Industry gives thumbs-up to MFs in CDS market

Fixed income managers said the move would help develop the corporate bond market, especially if the activity in the infra debt fund space picks up pace. However, they said the impact would not be immediately visible as the corporate bond market itself was significantly under-developed in India because of factors like lack of consensus in evaluating credit risk among various entities.

The regulator has allowed MFs to participate in CDS transactions only as users (protection buyer) and has barred them from selling protection or entering into short positions in the CDS contracts.

Fixed income managers said the step was taken to ensure that MFs mitigated the risk on the bonds they held by buying protection and refrained from exposing themselves to contingent liabilities by becoming sellers. “Mutual funds are permitted to buy credit protection only to hedge their credit risk on corporate bonds they hold,” said the regulator. Buyers of CDS pay a premium to get insured against credit defaults whereas sellers make good the loss in case of defaults.

MFs can participate as users in CDS within the portfolio of fixed maturity plans (FMP) schemes having tenure of more than one year. According to Killol Pandya, head, fixed income, Daiwa MF, this was a logical step as a fund manager's control over an

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