Column: A bit too little, a bit too late
In a bid to restart the credit default swap (CDS) market, RBI last week allowed CDS on unlisted rated corporate bonds in addition to the listed ones. A CDS is a financial swap agreement that the seller of the CDS will compensate the buyer in the event of a bond default. The buyer of the CDS makes a series of payments called the CDS ‘fee’ or ‘spread’ to the seller and, in exchange, receives a payoff if the bond defaults. The initial guidelines issued by RBI allowed CDS on only listed corporate bonds and did not allow for unwinding of CDS bought positions. It also did not permit CDS on securities with original maturity up to one year like commercial papers, certificates of deposit and non-convertible debentures. All those restrictions have now been relaxed.
However, the change of regulation is a bit too little and a bit too late. It is like trying to press the ignition button of a vehicle that does not have any fuel in the first place. RBI was ultra-conservative when it kick-started the CDS market in India and now it has realised its mistake. RBI brought out the CDS guidelines after a long wait of four years on May 23, 2011. The operational guidelines were announced on November 30, 2011. Post this, in the nine-month period till August 2012, there had been only three CDS
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