Banks, NBFCs can participate in CDS mkt: RBI draft

The Reserve Bank of India (RBI) today proposed that commercial banks, primary dealers and NBFCs should be allowed to engage in Credit Default Swap (CDS), an instrument which allows various business entities to manage risks associated with the bonds market.

The draft guideline, on which the RBI has invited comments from stakeholders by October 4, says that besides banks and NBFCs, insurance companies and mutual funds may also be permitted to participate in the CDS market.

It further said besides banks and financial entities, provident funds and listed companies will be allowed to hedge their debt risks.

As regards the market participants, the guideline said that only those banks and NBFCs with net NPAs of less than 3 per cent could be allowed to participate in the CDS market.

For NBFCs and primary dealers, the requirement of net-owned funds for entering the CDS market has been kept at Rs 500 crore. Also, the NBFC or primary dealer should have a net NPA of less than 3 per cent.

CDS is a specific kind of counter-party agreement which allows the transfer of third party credit risk from one party to another.

The CDS contract, the draft guideline said, should be in a standard form in terms of coupon rates, payment dates and other modalities.

"Keeping in view the need for development of the infrastructure sector, CDS shall be permitted to be written on corporate bonds issued by Special Purpose Vehicle (SPV) of rated infrastructure companies," the RBI said.