Can’t Hedge Your Bets yet: RBI’s Credit Default Swap Guidelines get postponed by a Month

(Image taken from here) 

For those eagerly awaiting RBI’s Credit Default Swap Guidelines for Corporate Bonds (hereinafter referred to as CDS) to come into force, there is some unwelcome news in the front, since the apex bank has seen it fit to defer it by another month to the end of November, 2011 (see RBI Circular RBI/2011-2012/228IDMD.PCD.No. 12/14.03.04/2011-12). The CDS had been agreed upon in its final form back in May, 2011 and was earlier supposed to operate from October 24, 2011. However, given the complexities of the documentation and operational processes involved, as well as the necessity of putting a functional institutional framework in place, the RBI has decided to give the stakeholders like mutual funds and insurance companies a bit more time to familiarize themselves with the guidelines. The exact revised date of implementation of CDS has not yet been declared.

For the uninitiated, CDS is meant to facilitate hedging against the defaulting risk in corporate bonds (including unlisted and unrated debt instruments, like those issued by infrastructure builders, for example) to which corporate entities like mutual funds, insurance companies and foreign institutional investors generally subscribe. In that aspect, it is meant to function like a risk management product, allowing the said entities to buy credit protection. For the purpose transaction of such swaps, institutions like banks, non-banking financial corporations and primary dealers with a proven and trusted financial history and net owned funds over INR 500,0000000 (500 crores) will be accorded facilitator status. However, CDS prohibits speculator transactions and is only confined within hedging against credit risks.

RBI had, as far back as 2008, also made an attempt to introduce CDS, but had desisted in the view of the global financial catastrophe that involved substantial trading of such bonds. In its current form however, the CDS is intended to promote development of the Indian corporate bond market, by attracting investor attention to the same.

[This post has been authored by Shouvik Kr. Guha, LL.M. 1st Year, W.B.N.U.J.S.]