Credit Default Swaps (CDS): Theory Emerging into Practice (Initiated by Reserve Bank of India)

Abstract

India is all set to launch credit Default Swaps which are expected to ignite the spark which will flourish the corporate bond market. Considering the caution nature of RBI and the havoc created by CDS in global market the move by RBI is significant. From the move of RBI one can say as the knife itself is not harmful but it depends whether it’s in a doctor’s hand or a robber’s hand. Similarly CDS as a product is certainly not harmful but its utility will depend on the judicial use of the same. RBI has given clear indications about the launch of CDS. Reserve Bank of India has placed its draft report of the Internal Group on Introduction of Credit Default Swaps (CDS) for Corporate Bonds on 4th August, 2010. RBI has published draft guidelines on the introduction to CDS in 2003 and in 2007 and these were again introduced in the Second Quarter Review of Monetary Policy of 2009-10 wherein RBI proposed the introduction of plain vanilla OTC single-name CDS for corporate bonds for resident entities subject to appropriate safeguards. However, taking into account the status of risk management practices then prevailing in the banking system and also the experiences relating to the financial crisis, the issuance of final guidelines was deferred.

This research paper aims to examine the scope of the guidelines issue by the RBI so far with respect to introducing CDS in India. As a part of the endeavour the authors also seek to identify need for CDS and analyse the Credit Derivative Market of India.

Keywords: CDS, Credit Default Swaps, RBI guidelines