MUMBAI (Reuters) - The Reserve Bank on Tuesday relaxed guidelines for market makers in credit default swaps (CDS) to help widen participation in the derivative products and set Oct. 23 for their launch.
A CDS is a swap contract in which the buyer of protection against a bond or loan makes regular premium payments to a counterparty who assumes the risk in the event of a default.
In the final guidelines placed on the central bank’s website, the Reserve Bank of India (RBI) said entities permitted to quote both buy and/or sell CDS spreads — market makers — needed a minimum capital to risk (weighted) assets ratio (CRAR) of 11 percent, down from 12 percent in the draft guidelines.
The core CRAR (Tier I) requirement was also reduced one percentage point to 7 percent.
Bankers said the relaxation was made on the request of state-run banks, which dominate banking in India, and the move would widen the base of eligible market makers.
Banks, primary dealers, financially strong non-bank finance companies and any institution approved by the RBI will be eligible as market makers.
The central bank also said it would allow foreign institutional investors as “users”, which means that they can buy credit protection to only hedge their credit risk.
Users are not allowed to sell protection and are not permitted to hold net short positions in the CDS contracts.
However, they can exit their bought CDS positions by unwinding them with the original counterparty or by assigning them in favour of buyer of the underlying bond.
The central bank also included restructuring under credit events for CDS, which bankers said was as per international standards.
Users will have a grace period of 10 business days from the sale of the underlying bond to unwind the CDS position, or double the time recommended in the draft guidelines.
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Reporting by Neha D'silva; Editing by Ranjit Gangadharan