The Reserve Bank of India (RBI) on Friday issued draft guidelines on derivatives trading for corporate bond indices and total return swaps (TRS). Finance Minister Nirmala Sitharaman announced these measures in the Budget to deepen the corporate bond market.
“An active derivatives market can facilitate efficient management of credit risks, improve liquidity and efficiency in the corporate bond market and facilitate issuance of corporate bonds across the rating spectrum,” the RBI said in the draft.
Synthetic Exposure
The draft now provides explicit rules on eligible participants, hedging conditions, reference assets, signalling RBI’s intent to broaden India’s credit risk transfer toolkit.
A TRS is a derivatives contract where one party receives the total return of a bond—coupon income plus price appreciation or depreciation without owning the underlying security. The swap provider, typically a bank, holds the bond on its balance sheet and the buyer will pay a fixed or a floating fee to the bank.
The RBI said in the draft that a market maker can offer TRS to resident other than an individual, without any restriction in terms of purpose. TRS should not be offers to any individuals.
Strict Guardrails
In case of non-residents, TRS should be offered only for the purpose of hedging.
The underlying asset for TRS or futures on credit indices should be an index comprising eligible debt instruments including money market debt instruments, rated corporate bonds and debentures, and unrated corporate bonds and debentures issued by the Special Purpose Vehicles (SPV) set up by infrastructure companies.
Floating interest rate for both TRS or credit indices should be a benchmark published by a financial benchmark administrators. Settlement norms for credit derivatives will be published by Fixed Income Money Market and Derivatives Association of India (FIMMDA), after consulting market participants.