RBI not keen on credit derivatives

Absence of clear global norms keeps central bank off such products.

Concerned over the role of sophisticated credit derivatives in the global financial market turmoil, the Reserve Bank of India (RBI) has told the finance ministry that it does not want to develop a market for these products unless a clear regulatory system emerges internationally.

DRAGGING ITS FEET

RBI wants clear global guidelines before permitting credit derivatives norms  

The finance ministry has urged central bank to consider at least launching plain-vanilla credit default swap (CDS) instruments  

A CDS is a credit derivatives contract between two parties, with one making periodic payments to the other and receiving a promise of a payoff in case of a default

However, the finance ministry has urged it to consider at least launching plain-vanilla credit default swap (CDS) instruments. A CDS is a credit derivatives contract between two parties, with one making periodic payments to the other and receiving a promise of a payoff in case of a default.

While agreeing to consider this request, the central bank has said that no timeframe can be set for this to happen.

This follows discussions at a meeting of the High-Level Coordination Committee on Financial Markets held on August 1. The meeting was attended by financial sector regulators and senior officials of the finance ministry on the fate of several financial sector reforms that are under the works, sources told Business Standard.

In the Union Budget 2008-’09, Finance Minister P Chidambaram had proposed steps to develop a transparent credit derivatives market with appropriate safeguards. This was also a key recommendation of the High-Powered Expert Committee on making Mumbai an international financial centre.

Several months have passed since and the finance ministry is keen that the Budget announcement be implemented as soon as possible.

At the meeting, RBI said it would consider developing the credit derivatives market only after emergence of a clear system globally over regulation of these products.

Besides development of credit derivatives, the Budget had also proposed exchange-traded currency futures and interest rate futures to create a bonds-currency-derivatives nexus that is needed for a developed financial market.

Accordingly, it has been decided that the Securities and Exchange Board of India (Sebi) will start exchange-traded currency futures by August-end.

On its part, RBI has said it is making all-out efforts to introduce interest rate futures by February 2009.