RBI finalises credit derivatives framework, permits wider use of credit default swaps

The Reserve Bank of India (RBI) on Thursday issued the final norms to expand the country’s credit derivatives market, allowing wider use of instruments such as credit default swaps (CDS) and total return swaps, according to an official statement by the Central bank.

This development aligns with the Union government’s proposal to deepen India’s credit derivatives market and improve risk management tools available to market participants in the Union Budget 2026.

The rules are applicable with immediate effect. “These Directions shall come into force on June 25, 2026,” the RBI circular read.

As per the release, these rules will enable resident Indian non-retail users to deploy instruments such as credit default swaps and total return swaps without any restrictions on purpose. However, non-resident users will be permitted to use these instruments only for hedging purposes.

The central bank defined hedging as undertaking a credit derivative transaction to reduce credit risk associated with a particular debt instrument or a portfolio of debt instruments.

RBI restricts retail entities to CDS for hedging

The RBI said retail resident users, except individuals, will be allowed to use credit default swaps only for hedging purposes. “A resident retail user, other than an individual, shall be allowed to buy protection only for the purpose of hedging,” the apex bank said in its final directions.

Credit derivative contracts with non-residents may be settled in Indian rupees or a foreign currency as per the latest rules. Under the rules, insurance companies, pension funds, mutual funds, alternative investment funds (AIFs) and foreign portfolio investors (FPIs) shall be eligible to act as protection sellers.

The apex bank further mentioned that it has examined and revised the draft directions based on the feedback and incorporated them in the final Master Directions. “The feedback received on the draft directions has been examined and consequent modifications have been suitably incorporated in the final Master Directions,” it added.

RBI mandates prior approval for exchange-traded CDS products

In its directions on exchange traded credit derivatives, the central bank said exchanges may offer standardised single-name CDS contracts and CDS contracts on credit indices with guaranteed settlement. However, such exchanges must obtain prior approval from RBI before launching any CDS product, including for its design, subsequent changes to the product, eligible participants, and other contract specifications.

The apex bank is allowing foreign portfolio investors (FPIs) to trade credit index futures, but with safeguards to prevent excessive speculation. For instance, FPIs cannot take excessive short (sell) positions and cannot trade credit index futures linked to very short-term debt instruments.