SEBI allows more flexibility to MFs to buy, sell credit default swaps
Informist, Friday, Sep 20, 2024
MUMBAI – The Securities Exchange Board of India today allowed greater flexibility to mutual funds to both buy and sell credit default swaps with adequate risk management.
"Such flexibility to participate in CDS (credit default swaps) shall serve as an additional investment product for mutual funds and also aid in increasing liquidity in the corporate bond market," the regulator said in a notification today.
Earlier, mutual funds in India were permitted to participate in credit default swap transactions only as users. Mutual funds can buy credit protection only to hedge the credit risk on corporate bonds held by them in the portfolio of fixed maturity plan schemes having a tenor of more than one year.
Mutual fund schemes can now buy credit default swaps for the purpose of hedging their credit risk on debt securities they hold in various schemes. However, the exposure of a credit default swap should not exceed the respective debt security exposure, and such exposure may not be added to gross exposure of the scheme, the SEBI said.
SEBI also allows mutual fund schemes to sell credit default swaps only as part of an investment in synthetic debt securities. Mutual funds can sell credit default swaps on a reference obligation covered with cash, gilts and treasury bills. Overnight and liquid schemes are not permitted to sell credit default swap contracts.
Mutual fund schemes should participate in credit default swaps only through standard contracts prescribed by Fixed Income Money Market and Derivatives Association of India. End
