RBI issues operational instructions for ‘Credit Default Swap’ transactions; allows FPIs to buy/sell CDS protections

Circular No. 23 RBI/2021-22/155, Dated: 10.02.2022

The RBI, issues operational instructions w.r.t transactions in Credit Default Swap (CDS) by Foreign Portfolio Investors (FPIs). FPIs are eligible to be categorised as non-retail users and are allowed to buy and sell CDS protection. The aggregate limit of the notional amount of CDS sold by FPIs shall be 5% of the outstanding stock of corporate bonds. FPIs shall not sell any CDS protection once the aggregate limit is utilised. These Directions shall come into effect from May 09, 2022

Clearing Corporation of India Ltd. (CCIL) shall disseminate the utilisation of aggregate limit based on the reporting by the market makers for transactions in OTC market and reporting by stock exchanges for transactions on exchanges.

Debt instruments received by FPIs as a deliverable obligation and debt instruments purchased by FPIs for meeting deliverable obligations in physical settlement of CDS contracts shall be reckoned under the investment limits for corporate bonds. In case of non-availability of investment limit at the time of physical settlement, such debt instruments shall be adjusted against the revised limits in the subsequent review of investment limits.

The notional amount of protection sold by FPIs, and the debt instruments received as a deliverable obligation as well as debt instruments purchased for meeting deliverable obligation by FPIs in physical settlement of CDS contracts shall not be subject to minimum residual maturity requirement or short-term limit, concentration limit or single or group investor-wise limits applicable to FPI investment in corporate bonds.

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