Mumbai: India’s stock market regulator Securities and Exchange Board of India, or Sebi, said on Thursday mutual funds can participate in credit default swaps (CDS) to hedge their risks on corporate bonds that they hold, but will not be allowed to short (sell without owning) these instruments.
CDS is a derivative used to offset risks in debt markets. It allows creditors to insure themselves against the possibility that a borrower might default.
In May 2011, the Reserve Bank of India (RBI) issued guidelines on credit default swaps for corporate bonds.
“Mutual funds can participate as users in CDS for the eligible securities as reference obligations, constituting from within the portfolio of only fixed maturity plans schemes having tenor exceeding one year,” Sebi said in a circular.
Exposure to a single counterparty in CDS transactions shall not exceed 10% of the net assets of the mutual fund scheme, while the cumulative exposure related to premium paid for all derivative positions including CDS should be not more than 20% of the net assets of the scheme, it said.
“Mutual funds shall also disclose the details of CDS transactions of the scheme in corporate debt securities in the monthly portfolio statements as well as in the half yearly trustee report,” it added.
Before entering a CDS transaction, mutual funds shall put in place a written policy on participation in the same approved by the board of the asset management company and its trustees as per guidelines specified by RBI and Sebi. Such policies shall be reviewed by mutual funds at least once a year, the regulator added.