The Reserve Bank of India on 10th February 2022, has issued Operational instructions transactions in credit default swap (CDS) by Foreign Portfolio Investors (FPI). The FPIs are eligible to be categorised as non-retail users and are allowed to buy and sell CDS protection under credit derivatives directions. These Directions shall come into effect from May 09, 2022.
As per the instruction, Selling of CDS protection by all FPIs shall be subject to a limit specified by the Reserve Bank from time to time. The aggregate limit of the notional amount of CDS sold by FPIs shall be 5% of the outstanding stock of corporate bonds. Clearing Corporation of India Ltd. (CCIL) shall disseminate the utilisation of aggregate limit based on the reporting by the market makers for transactions in OTC market and reporting by stock exchanges for transactions on exchanges.
FPIs shall not sell any CDS protection once aggregate limit is utilised. The limit utilised for CDS protection sold by the FPI shall be released upon the exit of the CDS position by the FPIs.
Further, the notional amount of protection sold by FPIs, and the debt instruments received as deliverable obligation as well as debt instruments purchased for meeting deliverable obligation by FPIs in physical settlement of CDS contracts shall not be subject to minimum residual maturity requirement / short-term limit, concentration limit or single/group investor-wise limits applicable to FPI investment in corporate bonds.
