{"id":13886,"date":"2021-02-17T00:00:00","date_gmt":"2021-02-17T00:00:00","guid":{"rendered":"https:\/\/www.nextias.com\/current_affairs\/uncategorized\/17-02-2021\/rbi-guidelines-for-credit-default-swaps\/"},"modified":"2021-02-17T00:00:00","modified_gmt":"2021-02-17T00:00:00","slug":"rbi-guidelines-for-credit-default-swaps","status":"publish","type":"post","link":"https:\/\/www.nextias.com\/ca\/current-affairs\/17-02-2021\/rbi-guidelines-for-credit-default-swaps","title":{"rendered":"RBI Guidelines for Credit Default Swaps"},"content":{"rendered":"<p><strong>In News: <\/strong>Recently, RBI came out with the<strong> draft guidelines<\/strong> for <strong>allowing derivatives trading<\/strong> in the <strong>Credit Default Swaps<\/strong> (CDS) in <strong>over-the-counter<\/strong> (OTC) markets and on recognised stock exchanges in the country.<\/p>\n<p><strong>Guidelines <\/strong><\/p>\n<ul>\n<li><strong>Eligible Debt Instruments<\/strong>\n<ul>\n<li>Debt instruments which will be eligible to be a reference \/ deliverable obligation in a CDS contract include\n<ul>\n<li><strong>Commercial Papers, Certificates of Deposi<\/strong>t and <strong>Non-Convertible Debentures <\/strong>of <strong>original maturity up to one year<\/strong><\/li>\n<li><strong>Rated Indian Rupee (INR)<\/strong> denominated corporate bonds (listed and unlisted), and Unrated INR bonds issued by the Special Purpose Vehicles set up by infrastructure companies.<\/li>\n<\/ul>\n<\/li>\n<li>The <strong>reference\/deliverable obligations<\/strong> shall be in <strong>dematerialised<\/strong> form only.\n<ul>\n<li><strong>Asset-backed securities\/mortgage-backed securities<\/strong> and structured obligations such as credit <strong>enhanced\/guaranteed bonds<\/strong>,<strong> convertible bonds<\/strong>, <strong>bonds with call\/put options <\/strong>etc. <strong>shall not be permitted<\/strong> as a reference and deliverable obligations.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<li><strong>User classification<\/strong>\n<ul>\n<li>The user of the credit derivatives contract <strong>can be retail as well as non-retail users<\/strong>\n<ul>\n<li><strong>Non-retail users<\/strong> will include <strong>insurance companies, pension funds, mutual funds<\/strong>, <strong>alternate investment funds, foreign portfolio investors.<\/strong> These entities will also be eligible to act as a protection seller in CDS.<\/li>\n<li><strong>Market-makers<\/strong>: They are entities which can buy and sell protection from\/to users and other market-makers in order to provide liquidity to the market.\n<ul>\n<li>It will include Scheduled Commercial Banks (except Small Finance Banks, Payment Banks, Local Area Banks and Regional Rural Banks) and NBFCs, including HFCs, and SPDs with a minimum net owned funds of Rs. 500 crores.<\/li>\n<li>They will also include Export-Import Bank of India, National Bank of Agriculture and Rural Development, National Housing Bank and Small Industries Development Bank of India.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<li>Any user who is not eligible to be classified as a non-retail user will be classified <strong>as a retail user.<\/strong><\/li>\n<li><strong>Retail users<\/strong> will be <strong>allowed to undertake transactions<\/strong> in permitted credit derivatives <strong>for hedging their underlying credit risk <\/strong>while<strong> non-retail users<\/strong> will be allowed to <strong>undertake transactions <\/strong>in credit derivatives for <strong>both hedging and other purposes.<\/strong><\/li>\n<\/ul>\n<\/li>\n<li><strong>Restrictions<\/strong>\n<ul>\n<li>Market-makers and users shall not enter into CDS transactions if the counterparty is a r<strong>elated party or where the reference entity<\/strong> is a<strong> related party to either of the contracting parties.<\/strong><\/li>\n<li>Further, <strong>Market-makers<\/strong> and users <strong>shall not buy\/sell protection on reference <\/strong>entities if there <strong>are regulatory restrictions<\/strong> on <strong>assuming similar exposures<\/strong> in the cash market or in violation of any other regulatory restriction, as may be applicable.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p><strong>Credit Default Swap<\/strong><\/p>\n<ul>\n<li>It is a <strong>financial derivative<\/strong> or <strong>contract <\/strong>that <strong>allows an investor to &#8220;swap&#8221; or offset<\/strong> his or <strong>her credit risk with that of another investor.<\/strong>\n<ul>\n<li>For example, if a l<strong>ender is worried<\/strong> that a <strong>borrower is going to default on a loan<\/strong>, the <strong>lender could use a CDS to offset or swap that risk.<\/strong>\n<ul>\n<li>To swap the <strong>risk of default,<\/strong> the <strong>lender buys a CDS from another investo<\/strong>r who agrees to <strong>reimburse the lender in the case<\/strong> the borrower defaults.<\/li>\n<li>Most CDS will require an ongoing premium payment to maintain the contract, which is like an insurance policy.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<li>A credit default swap is the most common form of credit derivative and may involve municipal bonds, emerging market bonds, mortgage-backed securities or corporate bonds.<\/li>\n<\/ul>\n<p><strong>Role Played by CDS<\/strong><\/p>\n<ul>\n<li>It played a role in the <strong>2008-09 global financial crisis.<\/strong>\n<ul>\n<li>CDS played a big role in the global financial crisis like Lehman Brothers, the biggest casualty, <strong>owed USD 600 billion<\/strong> in debt, out of which $ 400 billion was <strong>covered by CDS.<\/strong><\/li>\n<li>The RBI was planning to introduce Credit Default Swaps 10 years ago, deferred the move in 2011 in the wake of the<strong> global financial crisis in 2008-09.<\/strong><\/li>\n<li>Considering the risks involved, the RBI seems to be cautious now as the CDS buyer may default on the contract, thereby denying the seller the expected revenue.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p><a href=\"https:\/\/indianexpress.com\/article\/business\/banking-and-finance\/rbi-draft-norms-credit-default-swaps-retail-users-hedging-credit-risk-7191666\/\" target=\"_blank\" rel=\"noopener\">Source: IE<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>In News: Recently, RBI came out with the draft guidelines for allowing derivatives trading in the Credit Default Swaps (CDS) in over-the-counter (OTC) markets and on recognised stock exchanges in the country. Guidelines Eligible Debt Instruments Debt instruments which will be eligible to be a reference \/ deliverable obligation in a CDS contract include Commercial [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":13887,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[21],"tags":[],"class_list":["post-13886","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-current-affairs"],"acf":[],"jetpack_featured_media_url":"https:\/\/wp-images.nextias.com\/cdn-cgi\/image\/format=auto\/ca\/uploads\/2023\/07\/5813825current-affairs.jpg","_links":{"self":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/13886","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/comments?post=13886"}],"version-history":[{"count":0,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/13886\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/media\/13887"}],"wp:attachment":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/media?parent=13886"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/categories?post=13886"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/tags?post=13886"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}