RBI to fine-tune norms on credit default swaps

The Reserve Bank of India (RBI) has set up a group to look into the norms for credit-default swap (CDS), which will revisit guidelines already issued, RBI Deputy Governor Shyamala Gopinath said in Mumbai on Wednesday.

Speaking at a seminar on banking, Gopinath said credit derivatives were not like other derivatives linked to macro factors and carried idiosyncratic risks. Hence, we have to find ways to standardise these products, she added.

A CDS is a derivative contract based on a loan or a bond of a financial institution, and helps the institution hedge the default risk, in case the extended credit turns bad due to the receiving company undergoing restructuring, bankruptcy or a downgrade.

In 2007, RBI had issued draft guidelines for introduction of CDS. However, the issuance of final guidelines was kept in abeyance, given the role of credit derivatives in the ongoing financial crisis.

RBI, in the second-quarter monetary policy review 2009-10, had considered it appropriate to proceed with caution.

To start with, RBI proposes to introduce a basic, over-the-counter, single-name CDS for corporate bonds for resident entities, subject to safeguards. These will not be exchange-traded instruments such as a rupee-dollar forward contract. The underlying will initially be only corporate bonds.

Speaking to reporter’s on the sidelines of the summit, Gopinath said RBI had a capital account management framework and was monitoring developments closely.

“We have a capital account management framework, it’s not that we don’t have a framework. We are closely monitoring the developments,” she said when asked whether capital controls were needed and if RBI was concerned about the amount of inflows.

Later, her colleague and RBI Deputy Governor KC Chakrabarty added that the central bank did not interfere in exchange rate movements.