Sebi clears way for mutual funds to sell credit-default swaps
The Sebi circular said, “Such flexibility to participate in CDS shall serve as an additional
investment product for Mutual Funds and also aid in increasing liquidity in the corporate bond market”.
The market regulator has cleared the way for mutual funds to sell credit default swaps (CDS), under specific conditions.
Until now, mutual funds in India were allowed to participate in CDS transactions only as users, that is, to buy credit protection to hedge risk on corporate bonds held by them and only in portfolios of fixed maturity plan (FMP schemes).
A circular issued on September 20 by the Securities and Exchange Board of India (Sebi) has eased norms.
The circular stated that the Reserve Bank of India, via a master direction issued in February 2022, revised its framework to help the CDS market develop by expanding the base of protection sellers by including major non-bank regulated entities including mutual funds.
The circular added, in view of this and after after taking into consideration the recommendations of the Working Group set up to deliberate on the issue, recommendations of Advisory Committee on Mutual Funds (MFAC), inputs by AMFI and feedback received on the consultation paper on this issue, it has been decided to allow greater flexibility to Mutual Funds to both buy and sell CDS with adequate risk management.
The Sebi circular said, “Such flexibility to participate in CDS shall serve as an additional
investment product for Mutual Funds and also aid in increasing liquidity in the corporate bond market”.
(This is a developing story.)