BENGALURU (Reuters) – India’s markets regulator has allowed mutual funds to both buy and sell credit default swaps (CDSs) under certain conditions, it said in a circular on Friday, in a bid to drive up liquidity in the corporate bond market.
A credit default swap is a financial instrument that allows an investor to transfer credit risk to another party, acting similar in nature to an insurance contract.
Earlier, mutual funds could only act as buyers for CDSs to hedge credit risks on corporate bonds with a fixed maturity of more than a year.
“Flexibility to participate in CDSs shall serve as an additional investment product for mutual funds and also aid in increasing liquidity in the corporate bond market,” the Securities and Exchange Board of India (SEBI) said.
SEBI said that while selling CDSs, mutual funds must maintain adequate collateral in cash, government bonds or treasury bills, among other conditions.
Mutual funds can also only buy CDSs from sellers with investment-grade ratings, which are given to those with a higher likelihood of meeting debt obligations.
The exposure to CDS, while both buying and selling, should not exceed 10% of the assets under management of the mutual fund, the markets regulator said.
(Reporting by Nishit Navin; Editing by Janane Venkatraman)
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