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Informist, Thursday, Jun. 25, 2026

--RBI issues master directions on credit derivatives 

--RBI: Master directions on credit derivatives effective immediately 

--RBI: Norms to enable introduction of derivatives on credit indices 

--RBI: Norms to enable introduction of total return swaps on corporate bonds 
 

NEW DELHI – The Reserve Bank of India on Thursday issued master directions enabling the introduction of derivatives on credit indices and total return swaps on corporate bonds, effective immediately. The new rules will apply to all credit derivatives transactions entered into from the date the directions take effect. Existing directions will continue to apply to credit derivatives transactions undertaken under those rules until the contracts expire.

 

The RBI has allowed both residents and persons resident outside India to participate in the credit derivatives market. Under the latest directions, market-makers and users can undertake transactions in credit default swaps and total return swap contracts. Eligible market-makers include scheduled commercial banks, except Small Finance Banks, payment banks, local area banks and regional rural banks, as well as standalone primary dealers, Export Import Bank of India, National Bank for Agriculture and Rural Development, National Housing Bank, Small Industries Development Bank of India, and National Bank for Financing Infrastructure and Development. 

 

"The RBI said in case a non-banking financial company fails to meet the eligibility criteria for acting as a market-maker, it shall cease to act as a market-maker," RBI said. "The NBFC shall continue to meet all its obligations under the existing contracts till the maturity or termination of such contracts. At least one of the parties to a credit derivatives transaction shall be a market-maker or a central counterparty authorised by the Reserve Bank for the purpose." 

For offering credit derivatives contracts, market-makers shall classify users as either retail or non-retail. Non-banking financial companies other than market-makers, insurance companies regulated by the Insurance Regulatory and Development Authority of India, pension funds regulated by the Pension Fund Regulatory and Development Authority, mutual funds and alternative investment funds regulated by the Securities and Exchange Board of India, foreign portfolio investors registered with SEBI, are eligible to be classified as non-retail for the purpose of offering credit derivatives contracts, according to RBI. 

 

Non-retail market makers also include resident companies with minimum net worth of INR 5 billion or minimum turnover of INR 10 billion, as per the latest audited financial statements. 

 

The RBI said a resident retail user, other than an individual, is allowed to buy protection only for the purpose of hedging. In contrast, a non-retail user may buy protection without any restriction on the purpose. 

 

Further, the cental bank said an insurance company regulated by IRDAI, a pension fund regulated by PFRDA, a mutual fund regulated by SEBI, an alternative investment fund regulated by SEBI, and an FPI registered with SEBI shall be permitted to act as protection sellers subject to approval from their respective regulator.

 

Participation by FPIs in credit default swaps contracts is subject to certain limits. The total notional amount of credit default swaps protection sold by all FPIs shall not exceed 5% of the outstanding stock of corporate bonds. The Clearing Corporation of India Ltd. shall disseminate the utilisation of this limit based on reporting by market makers and stock exchanges. Once the limit is fully utilised, FPIs shall not sell any further credit default swaps protection.

 

Debt instruments received by FPIs as deliverable obligations, and those purchased to meet deliverable obligations in physical settlement of credit default swaps contracts, will count toward the investment limits for corporate bonds. If investment limits are unavailable at the time of physical settlement, such debt instruments will be adjusted against the revised limit during the next investment limit review.

 

The notional amount of protection sold by FPIs, along with debt instruments received as deliverable obligations and those purchased to meet deliverable obligations in physical settlement of credit default swaps contracts, shall not be subject to the minimum residual maturity requirement or the issue-wise limit that applies to FPI investment in corporate bonds.

 

A market maker shall not offer a credit default swaps contract to an FPI if the reference obligation or index includes a money market debt instrument, a debt instrument with residual maturity of less than a year, or a bond with call or put options exercisable within one year from the date of undertaking the credit default swaps contract. Further, a market maker shall not offer credit default swaps contracts to an individual.

 

On total return swaps, the RBI said a market maker may offer a total return swap contract to a resident retail user, other than an individual, only for the purpose of hedging. A market maker may offer a total return swap contract to a resident non-retail user without any restriction on the purpose.

 

A market maker may offer a total return swap contract to a person outside India, including an FPI, subject to the conditions where it can be offered for the purpose of hedging; or it may be offered where the person resident outside India is the total return receiver, provided the total return swap is structured as fully funded, with the person resident outside India providing the market maker in India the full notional amount of the reference asset upfront. 

 

Other operational directions for credit derivatives cover buying, unwinding, and settlement of the swaps. Market participants shall not enter into credit default swaps or total return swaps transactions if the reference entity is a related party to either counterparty. However, two or more government-related entities shall not be deemed related parties.

 

Market participants shall not undertake credit derivatives transactions involving reference entities, reference obligations, or reference assets if regulatory restrictions prevent such participants from taking similar exposures in the cash market, or if it would violate any other applicable regulatory restriction. "Market participants can exit their credit derivatives contracts by unwinding the contract with the original counterparty or assigning the contract to any other eligible market participant through novation subject to the provisions of the circular," the RBI said. 

 

Further, the RBI said that while offering a credit derivatives contract for the purpose of hedging, the market maker shall ensure the user has exposure to the reference asset, any of the eligible reference obligations, or any one or more of the debt instruments comprising the index, in the case of a credit derivatives contract on an index.

 

Exchanges may offer futures contracts on credit indices with guaranteed settlement, provided the credit index used as the underlying is composed solely of eligible debt instruments as set out in these directions and the composition and administration of the index are in line with SEBI's directions. Exchanges shall obtain prior approval of the central bank for product design, changes in product design, eligible participants, and other details of the futures contracts. SEBI shall prescribe the operational guidelines on the procedure for execution and settlement of trades on stock exchanges.  End

 

Reported by Vaishali Tyagi

Edited by Deepshikha Bhardwaj

 

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