Irda issues credit default swaps guidelines

The Insurance Regulatory and Development Authority (Irda) has issued modified guidelines for participation in in credit default swaps (CDS).

These guidelines tell insurers in what kind of CDS they are allowed as protection buyers and how. CDS is a counter party agreement, which allows the transfer of third party credit risk from one party to the other. An insurance company acts as a counter party, which agrees to insure the risk against payment of a premium. In case the third party defaults on payment, the counter party will have to purchase the defaulted asset from the insured party.

According to the guidelines, CDS are permitted as a hedge to manage the credit risk covering the credit event. It will be allowed only on listed corporate bonds as reference obligations. Unlisted unrated bonds issued by SPVs of infrastructure companies are also eligible as reference obligation. However, shift of exposure to protection seller (insurer) happens only in case the credit event is an investment in the infrastructure sector.

The regulator has also barred insurers from purchasing CDS if they belong to the promoter group or between the entities of the promoter group, on short-term instruments and on obligations such as asset-backed securities.