Flexibility in participation of Mutual Funds in Credit Default Swaps (CDS)

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..... Furthermore, such transactions can be currently undertaken by Mutual Funds only in the portfolios of Fixed Maturity Plans (FMP) schemes having tenor of more than one year. 2. Reserve Bank of India has issued a revised regulatory framework for CDS on February 10, 2022 "Master Direction - Reserve Bank of India (Credit Derivatives) Directions, 2022" in order to provide the necessary impetus for the development of CDS market by, inter alia, expanding the base of protection sellers including selling of protection by all major non-bank regulated entities including by Mutual Funds. 3. In view of the above, after taking into consideration the recommendations of the Working Group set up to deliberate on the issue, recommendations of Advisory....

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....f seller of CDS shall be considered for comparison). The exposure shall form part of overall single issuer limits for the reference entity or seller of CDS, whichever is applicable. In case of same rating for reference entity and seller of CDS, the exposure shall then be considered on reference entity and not on seller of CDS. 12.28.4. MF schemes shall buy CDS only from such sellers that have instruments with lowest long-term rating of investment grade and above. 12.28.5. Schemes may buy CDS for investment grade and existing below investment grade debt securities in the portfolio, if any. Mutual Fund Schemes as seller of CDS 12.28.6. MF Schemes may sell CDS only as part of investment in synthetic debt securities, i.e., sel....

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....t be sold or used for any other purpose till CDS sell position is open. 12.28.8. The exposure of synthetic debt security (notional amount) shall be considered in respective single issuer, group issuer and sectoral limits. Such exposure to the issuer, group and sector of the issuer shall be equal to the notional amount. 12.28.9. For the purpose of computing gross exposure of scheme investing in synthetic debt security, the exposure due to such investment shall be  computed as follows: • Notional amount (+) • Buffer (i.e., cover kept over and above notional amount) 12.28.10. Schemes shall sell CDS only against securities rated investment grade and above. 12.28.11. Credit risk rating of the s....