The Reserve Bank of India has expanded the scope of credit default swaps (CDS) for corporate bonds to include unlisted but rated corporate bonds. This move is aimed at adding depth and breadth to the corporate bond market.
Till now, a CDS was restricted to infrastructure companies. With the backing of a CDS, a form of insurance, investors will be encouraged to invest more in corporate bonds.
A CDS is an agreement that the seller of the swap will compensate the buyer in the event of a loan default or other credit event. The buyer of the CDS makes a series of payments (fee) to the seller and, in exchange, receives a payoff if the loan defaults. In a notification, revising CDS guidelines for corporate bonds, the central bank said a CDS will now be permitted on securities with original maturity up to one year such as commercial papers, certificates of deposit and non-convertible debentures with original maturity less than a year. The RBI said users will be allowed to unwind their CDS bought position with the original protection seller at a mutually agreeable price or a price set by the Fixed Income, Money Market and Derivatives Association (FIMMDA). If no agreement is reached, then the position will have to be unwound with the original protection seller at the FIMMDA price.
Repo allowed
“This (the set of guidelines) will allow manufacturing and other companies to enter into the bond market,” said N.S. Venkatesh, Chief General Manager and Head of Treasury, IDBI Bank.
Meanwhile, the central bank has also allowed repo on corporate debt (a transaction where two parties agree to sell and repurchase the same securities) involving commercial papers, certificates of deposit and non-convertible debentures of less than one year of original maturity.
The central bank has also revised the minimum haircut (the difference between prices at which a market maker can buy and sell a bond) applicable on the market value of corporate debt securities prevailing on the date of trade of the first leg.
The revised minimum haircut for an AAA-rated bond is 7.5 per cent (10 per cent earlier); AA+ is 8.5 per cent (12 per cent); and AA is 10 per cent (15 per cent).
beena.parmar@thehindu.co.in