UK-based clearing house LCH has informed Indian banks that it has fulfilled the necessary conditions mandated by the Reserve Bank of India (RBI) to function as a qualifying central counterparty (QCCP) for offshore derivatives trades. This development could potentially ease banks’ capital requirements for offshore non-deliverable forwards (NDF) trades. Sources have stated that LCH has complied with the norms prescribed by the RBI for QCCPs.
LCH’s compliance with RBI norms means that it will be regulated by the Department of Payment and Settlement Systems (DPSS) of the Indian central bank. Indian banks already engage in NDF trades, and this move could lead to more relaxed capital treatment for banks due to different outside counterparty limits with a QCCP. However, there may still be certain operational issues that need to be resolved, especially for foreign banks.
The RBI and the Bank of England recently signed a memorandum of understanding (MoU) regarding the Clearing Corporation of India, indicating increased collaboration between the regulators of the two countries. In June, it was reported that LCH was in the process of applying to the RBI for approval to function as a qualified central counterparty to tap into the growing local activity in the derivatives markets.
The dollar/rupee NDF market has considerably higher volumes compared to the local spot market, as revealed by an August report by the CCIL. The RBI’s Master Circular on Basel III Capital Regulations states that a QCCP is an entity licensed to operate as a central counterparty and permitted by the appropriate regulator/overseer. The circular emphasizes the need for the central counterparty to be based and prudentially supervised in a jurisdiction where the relevant regulator has established that its rules consistent with the Principles for Financial Market Infrastructures (PFMI) are consistently followed.
Overall, LCH’s compliance with RBI norms represents a significant development in the Indian derivatives market and could have implications for banks’ capital requirements in offshore trades, particularly in the NDF market.
