The Reserve Bank of India (RBI) is considering alternative arrangements for banks that may be affected if the European financial markets regulator withdraws recognition to Indian central counterparties (CCPs).

The RBI and European Securities and Markets Authority (ESMA) are currently at odds over the European market regulator's demand to join the RBI in overseeing Indian transactions, which the Indian central bank argues would give the foreign regulator "extra-territorial reach" and potentially create overlapping requirements or restrictions, reports Bloomberg.

"The legislations governing financial market infrastructures (FMIs), like CCPs, enacted in some advanced jurisdictions have incorporated provisions that give them an extra-territorial reach," the RBI stated in its half-yearly financial stability report.

"Such regulations, if implemented by all jurisdictions, can create a parallel maze of laws with overlapping requirements or restrictions and show a lack of trust in the capabilities and quality of oversight exercised by the host regulators. Such unilateral actions can lead to disruption in local markets and undermine domestic financial stability," it added.

In its report, the RBI stated that it is continuously engaged with ESMA and other regulators to arrive at a mutually acceptable arrangement that recognises the territorial independence of the host regulator.

The RBI also noted that it is currently considering remedial measures and alternate arrangements with entities that may be impacted by the stand-off.

"To prevent the possible implications and resolve the logjam, there has been continuous engagement and positive dialogue between the relevant stakeholders {including the European Securities and Markets Authority (ESMA) and the European Commission}. The discussions still continue, so as to arrive at a mutually acceptable arrangement, which duly recognises the territorial independence of the host regulator," the RBI stated.

"In the undesirable event of a possible market disruption, however, remedial measures by way of possible alternate arrangements are under deliberation with the entities likely to be impacted," it added.

If ESMA follows through on its threat to withdraw recognition of six Indian clearing houses in May 2023, banks such as BNP Paribas, Deutsche Bank, and others may need to unwind billions of rupees of trades or face higher capital requirements to trade in India.

Apart from ESMA, the Bank of England has also warned of withdrawing recognition from the Clearing Corp. of India in July 2023.