The Reserve Bank of India (RBI) has further expanded the scope of the credit default swaps (CDS) market by allowing CDS for unlisted corporate bonds. This comes two month after market regulator Securities and Exchanges Board of India (Sebi) permitted mutual funds to participate in CDS market following RBI guidelines on CDS for corporate bonds issued in May 2011.
The RBI revised the guidelines based on the feedback received from the market and suggestions of the Technical Advisory Committee on Money, Foreign Exchange and Government Securities Markets.
The central bank has said that in addition to listed corporate bonds, CDS shall also be permitted on unlisted but rated corporate bonds even for issues other than infrastructure companies.
Secondly, users shall be allowed to unwind their CDS bought position with original protection seller at mutually agreeable or FIMMDA price. If no agreement is reached, then unwinding has to be done with the original protection seller at FIMMDA price.
It has also stated that CDS shall be permitted on securities with original maturity up to one year like Commercial Papers, Certificates of Deposit and Non Convertible Debentures with original maturity less than one year as reference/deliverable obligations.
The CDS market was introduced for corporate bonds to provide market participants a tool to transfer and manage credit risk through redistribution. CDS as a risk management product offers the participants the opportunity to hive off credit risk and also to assume credit risk, which otherwise may not be possible.
Since it helps enhance investment and borrowing opportunities and reduces transaction costs while allowing risk-transfers, such products are expected to increase investors’ interest in corporate bonds and boost development of the corporate bond market in India.
Ready Forward Contracts in Corporate Debt Securities
The central bank has also eased norms for corporate debt securities by allowing repurchase agreements or repo in corporate debt on Commercial Papers, Certificates of Deposit and Non Convertible Debentures of less than one year of original maturity.
(Edited by Prem Udayabhanu)