MFs entry into CDS transactions
Besides, the regulator said that mutual funds can invest in repo or short-term repurchase of forward contract of corporate debt securities having ratings of AA and above that.
In a circular, Sebi said that mutual funds can participate in the CDS market for hedging their debt risks, but can not enter into short positions in the CDS contracts.
"Mutual funds shall participate in CDS transactions only as users (protection buyer)," Sebi said.
CDS is a specific kind of counter-party agreement which allows the transfer of third party credit risk from one party to another.
The regulator said that mutual funds can participate as users in CDS for the securities having Fixed Maturity Plans (FMP) with tenor exceeding one year.
It also said that such funds can buy CDS only from a market maker approved by the RBI and can enter into master agreement with the counterparty as stipulated under apex bank's guidelines such as exposure to a single counterparty in CDS transactions would not exceed 10 per cent of the net assets of the scheme.
Sebi also said that mutual funds are permitted to exit their bought CDS positions in case the cumulative gross exposure in corporate bonds along with equity, debt and derivative positions not exceed 100 per cent of the net assets of the concerned scheme.
Mutual funds are required to disclose the details of CDS transactions of the
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