Reserve Bank of India’s (RBI) notification on Directions for Central Counterparties (CCPs)

Introduction

On 28th October 2024, the Reserve Bank of India issued a notification regarding updated directions for Central Counterparties (“CCPs”) based upon review regarding previous regulations which were issued in June 2019 pertaining to capital requirements and governance framework of CCPs. According to the Reserve Bank of India, the present notified directions apply to both domestic CCPs authorized by the RBI and Foreign CCPs which are recognised under the Payments and Settlement Systems Act, 2007.

There are various updated directions under the notification which include diversified composition of the Board including mandatory independent directors and nominees along with Managing Directors, specified roles of the Board such as risk management, ensuring compliance and regulatory standards and defining the process of appointment of directors.

Analysis of the Directions

There are numerous implications of the directions upon the monetary policy and economic framework of the country which can be summarized as follows:

• The CCPs have been mandated to maintain a minimum net worth of Rs. 300 Crores while also empowering the RBI to periodically review and increase the limit as and when required.
• CCP entities listed and registered outside India also known as Foreign CCPs are required to obtain RBI’s prior approval and recognition to operate in India along with aligning their risk management standards with Indian standards and regulations. Additionally, foreign CCPs are also required to maintain their operational infrastructure domestically for Indian based operations.
• Every CCP is bound to establish a committee led by an independent director for the purpose of overseeing risk policies, ensuring effectiveness in operations and risk management along with regular reporting to the board.
• Only users authorized by the RBI can hold shares in the CCPs wherein ownership limits are also applicable which would restrict any single entity from holding excessive equity without the approval of RBI.
• The directions also mandate CCPs to form various key committees such as – Nomination and Remuneration Committee, Risk Management and Audit, Technical and Regulatory Compliance Committees headed by independent directors for the purpose of setting their agendas and managing their responsibilities.
• CCPs are required to maintain a Compliance Officer who shall be responsible for maintaining regulatory compliance along with monitoring that internal policies have been adhered to.
• Each CCP is required to report their financial positions, shareholding, and governance details to the Reserve Bank for the purpose of enhancing transparency.

Impact of Directives on Financial Institutions

There are various positive impacts upon the international financial institutions in spite of regulatory and procedural challenges, which include an opportunity for the foreign companies to invest in India and strengthen their financial position and reputation, expand their services and capture the Indian market, collaborate with Indian players and offer management and risk compliance services, support market structure through strategic equity participation and create advisory and investment opportunities.

The present notification serves as a rigorous standard to fortify India’s financial markets focusing on an advanced system of governance, compliance and risk management. These regulations offer financial institutions the opportunity to build resilience, strengthen reputation, and increase transparency. By embracing these measures, institutions can secure a trusted and competitive position in the market, contributing to a more robust financial ecosystem that supports sustainable growth in India’s economy.