The Reserve Bank of India vide its notification dated 10th March 2022 has published the Master Direction – Reserve Bank of India (Credit Derivatives) Directions, 2022 which shall come into force from 9th May 2022 and shall apply to credit derivatives transactions undertaken in Over-the-Counter (OTC) markets and on recognised stock exchanges in India.
Residents and non-residents who are eligible to invest in corporate bonds and debentures under the Foreign Exchange Management (Debt Instruments) Regulations 2019 will be eligible to participate in the credit derivatives market.
The following entities shall be eligible to act as market-makers in credit derivatives:
- Scheduled Commercial Banks, except Small Finance Banks, Payment Banks, Local Area Banks and Regional Rural Banks;
- Non-Banking Financial Companies (NBFCs), including Standalone Primary Dealers (SPDs) and Housing Finance Companies (HFCs), with minimum net owned funds of ₹500 crore as per the audited balance sheet as on March 31 of the previous financial year and subject to specific approval of the Department of Regulation, Reserve Bank; and
- Export Import Bank of India, National Bank of Agriculture and Rural Development, National Housing Bank and Small Industries Development Bank of India.
In case an NBFC, an SPD or an HFC, fails to meet the eligibility criteria subsequent to the receipt of approval for acting as a market-maker, it shall cease to act as a market-maker. The NBFC, SPD or HFC shall continue to meet all its obligations under the existing contracts till the maturity/termination of such contracts.At least one of the parties to a credit derivative transaction shall be a market-maker or a central counterparty authorised by the Reserve Bank for the purpose.
The Market-makers shall report all OTC CDS (credit default swap) transactions within 30 minutes of the transaction, to the trade repository of Clearing Corporation of India Ltd.
Exchanges may offer standardised single-name CDS contracts with guaranteed settlement and the exchanges shall obtain prior approval of the Reserve Bank for product design, changes in product design, eligible participants and other details of CDS contracts.
