RBI introduces total return swaps, broadens credit derivatives market

RBI introduces Total Return Swaps and widens credit derivatives participation to deepen the corporate bond market and improve risk management

The Reserve Bank of India (RBI) on Thursday introduced Total Return Swaps (TRS), widened participation in the credit derivatives market, and eased usage norms for resident non-retail participants under revised directions aimed at deepening the corporate bond market.

 

Under the Reserve Bank of India (Credit Derivatives) Directions, 2026, resident non-retail users will be permitted to buy and sell credit protection through both Credit Default Swaps (CDS) and TRS. The revised framework removes restrictions linking participation to underlying credit exposures, allowing eligible entities greater flexibility in managing credit risk.

 

TRS, which has been introduced as a new credit derivative instrument, enables market participants to transfer both credit and market risks associated with an underlying asset. Until now, CDS was the only credit derivative product permitted in the over-the-counter market.

 

The RBI said the revised directions seek to broaden the credit derivatives market, facilitate efficient transfer and management of credit risk, and support the development of the corporate bond market.

 

The directions allow eligible market-makers to offer CDS and TRS contracts in the over-the-counter market. Scheduled commercial banks, standalone primary dealers, non-banking financial companies and housing finance companies meeting prescribed conditions may act as market-makers.

 

The central bank has also expanded the category of participants. Resident non-retail users, including regulated financial entities and other eligible institutions, may use credit derivatives for hedging as well as other permitted purposes, subject to the provisions of the directions.

 

Market participants had sought greater flexibility in the draft framework issued earlier this year. In a feedback statement released alongside the final directions, the RBI said it had accepted several suggestions, including permitting resident non-retail users to buy and sell protection without restrictions related to the underlying exposure and introducing TRS as an eligible instrument.

 

The revised directions come into force with immediate effect, the RBI said.