The RBI has deferred operationalisation of its credit default swap (CDS) guidelines by a month till November-end to give market participants like banks and other financial institutions more time to clarify details on documentation and operational aspects.
"Market participants have asked for certain clarifications regarding documentation, operational aspects and the arrangement for the necessary institutional framework... The matter has been reviewed and it has been decided to operationalise CDS guidelines... by the end of November, 2011," the Reserve Bank said in a notification.
The apex bank had finalised the guidelines in May and they were scheduled to be implemented from October 24. It said the exact revised date for implementation of the CDS guidelines, which would allow corporate entities including insurers, FIIs and mutual funds to hedge against the risk of default in the corporate bonds to which they subscribe, will be notified shortly.
"Necessary infrastructure, which includes trade repository, documentation, publication of CDS curve for valuation, standardisation of contracts, etc, required for the launch of the product is being put in place," the RBI said.
Earlier this week, the central bank had issued a formal notification specifying that Credit Default Swaps are derivatives instruments. A CDS is a guarantee in which the buyer of a credit swap receives credit protection, while the seller of the swap guarantees the credit-worthiness of the product. By doing this, the risk of default is transferred from the holder of the fixed income security to the seller of the swap.
The RBI's guidelines come at a time when the quantum of bad loans in the banking system appears to be gradually building up. For instance, gross NPAs of the country's largest lender SBI reached a three-year high of 3.52% of loans for the quarter ended June 30.
The users of CDS include commercial banks, primary dealers, non-banking finance companies (NBFCs), mutual funds, insurance companies, housing finance companies, provident funds, listed corporates, foreign institutional investors and other institutions specifically permitted by the RBI.
The RBI had announced in its second quarter review of the monetary policy in October, 2009, that it would introduce a plain over-the-counter single name CDS for resident entities.
Following this, it had appointed an internal working group to finalise the operational framework in consultation with market participants.
The final report of the working group was presented to the RBI in February, following which it sought public comments.
As part of measures to enable more financial market reforms, the RBI also increased the period of short sale in government securities from the existing five days to a maximum of three months.
In its guidelines issued in May on CDS for corporate bonds, the RBI said a credit event (that is, 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.
The 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.
"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.
