RBI issues guidelines on credit default swap for corporate bonds
24 May 2011
The Reserve Bank of India (RBI) has announced guidelines on credit default swaps (CDS), which help entities to guard against possible defaults in repayment of corporate bonds.
Under the guidelines issued today, corporate entities, including, foreign institutional investors (FIIs), banks, insurers, NBFCs, listed companies, housing finance companies, provident funds and primary dealers would be eligible to use CDS to hedge risk against default in corporate bonds.
Banks, primary dealers and NBFCs with sound financial and good track record will be allowed to act as market makers or facilitators (for buying and selling of such swaps), RBI said in a release.
NBFCs and primary dealers with a net owned fund of Rs500 crore will be permitted to act as market makers.
CDS is used as a hedge against unlisted and unrated debt instruments, including those issued by infrastructure companies engaged in sectors like road, port, telecommunication, power etc.
The new guidelines will come into effect from 24 October, RBI said in a notification.