What changed
RBI issued a notification under Sections 45U(a) and 45V of the RBI Act, 1934, specifying Credit Default Swaps as a derivative. This brings CDS under the regulatory framework of Chapter IIID of the Act, which governs derivatives.
What it means for you
Banks and market participants can now legally deal in Credit Default Swaps as recognized derivatives, subject to RBI oversight. This formalizes CDS as a tool for hedging credit risk, enhancing market depth and risk management options for lenders.
What you must do
- Review internal policies to align CDS trading with RBI's derivative regulations under Chapter IIID.
- Ensure compliance with reporting and documentation requirements for CDS transactions.
- Train treasury and risk management teams on CDS mechanics and regulatory obligations.
- Update risk management frameworks to include CDS as a recognized hedging instrument.
Who it affects
All market participants including banks, primary dealers, and financial institutions, Treasury and risk management departments, Compliance and legal teams handling derivative products
What is the legal basis for this notification?
RBI used powers under Sections 45U(a) and 45V of the RBI Act, 1934, to specify Credit Default Swaps as a derivative for Chapter IIID.
Does this notification allow trading in CDS immediately?
Yes, the notification took effect on October 19, 2011, making CDS a recognized derivative under RBI regulation from that date.
What are the implications for banks?
Banks can now use CDS for credit risk hedging within the regulatory framework, requiring updated policies, compliance, and risk management practices.