The Reserve Bank on Monday allowed all financial institutions to participate in the credit default swap (CDS) market to help such entities to protect their risk.

"It has now been decided to permit all India financial institutions, namely, EXIM Bank, NABARD, NHB and SIDBI to participate in the CDS market as user to hedge the underlying credit risk in corporate bonds in their portfolio," the RBI said in the notification.

The CDS is a guarantee in which the buyer of a credit swap receives credit protection, whereas the seller of the swap guarantees the credit worthiness of the product. By doing this, the risk of default is transferred from the holder of the fixed income security to the seller of the swap.

As per the guidelines on CDS for corporate bonds, it said, commercial banks, non-banking financial institutions (NBFCs), mutual funds, insurance companies, housing finance companies (HFCs), provident funds, listed corporates and FIIs are permitted as users in the CDS market.

In 2007, the RBI had issued draft guidelines for introduction of CDS in India. However, the issuance of final guidelines was kept in abeyance keeping in view the role of credit derivatives in the then financial crisis.

The RBI then proposed to introduce plain vanilla OTC single-name CDS for corporate bonds for resident entities subject to appropriate safeguards. 
PTI