Reserve Bank of India (Credit… — RBI/2021-22/88 | RBI master-direction

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Reserve Bank of India (Credit… — RBI/2021-22/88 | RBI master-direction · Complied AI

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These Directions govern credit derivatives transactions undertaken in Over-the-Counter markets and on recognised stock exchanges in India. Eligible market participants include residents and eligible non-residents. Market-makers and users may execute single-name Credit Default Swap contracts. Retail users must execute Credit Default Swap transactions strictly for hedging and must physically settle their contracts. Market-makers must report Over-the-Counter credit derivatives transactions to the trade repository within thirty minutes. Exchanges may offer standardised single-name Credit Default Swap contracts with guaranteed settlement after receiving prior approval from the Reserve Bank.

What you must do

Market-makers shall report all OTC CDS transactions within 30 minutes of the transaction, to the trade repository of Clearing Corporation of India Ltd.
Retail users shall exit their CDS position within one month from the date they cease to have underlying exposure.
Exchanges shall obtain prior approval of the Reserve Bank for product design, changes in product design, eligible participants and other details of CDS contracts.
Market-makers shall put in place appropriate and robust methodologies for marking to market credit derivative contracts.

Key dates

Effective from: 09 May 2022
These Directions shall come into force on May 09, 2022.: 09 May 2022

Law this touches

FEMA s. 2

Who is affected

Scheduled Commercial Banks, except Small Finance Banks, Payment Banks, Local Area Banks and Regional Rural Banks
Non-Banking Financial Companies, Standalone Primary Dealers, and Housing Finance Companies with minimum net owned funds of 500 crore rupees
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
Retail users undertaking transactions in credit derivatives

Thresholds

Minimum net owned funds of 500 crore rupees for NBFCs, SPDs and HFCs
Resident companies qualifying as non-retail users must have minimum net worth of 500 crore rupees

Exceptions

Small Finance Banks, Payment Banks, Local Area Banks and Regional Rural Banks are excluded from acting as market-makers.

If you do not comply

The Reserve Bank may disallow any person or agency violating provisions from dealing in the credit derivatives market for a period not exceeding one month at a time after providing reasonable opportunity to defend.

Ask about this master direction

Written automatically from the official document. It is not a professional review, so check material decisions against the official record.

Document text

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Official PDF

RBI/2021-22/88 FMRD.DIRD.10/14.03.004/2021-22 February 10, 2022 ( Updated as on January 01, 2025 ) To, All Eligible Market Participants Madam/Sir, Master Direction – Reserve Bank of India (Credit Derivatives) Directions, 2022 Please refer to Paragraph 4 of the Statement on Developmental and Regulatory Policies announced as a part of the Bi-monthly Monetary Policy Statement for 2021-22 dated February 10, 2022 , regarding review of the Credit Default Swaps (CDS) Guidelines.

The draft Reserve Bank of India (Credit Derivatives) Directions, 2021 were released for public comments on February 16, 2021 . Based on the feedback received from the market participants, the draft Directions were reviewed and have since been finalised. The Master Direction – Reserve Bank of India (Credit Derivatives) Directions, 2022 are enclosed herewith.

Yours faithfully, (Dimple Bhandia) Chief General Manager FINANCIAL MARKETS REGULATION DEPARTMENT

Notification No. FMRD.DIRD.11/14.03.004/2021-22 dated February 10, 2022 Master Direction – Reserve Bank of India (Credit Derivatives) Directions, 2022 ( Updated as on January 01, 2025 )

In exercise of the powers conferred under section 45W of the Reserve Bank of India Act, 1934 (02 of 1934) (hereinafter called the Act) read with section 45U of the Act and in supersession of Circular No. IDMD.PCD.No.10/14.03.04/2012-13 dated January 07, 2013 , the Reserve Bank of India (hereinafter called the Reserve Bank) hereby issues the following Directions.

A reference is also invited to the Foreign Exchange Management Act, 1999 (42 of 1999), Foreign Exchange Management (Debt Instruments) Regulations, 2019 ( Notification No. FEMA. 396/2019-RB dated October 17, 2019 ) and A.P. (DIR Series) Circular No. 23 dated February 10, 2022 on Transactions in Credit Default Swap (CDS) by Foreign Portfolio Investors – Operational Instructions.

1. Short title, scope and commencement

(i) These Directions shall be called the Master Direction – Reserve Bank of India (Credit Derivatives) Directions, 2022.

(ii) These Directions shall apply to credit derivatives transactions undertaken in Over-the-Counter (OTC) markets and on recognised stock exchanges in India.

(iii) These Directions shall come into force on May 09, 2022.

2. Definitions

(i) In these Directions, unless the context otherwise requires:

(a) ‘Auction settlement’ of CDS means a settlement process in which the price of the reference/deliverable obligation at which the settlement will happen is determined through an auction mechanism.
(b) ‘Cash settlement’ of CDS means a settlement process in which the protection seller pays to the protection buyer, the notional amount of the CDS contract less the expected recovery value of the reference obligation.
(c) ‘Central counterparty’ means an entity that interposes itself between counterparties to contracts traded in one or more financial markets, becoming the buyer to every seller and the seller to every buyer and thereby ensuring the performance of open contracts.
(d) ‘Company’ shall have the same meaning as assigned to it in Section 2(20) of the Companies Act, 2013 (18 of 2013).
(e) ‘Corporate bonds and debentures’ mean non-convertible debt securities which create or acknowledge indebtedness and include debentures, bonds and such other securities issued by a body corporate or a trust or any statutory body constituted by virtue of a legislation, whether constituting a charge on the assets of the issuer or not, but excludes money market debt instruments, security receipts, securitized debt instruments and bonds issued by the Central Government or a State Government, or such other persons as may be specified by the Reserve Bank.
(f) ‘Credit Default Swap (CDS)’ means a credit derivative contract in which one counterparty (protection seller) commits to pay to the other counterparty (protection buyer) in the case of a credit event with respect to a reference entity and in return, the protection buyer makes periodic payments (premium) to the protection seller until the maturity of the contract or the credit event, whichever is earlier.
(g) ‘Credit derivative’ means a derivative contract whose value is derived from the credit risk of an underlying debt instrument.
(h) ‘Credit event’ means a pre-defined event in a credit derivative contract, which triggers a settlement under the contract.
(i) ‘Deliverable obligation’ means a debt instrument issued by the reference entity that the protection buyer can deliver to the protection seller in a physically settled CDS contract, in case of occurrence of a credit event.
(j) ‘Electronic Trading Platform (ETP)’ shall have the same meaning as assigned to it in Paragraph 2(1)(iii) of The Electronic Trading Platforms (Reserve Bank) Directions, 2018 issued vide Notification No. FMRD.FMID.08/2018 dated October 05, 2018 , as amended from time to time.
(k) ‘Exchange’ shall mean ‘recognised stock exchange’ and shall have the same meaning as assigned to it in Section 2(f) of the Securities Contract Regulation Act, 1956 (42 of 1956).
(l) ‘Government-related entity’ shall have the same meaning as assigned to it in Paragraph 9 of Indian Accounting Standard (Ind AS) 24: Related Party Disclosures.
(m) ‘Hedging’ means the activity of undertaking a credit derivative transaction to reduce credit risk of a particular debt instrument or a portfolio of debt instruments.
(n) ‘Infrastructure company’ means a company engaged primarily in activities related to specific infrastructure sub-sectors listed under the Harmonized Master List of Infrastructure Sub-sectors notified by Department of Economic Affairs, Ministry of Finance, Government of India, via gazette notification no. F.No.13/6/2009-INF dated April 08, 2016, as amended from time to time.
(o) ‘Market-maker’ means an entity which provides prices to users and other market-makers.
(p) ‘Money market debt instruments’ mean commercial papers as defined under the Reserve Bank Commercial Paper Directions, 2017, issued vide Notification No. FMRD.DIRD.2/14.01.002/2017-18 dated August 10, 2017 as amended from time to time, certificates of deposit as defined under the Master Direction – Reserve Bank of India (Certificate of Deposit) Directions, 2021, issued vide Notification No. FMRD.DIRD.03/14.01.003/2021-22 dated June 04, 2021 as amended from time to time, and non-convertible debentures of original or initial maturity up to one year as defined under the Master Direction on Money Market Instruments: Call/Notice Money Market, Commercial Paper, Certificates of Deposit and Non-Convertible Debentures (original maturity up to one year), issued vide Notification No. FMRD. Master Direction No.2/2016-17 dated July 07, 2016 as amended from time to time.
(q) ‘Net worth’ shall have the same meaning as assigned to it in Section 2(57) of the Companies Act, 2013 (18 of 2013).
(r) ‘Non-resident’ shall mean a ‘person resident outside India’ and shall have the same meaning as assigned to it in Section 2(w) of Foreign Exchange Management Act, 1999 (42 of 1999).
(s) ‘Over-the-Counter (OTC) markets’ mean the markets where transactions are undertaken in any manner other than on exchanges and shall include electronic trading platforms (ETPs).
(t) ‘Physical settlement’ of CDS means a settlement process in which the protection buyer delivers any of the eligible deliverable obligations to the protection seller against the receipt of notional amount of the CDS contract.
(u) ‘Reference entity’ means an entity, against whose credit risk, a credit derivative contract is entered into.
(v) ‘Reference obligation’ means a debt instrument issued by the reference entity and specified in a CDS contract for the purpose of valuation of the contract and for determining the cash settlement value or the deliverable obligation in case of occurrence of a credit event.
(w) ‘Related party’ shall have the same meaning as assigned to it under Paragraph 9 of Indian Accounting Standard (Ind AS) 24 – Related Party Disclosures.
(x) ‘Resident’ shall mean a ‘person resident in India’ and shall have the same meaning as assigned to it in section 2(v) of the Foreign Exchange Management Act, 1999 (42 of 1999).
(y) ‘Single-name CDS’ means a CDS contract in which the underlying is a single reference entity.
(z) ‘Substitution event’ means any event that results in the reference obligation being replaced by another obligation issued by the reference entity.
(aa) ‘Succession event’ means any event that results in the reference entity no longer being the primary obligor for the reference obligation.
(bb) ‘User’ means a person that undertakes derivative transactions other than as a market-maker.

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1. Short title, scope and commencement

2. Definitions

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