Credit derivatives to wait until markets recover.
The rollout of credit default swaps (CDS) in India to hedge risks has been postponed once again as global markets are in the midst of a financial crisis. The Reserve Bank of India today said it will draw lessons from the recent turmoil and review the proposal to introduce CDS at an appropriate time.
A CDS is a contract, in which a buyer makes a series of payments to a seller and in exchange receives the right to a payoff if a credit instrument goes into default, or if a specific credit event, including bankruptcy or restructuring occurs.
The central bank had issued draft norms on CDS in May 2007 and revised it again in October 2007. In the past few weeks, several companies, including insurers and banks, were bailed out by their respective governments after they reported losses arising out of dabbling in CDS.
Last month's $85-billion US government-sponsored rescue of the American International Group was required because of the firm's involvement in credit-default swaps. Experts estimate the size of the CDS market to be in excess of $50 trillion.
Meanwhile, RBI said it will launch Interest Rate Futures (IRF) contracts in early 2009 along with the necessary changes in the regulatory regime. An IRF contract allows the buyer to lock in a future investment rate.
RBI had earlier allowed banks to take trading positions in IRFs to add depth and liquidity to the market. The guidelines were also applicable to overseas branches of the domestic banks.
Also, a panel comprising officials of RBI and Securities and Exchange Board of India, the stock market regulator, is working on specifications, margins and regulatory issues for the banks to deal in contracts.