RBI tightens rules for credit swaps debut

The Reserve Bank of India has laid down foolproof guidelines for the introduction of credit default swaps - an insurance against bonds default , speculation on which brought down the global finance to its knees in 2008. High capital requirements, restricting the participation to a few in financial services, a tight transaction norm and limiting it to just vanilla corporate bonds will ensure there is no trading risk on credit default swaps, or CDS. But the absence of immediate profit opportunity could delay the instrument becoming popular or widely sought after. It may deter many players from taking up the business, including market-making, given the high capital requirement and low profitability, at least in the initial years. Only institutions will be able to buy CDS, or protection against default, only to the extent of underlying value of bonds. All CDS trades should have RBI-regulated entity at least on one leg of the transaction and the protection seller cannot unilaterally cancel the contract.