What changed
RBI introduced comprehensive prudential guidelines for CDS transactions on corporate bonds, following the May 2011 circular that allowed single-name CDS. The guidelines specify capital adequacy, exposure norms, and provisioning requirements for banks. CDS positions must be classified as Trading Book (market-making, short-term) or Banking Book (hedging banking exposures), with all positions marked-to-market.
What it means for you
Banks can now use CDS to transfer and manage credit risk on corporate bonds, both domestically and through overseas branches, subject to host country rules if stricter. This requires banks to align CDS operations with capital adequacy norms, impacting risk-weighted assets and provisioning. Market-makers and hedging users must ensure proper classification and operational compliance.
What you must do
- Classify all CDS positions as Trading Book or Banking Book based on hedging intent and mark-to-market all positions.
- Ensure CDS transactions meet operational requirements for eligibility as external hedges.
- Adhere to host country guidelines for overseas CDS transactions if they are more conservative.
- Review and update capital adequacy, exposure limits, and provisioning policies for CDS.
Who it affects
All Scheduled Commercial Banks (excluding RRBs and Local Area Banks), Indian banks' overseas branches, subsidiaries, and joint ventures, Indian operations of foreign banks
Can banks use CDS only for hedging or also for trading?
Banks can act as both market-makers and users. As users, they can buy CDS to hedge Banking Book or Trading Book exposures. Market-making positions are classified in the Trading Book.
What are the key prudential requirements for CDS?
All CDS positions must be marked-to-market and classified into Trading or Banking Book. Banks must follow capital adequacy, exposure norms, and provisioning guidelines as per the annex. Operational requirements for eligibility as external hedges must be met.
Do these guidelines apply to overseas CDS transactions?
Yes, they apply to CDS undertaken domestically or through overseas branches/subsidiaries/joint ventures. If host country guidelines are stricter, those must be followed.