Sebi permits mutual funds to purchase, promote credit score default swaps New Delhi, Sep 20 (PTI) Markets regulator Sebi on Friday allowed mutual funds to each purchase and promote Credit score Default Swaps (CDS), a transfer geared toward rising liquidity within the company bond market.
This flexibility to take part in CDS would function a further funding product for mutual funds, Sebi mentioned in a round.
Earlier, mutual funds had been solely permitted to make use of CDS transactions to purchase safety towards the credit score threat of company bonds they held. These transactions had been restricted to Mounted Maturity Plan (FMP) schemes with a length of multiple yr.
Now, “It has been determined to permit better flexibility to mutual funds to each purchase and promote CDS with sufficient threat administration,” Sebi mentioned.
In market parlance, Credit score Default Swaps are like insurance coverage contracts that defend towards default by a borrower.
For mutual funds, CDS helps handle the chance of debt securities they maintain. When a mutual fund purchases a CDS, it pays a premium to the vendor in trade for cover if a selected bond (the reference entity) defaults.
Below the brand new framework, Sebi mentioned mutual funds should buy CDS to hedge the credit score threat of debt securities they maintain.
Nonetheless, the CDS publicity cannot exceed the worth of the debt safety being protected.
The regulator mentioned that mutual funds can solely purchase CDS from sellers with an investment-grade score or greater.
On CDS sellers, Sebi mentioned that mutual funds can promote CDS as a part of artificial debt investments backed by money, authorities securities, or treasury payments. Nonetheless, In a single day and liquid mutual fund schemes can’t promote CDS.
The full CDS publicity for a scheme –both shopping for and selling– can’t exceed 10 per cent of the scheme’s belongings, Sebi mentioned.
The regulator mentioned that CDS can be valued based mostly on precise traded ranges or credit score spreads.
Mutual funds have been directed to reveal particulars of their CDS transactions, together with the score of the CDS vendor and any offers with sponsor group corporations. The round would come into impact instantly.
First Revealed: Sep 20 2024 | 6:39 PM IST
