Sebi plans to open CDS market for MFs

The Securities and Exchange Board of India (Sebi) is planning steps that will increase participation and allow greater flexibility for mutual funds (MFs) in the credit default swap (CDS) market.

- KHUSHBOO TIWARI

These include proposals to allow MFs to participate as buyers and sellers in a wider range of schemes. The market regulator has sought comments on the proposals by July 1. CDS allows an investor to offset their credit risk with another investor, who is willing to reimburse or pay a notional amount in case the borrower or the issuer of the bond defaults.

It facilitates risk mitigation and investments in lowerrated corporate bonds. It also facilitates the swapping of the risk of default through a derivative contract and is akin to insurance.

For instance, if an Entity A has corporate bonds of a company and enters CDS with Entity B, then in case of a default, Entity A will transfer these bonds to Entity B on receiving a notional amount.