You are here: Home » Finance » RBI Policy » News
Business Standard

RBI issues draft guidelines for derivatives trading in credit default swaps

RBI on Tuesday came out with the draft guidelines for allowing derivatives trading in the credit default swaps (CDS) in over-the-counter (OTC) markets and on recognised stock exchanges in the country

Reserve Bank of India

Press Trust of India  |  Mumbai 

RBI, reserve bank of india

The (RBI) on Tuesday came out with the draft guidelines for allowing derivatives trading in the credit default swaps (CDS) in over-the-counter (OTC) markets and on recognised stock exchanges in the country.

As per the draft, the debt instruments eligible to be a reference or deliverable obligation in a CDS contract will include commercial papers, certificates of deposit and non-convertible debentures of original maturity up to one year, rated corporate bonds (listed and unlisted) and unrated rupee bonds issued by the special purpose vehicles set up by infrastructure companies.

Asset-backed securities and mortgage-backed securities and structured obligations, such as credit enhanced and guaranteed bonds, convertible bonds, and bonds with call-put options, will not be permitted as reference or deliverable obligations.

The CDS refers to credit derivative contract in which protection seller commits to compensate the protection buyer for the loss in the value of an underlying debt instrument resulting from a credit event. In return, the protection buyer makes periodic payments (premium) to the protection seller until the maturity of the contract or the credit event, whichever is earlier.

As per the draft guidelines, at least one of the parties to a CDS transaction will be a market-maker or a central counterparty authorised by the RBI.

The market makers for CDS will include scheduled commercial banks, NBFCs and primary dealers with a minimum net worth of Rs 500 crore, Exim Bank, NABARD, National Housing Bank and SIDBI.

The user of the credit derivatives contract can be retail as well as non-retail. The non-retail users include insurance companies, pension funds, mutual funds, alternate investment funds, and foreign portfolio investors.

The guidelines further said the retail users will be allowed to undertake transactions in permitted credit derivatives for hedging their underlying credit risk, while the non-retail users may undertake transactions for hedging and other purposes.

The stakeholders including banks and market participants can send their comments on the draft to the RBI by March 15, 2021.

In December last year, the central bank had made announcement regarding the review of CDS guidelines.

(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

Dear Reader,

Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

First Published: Tue, February 16 2021. 23:27 IST