Participation of AIFs in Credit Default Swaps
Summary
This circular amends the SEBI (Alternative Investment Funds) Regulations, 2012 to permit AIFs to participate in Credit Default Swaps as protection buyers and sellers. It establishes specific conditions for Category I, II, and III AIFs regarding hedging purposes, leverage limits, and collateral requirements. The document also mandates reporting obligations to custodians, platform regulations, and compliance with RBI directives.
Text
SEBI (Alternative Investment Funds) Regulations, 2012 have been amended to allow AIFs to participate in Credit Default Swaps as protection buyers and sellers.
Category I AIFs and Category II AIFs may buy CDS on underlying investment in debt securities, only for the purpose of hedging.
Category III AIFs may buy CDS for the purpose of hedging or otherwise, within permissible leverage as specified in SEBI circular no. CIR/IMD/DF/10/2013 dated July 29, 2013.
Category III AIFs may sell CDS, subject to the condition that effective leverage undertaken is within the permissible limits as specified in SEBI circular no. CIR/IMD/DF/10/2013 dated July 29, 2013.
Category II AIFs and Category III AIFs may sell CDS by earmarking unencumbered Government bonds/Treasury bills equal to the amount of the said CDS exposure.
Total exposure to an investee company, including exposure through CDS, shall be within the limit of applicable concentration norm as specified in AIF Regulations.
AIFs shall report details of CDS transaction to the custodian, by the next working day, in the manner as specified by the custodian.
Custodian shall put in place a mechanism to collect necessary details from AIFs transacting in CDS, to monitor the compliance with conditions specified at para 2A and para 2B above.
The obligation of manager/AIF and custodian in case of breach of leverage limits due to transactions in CDS by Category III AIFs shall be as specified in referenced SEBI circulars.
In case the amount of earmarked securities falls below CDS exposure, the AIF shall report to custodian on the same day and rectify by the end of the next trading day.
Any unhedged position resulting in gross unhedged positions across all CDS transactions exceeding twenty-five percent of investable funds shall be taken only after intimating to all unit holders.
Category I and Category II AIFs which transact in CDS shall maintain thirty days cooling off period between the two periods of borrowing or engaging in leverage.
You have read the preview. Create a free account to read the full document and see every order that applied it.
Free accounts include 10 searches/day with full text access.
Source: SecMarx — Participation of AIFs in Credit Default Swaps. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.