RBI notifies final credit derivatives directions, expands risk-management tools

The Reserve Bank of India (RBI) on Thursday issued final directions for the credit derivatives market, a move aimed at deepening India's corporate bond market and expanding the range of risk-management tools available to market participants.

The framework follows proposals announced in the Union Budget for FY27 and draft directions released in February for public consultation. After reviewing stakeholder feedback, the central bank has now finalised the rules, which come into effect immediately.

The new framework allows resident non-retail participants to use credit derivatives, including credit default swaps (CDS) and total return swaps, without restrictions on purpose. Non-resident participants, however, will be permitted to use such instruments only for hedging purposes.

A key objective of the framework is to facilitate the introduction of derivatives on credit indices and total return swaps linked to corporate bonds, broadening the country's relatively underdeveloped credit derivatives market.

What changes

The RBI has retained safeguards around retail participation. Resident retail users, other than individuals, will be allowed to undertake credit default swap transactions only for hedging underlying exposures. The central bank has also declined requests from market participants to permit credit derivatives on loans, keeping the market focused on eligible debt securities.

The final directions allow credit derivative contracts involving non-residents to be settled either in Indian rupees or foreign currency. The framework also permits exchanges to launch standardised single-name CDS contracts and credit index-based CDS products, subject to prior RBI approval.

The credit index for an exchange-traded CDS contract shall be an index comprising solely of eligible debt instruments.

"FPIs shall not participate in future contracts on credit indices where the underlying credit index includes a money market debt instrument or a debt instrument with residual maturity less than one year or a bond with call / put options exercisable within one year from the date of the contract," the document read.

New market infrastructure

To support the market's development, the RBI has mandated the creation of a Credit Derivatives Determinations Committee under FIMMDA. The committee will make binding decisions on matters such as credit events, successor entities and settlement-related issues.

The directions also require market-makers to report over-the-counter credit derivative transactions to the Clearing Corporation of India Ltd (CCIL) within 30 minutes, strengthening transparency and oversight.

The move forms part of the RBI's broader effort to deepen domestic debt markets, improve risk-transfer mechanisms and provide investors with more sophisticated tools to manage credit risk.

(With Agency Inputs)