The Reserve Bank of India (RBI) has provided guidelines on the use of Credit Default Swaps (CDS) in India, which are designed to promote transparency, standardization, and risk management in the Indian financial system. Some of the key guidelines are as follows:
- Eligibility: Only eligible market participants like banks, primary dealers, NBFCs, insurance companies, mutual funds, and foreign portfolio investors can enter into CDS contracts.
- Underlying Assets: CDS contracts may be allowed for corporate bonds issued by companies and unlisted entities, listed non-convertible debentures, and some other debt securities.
- Documentation: CDS transactions should be supported by documentation like the standard International Swaps and Derivatives Association (ISDA) documentation, which should be appropriately modified for Indian conditions.
- Margin Requirements: The RBI has specified minimum margin requirements for CDS contracts, which should be collected upfront and marked-to-market on a daily basis.
- Reporting Requirements: All CDS transactions must be reported to the Clearing Corporation of India Limited (CCIL) for trade confirmation, clearing, and settlement. The CCIL would maintain a comprehensive database of CDS transactions for monitoring systemic risks.
- Hedging: CDS contracts should be used for hedging and risk management purposes only, and not for speculation.
- Risk Management: Market participants should have robust risk management systems in place to manage the risks associated with CDS contracts.
The guidelines are aimed at providing a framework for the use of CDS contracts in India, while also ensuring that the risks associated with such contracts are effectively managed.