Participation of mutual funds in Credit Default Swaps (CDS) Market as Users (“Protection Buyers”) and in repo, in corporate debt securities
Summary
This circular permits mutual funds to participate in the Credit Default Swap (CDS) market as protection buyers solely for hedging credit risk on corporate bonds. It also expands the eligibility criteria for mutual funds to participate in repo transactions involving corporate debt securities from AAA rated to AA and above rated instruments. The document mandates specific disclosure requirements, internal policies, and exposure limits for these derivative and repo activities.
Text
Mutual funds shall participate in CDS transactions only as users (protection buyer)... They shall not be allowed to sell protection and hence not permitted to enter into short positions in the CDS contracts.
Mutual funds can participate as users in CDS for the eligible securities as reference obligations, constituting from within the portfolio of only Fixed Maturity Plans (FMP) schemes having tenor exceeding one year.
Mutual funds shall buy CDS only from a market maker approved by the RBI... Exposure to a single counterparty in CDS transactions shall not exceed 10% of the net assets of the scheme.
The cumulative gross exposure through credit default swap in corporate bonds along with equity, debt and derivative positions shall not exceed 100% of the net assets of the scheme.
The total exposure related to premium paid for all derivative positions, including CDS, shall not exceed 20% of the net assets of the scheme.
Before undertaking CDS transactions, mutual funds shall put in place a written policy on participation in CDS approved by the Board of the Asset Management Company and the Trustees... The policy shall be reviewed by mutual funds, at least once a year.
To enable the investors in the mutual funds schemes to take an informed decision, the concerned Scheme Information Document (SID) shall disclose the intention to participate in CDS transaction in corporate debt securities...
Mutual funds shall also disclose the details of CDS transactions of the scheme in the monthly portfolio statements as well as in the half yearly trustee report... Further, mutual funds shall disclose the schemewise details of CDS transactions in the notes to the accounts of annual report...
Mutual funds shall participate in repo transactions only in AA and above rated corporate debt securities.
Source: SecMarx — Participation of mutual funds in Credit Default Swaps (CDS) Market as Users (“Protection Buyers”) and in repo, in corporate debt securities. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.