RBI Expands Credit Derivatives Market, Introduces TRS And Credit Index Products

New Delhi, Jun 27 (KNN) The Reserve Bank of India (RBI) on Thursday issued the Master Direction — Reserve Bank of India (Credit Derivatives) Directions, 2026, expanding the country's credit derivatives market beyond single-name credit default swaps (CDS) to include total return swaps (TRS) on corporate bonds, exchange-traded CDS on credit indices and futures on credit indices. 

The directions take immediate effect, replacing the previous framework issued in February 2022.

The move operationalises proposals announced in the Union Budget for FY2026-27 and the RBI's February 2026 monetary policy statement, and follows a public consultation process initiated earlier this year.

Total Return Swaps Introduced

The framework permits eligible market-makers to offer TRS contracts in the over-the-counter market. 

Resident non-retail users — including regulated financial entities and large companies with a net worth of at least Rs 500 crore or turnover of at least Rs 1,000 crore — may use TRS without restrictions on purpose. Resident retail users, excluding individuals, will be permitted to participate only for hedging purposes.

Foreign investors, including foreign portfolio investors, will be allowed to participate in TRS under specified conditions including through fully funded structures. 

Market-makers may also offer TRS contracts to overseas entities through overseas branches, International Financial Services Centre banking units, wholly owned subsidiaries and joint ventures, subject to regulatory safeguards.

Exchange-Traded Credit Index Products

The new framework permits stock exchanges, with prior RBI approval, to offer standardised single-name CDS contracts and CDS contracts on credit indices, marking the first time such products have been formally permitted in India. 

Exchanges may also launch futures contracts on credit indices, subject to RBI approval and operational guidelines from the Securities and Exchange Board of India. 

Eligible credit indices must comprise only approved debt instruments and be administered by authorised benchmark administrators.

Broader Participation

The RBI has expanded the list of eligible market-makers to include scheduled commercial banks, standalone primary dealers, upper-layer and middle-layer non-banking financial companies including housing finance companies, and select development finance institutions.

Institutional participation has also been broadened. Insurance companies, pension funds, mutual funds, alternative investment funds and foreign portfolio investors may now act as protection sellers in CDS contracts, subject to applicable regulatory approvals. 

The revised framework removes earlier restrictions linking participation to underlying credit exposures, giving eligible entities greater flexibility in managing credit risk.

Individuals have been prohibited from participating in Over-the-Counter (OTC) credit default swaps and total return swaps. Market participants are also barred from entering into credit derivative transactions involving related-party reference entities.

Reporting and Market Infrastructure

All OTC credit derivative transactions must be reported to the trade repository of the Clearing Corporation of India within 30 minutes of execution. 

The RBI has directed the Fixed Income Money Market and Derivatives Association of India to establish a Credit Derivatives Determinations Committee comprising market-makers and users, which will be responsible for credit event determinations, settlement procedures and conducting auctions when required.

(KNN Bureau)