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RBI issues draft guidelines for CDS, derivative contracts

Insurance companies, mutual funds, foreign portfolio investors, select companies, pension and alternative investment funds are among others that will be permitted buy protection against any possible default on select debt securities, the Reserve Bank of India said in a draft guidelines issued Tuesday for Credit Default Swap (CDS), a derivative instrument gaining ground globally after the great economic recession in 2009. A protection buyer will pay a premium to the protection seller, which will take care of any loss arising in the event of any default. This continues until the maturity of the contract or a credit event, whichever is earlier. Banks, non-banking finance companies including home financiers, bond houses along with Exim Bank, NABARD and National Housing Bank will help the proposed product to become liquid as they will buy and sell such derivative contracts frequently adding to daily trading volumes. They are known as market makers in the market parlance.

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