Credit default swaps (CDS) are likely to evolve with time and once developed, it would give a boost to the corporate debt market, industry experts said today.
"CDS market in the country will evolve with time as it is a new product. However, a developed CDS market will definitely give a boost to corporate bond market," HDFC Bank market risk head Sanmoy Chakrabarti said.
He also said that present regulations concerning CDS should be simplified to bring more investors into the market.
CDS is a credit derivative contract in which the buyer makes periodic payments to the seller and in turn receives a payoff if an underlying financial instrument defaults.
Usually, in the event of default, the buyer of the CDS receives money (the face value of the loan) and the seller of the CDS receives the defaulted loan (and right to recover the loan later).
"CDS market is very important for developing the corporate bond market. However, there should be enough investors in the CDS market so that it doesn't meet the fate of the corporate repo market," Kotak Mahindra Bank Treasury Head Mohan Shenoy said.
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Though RBI has permitted repo trade in corporate debt market since last year, there were hardly 4-5 trades done in this space during this time-period, he added.
In the meanwhile, IDBI Bank sold credit default swap to ICICI Bank yesterday, covering two bonds worth Rs 5 crore each at spreads of 99 basis points.
Both these bonds are 10-year, AAA-rated infra bonds from Rural Electrification Corporation (REC) and Indian Railway Finance Corporation (IRFC), respectively.
Meanwhile, credit rating agency Crisil said in a note today that CDS would enhance the bond market for low-rated issues, which go beyond the traditional safe haven option of high rated categories, adding that the RBI restriction on buying CDS without underlying exposure would check speculative trading.