed. This is a key requirement for local clearing houses to regain official recognition from British authorities.

Over the past few years, activity in derivative products such as overnight indexed swaps (OIS) and non-deliverable OIS has accelerated sharply, with the RBI’s steps to liberalise the OIS market playing a major factor in bringing in more players. In April, the RBI said that it had proposed to let banks with IFSC units provide non-deliverable foreign exchange derivatives using the rupee to residents in onshore markets.