RBI Proposes To Widen Market For Credit Default Swaps

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The Reserve Bank of India is proposing to widen the market for credit default swaps, in an attempt to give a push to a product which has so far failed to pick-up in India. In December 2020, the RBI had said that it intends to release draft rules on this derivative product, which is used to offset credit risk on an underlying security.

The draft rules, released on Feb. 16, say non-retail users can buy these swaps for purposes other than just hedging an existing underlying exposure. Retail users are permitted to purchase CDS but only for hedging purposes.

The 2013 guidelines permitted only non-retail users to buy credit default swaps and only in cases where there was an underlying exposure to hedge. The current draft guidelines remove these restrictions.

Underlying instruments on which a CDS contract can be written include commercial papers, certificates of deposit, non-convertible debentures of original maturity up to one year. In addition, listed and unlisted rated bonds, together with unrated bonds issued by infrastructure special purpose vehicles, will be permitted as underlying instruments for CDS contracts.

Users & Use Cases

Users will be classified as retail and non-retail. The following users shall be eligible to be classified as non-retail users:

  • Insurance companies.
  • Pension funds.
  • Mutual funds.
  • Alternate investment funds.
  • Standalone primary dealers with a minimum net owned funds of Rs 500 crore.
  • NBFCs, including housing financiers, with minimum net owned funds of Rs 500 crore.
  • Resident companies with a minimum net worth of Rs 500 crore.
  • Foreign portfolio investors registered with SEBI.

Any user who isn’t eligible to be classified as a non-retail user shall be classified as a retail user.

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