RBI/2011-12/317
DNBS.CC.PD.No.253/03.10.01/2011-12

December 26, 2011

To
All NBFCs(excluding primary dealers)

Dear Sir,

Credit Default Swaps – NBFCs as Users

Please refer to the Guidelines on Credit Default Swaps for Corporate Bonds issued vide Circular No. IDMD.PCD.No.5053/14.03.04/2010-11 dated May 23, 2011 in terms of which broad guidelines including the eligible participants and other requirements were outlined. It was also indicated that market participants will have to follow the capital adequacy guidelines for credit default swaps (CDS) issued by their respective regulators.  

2.  In this connection, it has been decided that NBFCs shall only participate in CDS market as users. As users, they would be permitted to buy credit protection only to hedge their credit risk on corporate bonds they hold. They are not permitted to sell protection and hence not permitted to enter into short positions in the CDS contracts. However, they are permitted to exit their bought CDS positions by unwinding them with the original counterparty or by assigning them in favour of buyer of the underlying bond.

3.  Apart from complying with all the provisions above, NBFCs, as users, shall also be required to ensure that the guidelines detailed in the annex-1 including operational requirements for CDS are fulfilled by them.

Yours sincerely,

(Uma Subramaniam)
Chief General Manager-in-Charge