RBI today operationalised new guidelines on credit default swap (CDS), directing market participants to report such trades within 30 minutes to the Clearing Corporation's online repository.
"It is advised that all market makers shall report their CDS trades in corporate bonds within 30 minutes of the trade to the Clearing Corporation of India Ltd (CCIL) trade repository CCIL Online Reporting Engine (CORE) beginning December 1, 2011," the Reserve Bank said in a circular.
CDS provides credit protection to corporate bond buyers, as the sellers of the swaps guarantee the credit-worthiness of the product. Thus, the risk of default is transferred from the holder of the fixed income security to the seller of the swap.
RBI observed that the objective of introducing CDS on corporate bonds is to provide market participants a tool to transfer and manage credit risk in an effective manner through redistribution of risk.
In October, RBI issued a formal notification specifying that CDS is a derivatives instrument.
The apex bank had finalised the guidelines in May to allow corporate entities including insurers, FIIs and mutual funds to hedge against the risk of default in the corporate bonds to which they subscribe.
RBI had said a credit event (a default on a previously agreed financial obligation) will cover restructuring approved under the Board for Industrial and Financial Reconstruction, including corporate debt restructuring and corporate bond restructuring.
"Since CDS have benefits like enhancing investment and borrowing opportunities and reducing transaction costs while allowing risk-transfers, such products would increase investors' interest in corporate bonds and would be beneficial to the development of the corporate bond market in India," the central bank had said.
The RBI guidelines come at a time when the quantum of bad loans in the banking system appears to be gradually building up.
The guidelines take effect after a delay of over a month. They were originally scheduled for October 24, but RBI deferred it to give market participants like banks and other financial institutions more time to clarify details on documentation and operational aspects.