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RBI issues draft guidelines on Credit Default Swaps

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RBI issues draft guidelines on credit default swapsOn February 16, 2021, Reserve Bank of India (RBI) has released the Draft Reserve Bank of India (Credit Derivatives) Directions, 2021 in exercise of the powers conferred under section 45W of the RBI Act 1934 read with section 45U.

  • The guidelines are for allowing derivatives trading in the credit default swaps (CDS) in over-the-counter (OTC) markets and on recognised stock exchanges in the country.
  • RBI invited comments on the Draft Directions by March 15, 2021.

What is CDS?

It is a credit derivative contract in which the protection seller commits to compensate the protection buyer for the loss in the value of an underlying debt instrument resulting from a credit event. In return, the protection buyer makes periodic payments (premium) to the protection seller until the maturity of the contract or the credit event, whichever is earlier.

Key Points:

–As per the draft, the debt instruments eligible to be a reference or deliverable obligation in a CDS contract are commercial papers, certificates of deposit and non-convertible debentures of original maturity up to one year, rated corporate bonds (listed and unlisted) and unrated rupee bonds issued by the special purpose vehicles set up by infrastructure companies.

–In CDS transaction, at least one of the parties should be market-maker or a central counterparty authorised by the RBI which can scheduled commercial banks (SCBs), Non-Banking Financial Company (NBFC) and primary dealers with a minimum net worth of Rs 500 crore, Exim Bank, NABARD, National Housing Bank and SIDBI.

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ii.In accordance with an article ‘Small Finance Banks: Balancing Financial Inclusion and Viability’ published in Reserve Bank of India’s (RBI) monthly bulletin on January 21, 2021, the assets of Small Finance Banks (SFBs) between financial years (FY) 2017-18 and 2019-20 have grown 150% annually.

Static points about Reserve Bank of India (RBI):

-It was established on the recommendation of the Hilton Young Commission.

-RBI is responsible only for printing the currency notes. Minting of coins is done by the Government of India.

-Dr. Manmohan Singh is the only Prime Minister to have also served as the Governor of RBI.