Regulatory overreach needs to be balanced with regulatory reforms; India’s presidency of G20 provides the inter-governmental platform to do so
This means, if an investor from a member-nation of the EU wants to buy a futures contract in India, for instance, they will not be able to do so because the six clearing corporations that ensure the buy-sell match in India will have been derecognised. It shuts down the free flow of capital from EU investors to India. The derecognition derives its legal authority from EU Regulation (EU) No 648/2012. The precise regulatory clause under which the six corporations will be derecognised lies under Paragraph 7 of Article 25 (Recognition of a third-country CCP) in Chapter 4 (Relations with third countries). There are four sub-Paragraphs under Paragraph 7 that seek to establish cooperation arrangements; mechanisms for sharing breaches; and procedural coordination in general, and around on-site inspections in particular. Paragraph 6 demands that TP-CCPs comply. These, in turn, stand on the shoulders of the G20, where multilateral negotiations have expanded the scope of regulatory practices around Over The Counter (OTC) derivatives, hedge funds, and credit rating agencies. “All standardised OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end 2012 at the latest,” the 26 September 2009 G20 Leaders’ Statement at the Pittsburgh Summit said. The next year, the 27 June 2010 G20 Toronto Summit Declaration pushed harder: “We committed to accelerate the implementation of strong measures to improve transparency and regulatory oversight of hedge funds, credit rating agencies, and over-the-counter derivatives in an internationally consistent and non-discriminatory way.”
The precise regulatory clause under which the six corporations will be derecognised lies under Paragraph 7 of Article 25 (Recognition of a third-country CCP) in Chapter 4 (Relations with third countries).
If this matter is not resolved before the 30 April 2023 deadline, it will have a short-term impact on India’s markets, as investors from EU member nations are prevented from trading. But effectively, investors from the continent will log out of the world’s fastest-growing economy, and as a result, lose access to one of the world’s highest returns. With their growing complexity because of the free flow of finance, regulatory jurisdictions have become a game of dominance and showcasing of power. On their part, companies have been playing this game for decades through regulatory shopping, using the most profitable jurisdiction to set up businesses. In fact, as a risk management tool, the boards of FPIs will already be planning their emigration policies towards more conducive jurisdictions. Nobody—not institutions, not corporations, not individuals—wants to be left out of the India play. As the world’s fastest-growing economy, India remains an attractive investment destination. And likely will remain so for the rest of this decade, as it becomes the world’s third-largest economy before 2030.
Investors from the continent will log out of the world’s fastest-growing economy, and as a result, lose access to one of the world’s highest returns.
Ironically, the bigger and the truly ferocious EU enemy, China, has been and is being given a free pass—five CCPs of China stand on Tier 1 (non-systemically important), the same status as CCPs from the US, Japan, and Dubai. These are, Shanghai Clearing House, Hong Kong Securities Clearing Company Ltd, HKFE Clearing Corporation Ltd, OTC Clearing Hong Kong Ltd, and SEHK Options Clearing House Ltd. There is only one Tier 2 (systemically important) country, the UK. Leaving its investors at the mercy of the whims of the Chairman of Everything in China is not merely a puzzle that the EU investors need to resolve financially, it is the biggest systemic risk to the continent that voters should fix politically. The recent crackdown by China on its entrepreneurs is still fresh. Worse, Hong Kong is facing a talent exodus, even as the once-free part of China is losing its status as an international financial centre. Amidst all these developments, investing in China becomes uncertain, and because of its size and scale, a systemic risk of exponential proportions. For the EU bureaucracy to climb over this risky mountain of financial danger from China to fix its eye on the Indian regulatory systems is beyond belief. That the EU chooses to ignore this risk, even embrace it, shows a startling lack of awareness of how China functions. It also displays how some leaders and institutions in the EU are being held hostage by China. On 30 December 2020, the European Commission short-sold the Comprehensive Agreement on Investment with China to the EU. It took the European Parliament to reject it through a 20 May 2021 resolution. Addicted to Chinese manufacturing and Chinese markets, both bound together by Chinese finance—a systemic risk—Europe needs a China financial deaddiction centre. That sanctuary is India.
Indian securities markets are amongst the world’s best-governed. So, pushing the exit India button on financial regulation with its concomitant looming isolation will lead to nowhere.
Of course, this ongoing regulatory tussle will end faster than we imagine. For a continent that’s looking at flat to negative growth rates, its largest and third-largest economies (Germany and Italy) headed for recession, high inflation driven by rising energy prices, and fears of a potential stagflation looming, working with high-growth partners such as India will not only be a handshake of interests but of values as well. Following the Russia-Ukraine conflict, Europe has become an energy starved, an economically shrinking, a politically cornered, and a strategically imploding geography, the harsh outcomes of which will show themselves over the next few cold months through the politics of discomfort. If the EU seeks a wider and deeper relationship with India, through a free trade agreement, for instance—the negotiations for which are underway—it will need to be on its best, rather than worst, behaviour. Poking India on non-issues such as financial regulatory jurisdiction will not help. But this problem can—and should—be seen as an opportunity for global financial sector reforms as well. A global regulatory harmony, with absolute and equal reciprocity for all jurisdictions, is the way forward. Over the next few months, India should drive the G20 agenda towards a principles-based inter-jurisdictional financial regulatory revamp. That is, if the EU or the US regulators want regulatory oversight on Indian firms, India will get a similar oversight on their companies as well. If ICICI Bank is to open its books to European Banking Authority and Federal Reserve, Deutsche Bank and Merrill Lynch will open their books to RBI inspections.
Europe has become an energy starved, an economically shrinking, a politically cornered, and a strategically imploding geography, the harsh outcomes of which will show themselves over the next few cold months through the politics of discomfort.
The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.
Gautam Chikermane is a Vice President at ORF. His areas of research are economics, politics and foreign policy. A Jefferson Fellow (Fall 2001) at the East-West ...Read More +