Guidelines on credit default swaps for corporate bonds

The Reserve Bank of India (RBI) has placed the draft guidelines on credit default swaps (CDS) for corporate bonds on its website and invited comments from the public. It has also published the report of the internal working group on the introduction of credit default swaps for corporate bonds.

The report defines a CDS contract as a bilateral derivative contract on one or more reference assets. As part of it the protection buyer, who pays a premium during the life of the contract, receives a credit event payment from the protection seller following a credit event of the reference entities.

Limited availability

Following the global financial crisis, the RBI appears cautious about the introduction of CDS and so allows only listed corporate bonds as the reference obligation. However the infrastructure sector has been granted some latitude. As such, unlisted rated bonds of infrastructure companies and unlisted unrated bonds issued by the special purpose vehicles (SPVs) setup by infrastructure companies can also be reference obligations.

Ameya Khandge is a partner at Trilegal in Mumbai where Anoop Vasu is an associate. Trilegal is a full service law firm with offices in Delhi, Mumbai, Bangalore and Hyderabad and has over 120 lawyers.