What changed
RBI replaced the 2013 CDS circular with a comprehensive Master Direction effective May 9, 2022. The new direction incorporates public feedback on the 2021 draft and aligns with FEMA regulations. It provides updated definitions for auction and cash settlement, central counterparty, and corporate bonds.
What it means for you
Banks and market participants now have a consolidated, updated framework for credit derivatives, enhancing clarity and risk management. The inclusion of OTC and exchange-traded CDS broadens market scope. Compliance with the new definitions and settlement processes is mandatory from the effective date.
What you must do
- Review and update internal policies to align with the Master Direction by May 9, 2022.
- Ensure CDS contracts reference the new definitions for auction and cash settlement.
- Train trading and risk teams on updated settlement mechanisms and eligible reference entities.
- Verify compliance with FEMA and FPI operational instructions for cross-border CDS transactions.
Who it affects
All eligible market participants trading credit derivatives, Banks and financial institutions dealing in CDS, Foreign Portfolio Investors (FPIs) transacting in CDS, Clearing corporations and central counterparties
What is the effective date of the new Master Direction?
The Master Direction comes into force on May 9, 2022, superseding the earlier circular of January 7, 2013.
Does this direction apply to exchange-traded CDS?
Yes, it applies to credit derivatives transactions in both OTC markets and on recognised stock exchanges in India.
What are the key settlement methods defined?
The direction defines auction settlement (price determined via auction) and cash settlement (protection seller pays notional less expected recovery value).