Soon it may be possible to take credit protection, a hedge against defaults, on bonds issued by a special purpose vehicle (SPV) of rated infrastructure companies. This may permitted keeping in view the need for development of the sector.
The Reserve Bank of India (RBI) today released a draft proposal for the operational framework in introducing corporate default swaps, a form of insurance in case a bond or loan goes into default.
An internal group of RBI, in its recommendations, said CDS should be permitted on bonds issued by rated legal resident entities. The group hasn’t stipulated a rating for entities where a CDS can be had for their corporate bonds.
The internal group has mooted that a system of non-guaranteed settlement of CDS transactions should be set up at the initial stage. Gradually, a central counterparty (an entity that is the buffer between the buyer and seller of a trade) for guaranteed settlement of CDS deals should set up.
Those who can participate in CDS are sought to be divided in two categories, market makers and users. Market makers like banks, mutual funds and insurance companies could do both protection buying and protection selling. Users can only hedge their own underlying exposures.
