RBI and Bank of England Bond Settlement Deal
Explore the significant memorandum of understanding (MoU) signed between the Reserve Bank of India (RBI) and the Bank of England (BoE), facilitating the trading of Indian sovereign bonds in London. Understand the focus on Clearing Corporation of India (CCIL) and the framework designed for substantial inflows into Indian bonds.
Introduction
The Reserve Bank of India (RBI) and the Bank of England (BoE) have inked a crucial memorandum of understanding (MoU) that unlocks the potential for trading billions of dollars in Indian sovereign bonds through the London-based lender. This move holds strategic importance for both countries, opening avenues for increased financial collaboration.
 |
| RBI and Bank of England signed agreement on bond clearing settlement |
MoU Focus: Clearing Corporation of India (CCIL)
A key aspect of the MoU is its emphasis on monitoring the Clearing Corporation of India (CCIL). As a pivotal entity in local transaction settlement, CCIL's role is central to the regulatory framework outlined in the MoU. The agreement not only acts as a blueprint for regulatory oversight but also establishes a robust framework for CCIL to address and manage oversight challenges effectively.
Framework for $25 Billion Inflows by 2025
The framework articulated in the MoU is specifically tailored to accommodate an estimated $25 billion of incremental inflows into Indian sovereign bonds by mid-2025. This surge in inflows is anticipated following the inclusion of Indian sovereign bonds in JPMorgan's globally tracked indices, providing a substantial boost to the Indian bond market.
Relief for UK-Based Banks and Custodians
This development brings relief to major UK-based banks, including Standard Chartered, Barclays, and HSBC. These financial institutions play a crucial role in both the domestic bond and derivatives markets. Additionally, they act as custodians for foreign investment flows into India. The agreement ensures a smoother operational environment for these institutions and facilitates enhanced participation in Indian markets.
ESMA De-recognition and Subsequent Equivalence
The backdrop of this agreement involves the European Securities and Markets Authority (ESMA) de-recognizing six Indian clearing houses, including CCIL, in October 2022. This action followed the RBI's refusal to grant foreign bodies inspection and audit powers over domestic clearing houses. However, in June of the subsequent year, the UK Treasury granted equivalence to central counterparties authorized by the RBI. This marked a significant decision post-Brexit, paving the way for a more collaborative approach.
CCIL's Ongoing Efforts for Recognition
Following the UK Treasury's decision, CCIL submitted a fresh application to the Bank of England (BOE) for recognition as a third-country central counterparty. This application, effective from January 31 of the current year, signifies CCIL's ongoing efforts to secure recognition and further solidify its role in the global financial landscape.
FAQs
Q: What is the focus of the MoU between RBI and BoE? A: The MoU primarily focuses on monitoring the Clearing Corporation of India (CCIL) and establishes a regulatory framework for local transaction settlement.
Q: Why is the framework designed for $25 billion inflows into Indian sovereign bonds? A: The framework anticipates significant inflows following the inclusion of Indian sovereign bonds in JPMorgan's globally tracked indices.
Q: How does the agreement benefit UK-based banks like Standard Chartered, Barclays, and HSBC? A: The agreement provides relief to these banks, facilitating smoother operations in the domestic bond and derivatives markets and supporting their role as custodians for foreign investments into India.
Q: Why were six Indian clearing houses, including CCIL, de-recognized by ESMA in 2022? A: ESMA de-recognized these clearing houses after the RBI declined to grant foreign bodies inspection and audit powers over domestic clearing houses.
Q: What is the significance of the UK Treasury granting equivalence to central counterparties authorized by the RBI? A: This decision, post-Brexit, marked a collaborative approach, allowing greater cooperation between the RBI and UK-based financial entities.
Q: What ongoing efforts has CCIL undertaken for recognition following the UK Treasury's decision? A: CCIL submitted a fresh application to the BOE for recognition as a third-country central counterparty, indicating its commitment to global financial integration.
Conclusion
The RBI and BoE's memorandum of understanding sets the stage for enhanced collaboration in the financial realm, particularly concerning Indian sovereign bonds. The focus on CCIL and the framework designed for substantial inflows exemplify the commitment to fostering a conducive environment for financial transactions. As the global financial landscape evolves, this agreement positions India and the UK for strengthened financial ties.
