RBI allows FIIs, MFs to hedge risk in corp bonds from Oct

Posted By: Staff
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RBI to allow MFs and FIIs to invest in corp bonds
A credit default swap (CDS) guidelines was issued by the Reserve Bank on Tuesday which would allow corporate entities including insurers, FIIs and mutual funds to hedge risk against default in corporate bonds which are subscribed by them. A credit default swap (CDS) is referred to as a form of insurance that protects a lender of any defaults in repayment of corporate bond by the borrower.

A notification by RBI said that the guidelines that were finalized by the RBI after getting views from stakeholders would come into enforcement from October 24. The guidelines allows foreign institutional investors (FIIs), banks, insurers, NBFCs, listed companies, housing finance companies, provident funds and primary dealers to buy credit protection under the scheme.

It further lets banks, primary dealers and NBFCs with sound financial and good records of accomplishment to act as market makers or facilitators (for buying and selling of such swaps).

All the unlisted and unrated debt instruments, including those issued by the infrastructure companies, which are in sectors like road, port and telecommunication, power among others, would be included in the bonds for the purpose of CDS.

"CDS would increase investors' interest in corporate bonds and would be beneficial to the development of the corporate bond market in India," the RBI said.

The NBFCs and primary dealers with a net owned fund of Rs 500 crore, besides banks would also be allowed to act as market makers, as told by RBI.

As per the guidelines, CDS can be bought by entities only to hedge credit risk and not for speculation. There was a plan to introduce the CDS for corporate bonds by the central bank in 2008, but it got postponed due to the global financial crisis.

Read more about: rbi, fii, mutual funds, bond
Story first published: Wednesday, May 25, 2011, 9:30 [IST]
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