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SEBI on Friday proposed to give mutual funds more flexibility in trading of investment product credit default swaps (CDS) to further develop the debt market in the country. Under the current framework, mutual funds are allowed to engage in CDS transactions only as users.
New Delhi. Capital market regulator Sebi on Friday proposed to give mutual funds more flexibility in buying and selling investment product credit default swaps (CDS) to further develop the debt market in the country. Under the current framework, mutual funds are allowed to engage in CDS transactions only as users. This can be done only to reduce the credit risk on corporate bonds held by them. Apart from this, mutual funds can do this transaction only in the portfolio of term maturity plan (FMP) with a duration of more than one year.
In its consultation paper, the regulator has suggested allowing mutual funds to participate in CDS purchase as well as CDS sale for all schemes except intraday and cash schemes. The Securities and Exchange Board of India (SEBI) has sought comments on the proposal by July. In the market, CDS is a credit derivative contract, in which in case of debt, one counterparty (protection seller) promises to pay the other counterparty (protection buyer) and the protection buyer in return makes regular payments to the protection seller. It is like insuring the debt in a way.
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