Sunday, January 15, 2012

NBFCs BARRED FROM SELLING CREDIT DEFAULT SWAPs (CDS)

Non-banking companies can participate in the credit default swap (CDS) market only as users, according to the Reserve Bank of India. As users, they would be permitted to buy credit protection only to hedge their credit risk on corporate bonds they hold. CDS is an agreement that the seller of the CDS will compensate the buyer in the event of loan default. The RBI, in a notification, said NBFCs are not permitted to sell protection and hence not permitted to enter into short positions in the CDS contracts. However, they are permitted to exit their bought CDS positions by unwinding them with the original counter party or by assigning them in favour of buyer of the underlying bond.

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