Credit default swaps (CDS) of RBI

RBI will soon issue fresh guidelines on credit default swaps (CDS).

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CDS is a financial derivative instrument to hedge risks in bond investments.
The enactment of the Bilateral Netting of Qualified Financial Contracts law paves the way for an active CDS market.
The government is working with financial sector regulators, SEBI, RBI, IRDA and PFRDA to build a robust and vibrant bond market.
Enhancing the bond markets is very important for the requirement of infrastructure financing, particularly the projects lined up in the National Infrastructure Pipeline.

What is CDS?

A credit default swap (CDS) is a financial derivative or contract that allows an investor to “swap” or offset his or her credit risk with that of another investor.
E.g. if a lender is worried that a borrower is going to default on a loan, the lender could use a CDS to offset or swap that risk.
To swap the risk of default, the lender buys a CDS from another investor who agrees to reimburse the lender in the case the borrower defaults.
Most CDS will require an ongoing premium payment to maintain the contract, which is like an insurance policy.
A CDS is the most common form of credit derivative and may involve municipal bonds, emerging market bonds, mortgage-backed securities or corporate bonds.