The Reserve Bank of India recommends broadening the market for credit default swaps to push to a product that has gone awry to pick-up in India.
In December 2020, the RBI had said that it aims to release draft rules on this derivative product, which is utilized to offset credit risk on an underlying security. The draft rules, released on Feb. 16, say non-retail users can purchase these swaps for purposes other than just staggering an existing underlying exposure. Retail users are authorized to purchase CDS but only for hedging purposes. The 2013 guidelines enabled only non-retail users to buy credit default swaps and only in cases with underlying hedge exposure. The current draft guidelines remove these restrictions.
Underlying instruments on which a CDS contract can be written contain commercial papers, certificates of deposit, non-convertible debentures of original maturity up to one year. Besides, listed and unlisted rated bonds, together with unrated bonds issued by infrastructure select purpose vehicles, will be approved as underlying instruments for CDS contracts.
Users & Use Cases Users will be categorized 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 a 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 qualified to be classified as a non-retail user shall be classified as a retail user.
Retail users shall be allowed to undertake transactions in permitted credit derivatives for hedging their underlying credit risk, the RBI said. Non-retail users shall be entitled to undertake transactions in credit derivatives for both hedging and “other purposes”, it added.