UK clearing house LCH fulfils norms to function as central counterparty

Mumbai: UK-based clearing house LCH has reached out to Indian banks and informed them that it has fulfilled necessary conditions mandated by the Reserve Bank of India to function as a qualifying central counterparty (QCCP) for offshore derivatives trades.

In a development that could ease banks’ capital requirements for offshore non-deliverable forwards (NDF) trades, LCH has said to banks that it has complied with norms prescribed by the RBI for QCCPs, sources aware of the development told ET. The LCH is one of the largest players in the global interest rate swap market.

“The LCH has referred to an RBI circular and informed banks that they have met the requirements. There are matters such as the explicit adoption of PFMI (Principles for Financial Market Infrastructures) in the home country. For all practical purposes, they would be treated as a QCCP in India,” a source said.

Emails sent to the RBI and the LSEG did not receive responses by the time of publication. LCH is part of the LSEG Post Trade group of companies.

The latest developments come at a time when the RBI and the Bank of England have signed a memorandum of understanding (MoU) with regard to the Clearing Corporation of India, marking new steps in collaboration between the regulators of the two countries.

ET had reported in June that the LCH was in the process of applying to the RBI for approval to function as a qualified central counterparty here in order to tap into the increasing local activity in derivatives markets. Volumes in the dollar/rupee NDF market outstrip the local spot market by more than 3 times, an August report by the CCIL showed.

According to the RBI’s April 2022 Master Circular on Basel III Capital Regulations, “A qualifying central counterparty (QCCP) is an entity that is licensed to operate as a CCP (including a licence granted by way of confirming an exemption) and is permitted by the appropriate regulator / overseer to operate as such with respect to the products offered.”The RBI circular states that this is subject to the provision that central counterparty is based and prudentially supervised in a jurisdiction where the relevant regulator has established that it rules consistent with the PFMI are consistent on an ongoing basis.

Following its adherence to RBI norms, the LCH would be regulated by the Department of Payment and Settlement Systems (DPSS) of the Indian central bank, sources said.

The LCH, which is authorised as a UK central counterparty, counts dollar/rupee NDF as a forex asset class that it is authorised to clear.

“Indian banks are already conducting NDF trades as that market is a very large one. If this process were to work out, it would imply a more relaxed approach for banks in terms of capital treatment due to different outside counterparty limits with a QCCP,” another source said.

Sources said, however, that it may take time for trades to pick up meaningfully as certain operational issues would need to be sorted out, especially for foreign banks.

“Hypothetically speaking, if the head office of a foreign bank were to default on a trade, then what happens to the exposure here? Some of these operational matters need to be cleared out. Indian banks could also opt to take a measured approach, given the huge volumes transacted in the NDF markets,” the second source said.