RBI Releases Draft Revised Credit Derivatives Directions, Seeks Public Feedback by Feb 27

New Delhi, Feb 7 (KNN) The Reserve Bank of India (RBI) on Friday released the draft revised ‘Master Direction – Reserve Bank of India (Credit Derivatives) Directions, 2022’, inviting comments from market participants, stakeholders and other interested parties by February 27, 2026.

The draft guidelines introduce a framework for derivatives trading in corporate bond indices and total return swaps (TRS), a move announced earlier by Finance Minister Nirmala Sitharaman in the Union Budget to deepen and broaden the corporate bond market.

Expanding Credit Risk Management Tools

The RBI said an active credit derivatives market could help improve credit risk management, enhance liquidity and efficiency in the corporate bond market, and support bond issuance across different credit ratings. 

The revised draft sets out clearer rules on eligible participants, hedging conditions and reference assets, signalling the central bank’s intent to strengthen India’s credit risk transfer mechanisms.

Rules for Total Return Swaps

A total return swap allows one party to receive the total return of a bond—including interest income and price movements—without owning the underlying security, while the counterparty typically holds the bond and receives a fixed or floating payment.

Under the draft, market makers will be allowed to offer TRS to resident entities other than individuals, without restrictions on end-use. However, individuals will not be permitted to participate in TRS transactions. For non-residents, TRS will be allowed only for hedging purposes.

Eligible Assets and Settlement Norms

The RBI said the underlying asset for TRS or futures on credit indices must be an index comprising eligible debt instruments. These include money market instruments, rated corporate bonds and debentures, as well as unrated bonds and debentures issued by special purpose vehicles set up by infrastructure companies.

Floating interest rates for TRS and credit index products must be linked to benchmarks published by recognised financial benchmark administrators. 

Settlement norms for credit derivatives will be issued separately by the Fixed Income Money Market and Derivatives Association of India (FIMMDA) after consultation with market participants.

The RBI said feedback received on the draft would be considered before finalising the revised directions.

(KNN Bureau)