It will provide participants a tool to transfer and manage credit risk

The Reserve Bank of India (RBI) has issued revised guidelines for Credit Default Swaps (CDS) for corporate bonds.

As per the revised guidelines, besides listed corporate bonds, CDS shall be permitted on unlisted but rated corporate bonds even for issues other than infrastructure companies.

Apart from this, users will be allowed to unwind their Credit Default Swaps bought position with original protection seller at mutually agreeable or the Fixed Income Money Market and Derivatives Association of India (FIMMDA) price.

“If no agreement is reached, then unwinding has to be done with the original protection seller at the FIMMDA price,” the RBI said.

Now, CDS will 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, it added.

The apex bank said the objective of introducing CDS on corporate bonds was to provide market participants a tool to transfer and manage credit risk in an effective manner through redistribution of risk.

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 Credit Default Swaps have benefits such as enhancing investment and borrowing opportunities and reducing transaction costs while allowing risk transfers, such products would increase investors’ interest in corporate bonds and would be beneficial to the development of the corporate bond market.

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