The Reserve Bank of India issued its final Master Direction on Credit Derivatives on Thursday, expanding the use of credit default swaps and total return swaps in both over-the-counter and exchange-traded markets, with immediate effect.
The directions, issued under Section 45W of the Reserve Bank of India Act, 1934, supersede the earlier framework from February 2022.
Draft directions had been released for public comment on 6 February as part of the central bank's bi-monthly monetary policy statement, and the final norms incorporate feedback received from market participants.
Wider Access, Stricter Guardrails
Resident non-retail users, including NBFCs, mutual funds, insurance companies, pension funds, alternative investment funds, and companies with a minimum net worth of Rs 500 crore or turnover of Rs 1,000 crore, will be permitted to use CDS and total return swaps without any restriction on purpose.
Retail resident users, other than individuals, will be restricted to using credit default swaps solely for hedging, which is defined as reducing credit risk on a particular debt instrument or portfolio. Individuals are barred from participating in both CDS and total return swap contracts entirely.
Non-resident users, including foreign portfolio investors, will be permitted to use these instruments only for hedging purposes, with additional safeguards. FPIs may also act as protection sellers, but the notional amount of CDS protection sold by all FPIs collectively cannot exceed 5 per cent of the outstanding stock of corporate bonds. FPIs are also barred from selling protection on debt instruments with a residual maturity of less than one year.
Market Infrastructure And Settlement Rules
Credit derivative contracts between a market-maker and a non-resident may be settled in Indian rupees or a foreign currency.
Exchanges seeking to offer standardised single-name CDS contracts or CDS contracts on credit indices must obtain prior approval from the RBI for product design, eligible participants, and contract specifications. FPIs will be permitted to trade credit index futures, but cannot take short positions exceeding their consolidated long position in corporate bonds.
The RBI has mandated that the Fixed Income Money Market and Derivatives Association of India set up a Credit Derivatives Determinations Committee, comprising market-makers and users, to make binding determinations on credit events, settlement procedures, and auction mechanisms. |
