The Securities and Exchange Board of India (SEBI) has recently permitted mutual funds to sell credit default swaps (CDS), under specific conditions, in a move aimed at expanding investment options and boosting liquidity in the corporate bond market. Previously, mutual funds in India could only participate in CDS transactions as buyers, using them to hedge risks on corporate bonds held within fixed maturity plan (FMP) schemes.
On September 20, SEBI issued a circular that eases these restrictions, allowing mutual funds greater flexibility. The circular references a revised framework introduced by the Reserve Bank of India (RBI) in February 2022. This framework aims to develop the CDS market by expanding the pool of protection sellers to include major non-bank regulated entities, such as mutual funds.
SEBI’s decision follows recommendations from a Working Group established to address the issue, feedback from the Advisory Committee on Mutual Funds (MFAC), input from the Association of Mutual Funds in India (AMFI), and a consultation paper. The updated rules allow mutual funds not only to buy but also to sell CDS, provided they implement adequate risk management measures.
According to SEBI, this move will offer mutual funds a new investment avenue and help increase liquidity in the corporate bond market. The introduction of this flexibility is expected to strengthen the overall functioning of the CDS market, benefiting both mutual funds and the broader financial ecosystem.
This regulatory change marks a significant step in diversifying the investment products available to mutual funds and enhancing the depth of India’s corporate bond market.
