SEBI Allows Flexibility to Mutual Funds to Buy and Sell Credit Default Swaps With Adequate Risk Management
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- Last Updated on 23 September, 2024
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Circular No. SEBI/HO/IMD/PoD2/P/CIR/2024/125; Dated: 20.09.2024
SEBI has allowed mutual funds (MFs) greater flexibility in buying and selling credit default swaps (CDS) with adequate risk management. This flexibility to participate in CDS would serve as an additional investment product for mutual funds and also aid in increasing liquidity in the corporate bond market.
As per the new framework, MF Schemes can buy CDS only to hedge their credit risk on debt securities they hold in various schemes. The exposure of CDS shall not exceed respective debt security exposure, and such exposure may not be added to the gross exposure of the scheme.
In case, the protected debt security is sold, schemes must ensure that the respective CDS position is closed within 15 working days of selling the above-protected debt security. Further, MF schemes must buy CDS only from such sellers that have instruments with the lowest long-term rating of investment grade and above. The circular shall be effective immediately.
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