FIIs and MFs to hedge risk against default in corporate bonds

The Reserve Bank today came out with a credit default swap (CDS) guidelines that would allow corporate entities including insurers, FIIs and mutual funds to hedge risk against default in corporate bonds to which they subscribe.

The guidelines, which were finalised by the RBI after receiving views from stakeholders, will come into effect from October 24, it said in a notification.

CDS is a risk management product which helps entities guard against possibility of defaults in repayment of corporate bonds.

As per guidelines, foreign institutional investors (FIIs), banks, insurers, NBFCs, listed companies, housing finance companies, provident funds and primary dealers can buy credit protection under the scheme.

It further said that banks, primary dealers and NBFCs with sound financial and good track record will be allowed to act as market makers or facilitators (for buying and selling of such swaps).

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