The RBI, by way of its Circular dated February 10, 2022 (‘FPI CDS Circular’), has introduced operational instructions for FPIs vis-à-vis transactions by such FPIs in credit default swaps (‘CDS’) in Indian markets. The FPI CDS Circular comes into effect from May 9, 2022.

While the erstwhile CDS guidelines issued by RBI in 2013 permitted foreign institutional investors as eligible users in CDS markets, they did not provide any further details in this regard. The recently introduced Master Direction – RBI (Credit Derivatives) Directions, 2022 (‘Master Directions’) classify FPIs as non-retail users and permit them to buy / sell CDS protection, in line with the FPI CDS Circular and Master Directions.

As is the case with respect to permitted investments by FPIs in corporate debt and Government securities, the (notional value of) CDS protection sold by all FPIs will also be subject to aggregate limits prescribed by RBI from time to time. The aggregate limit presently prescribed under the FPI CDS Circular is 5% of the outstanding stock of corporate bonds. FPIs cannot sell any CDS protection once the aggregate limit is utilised, although the limit utilised for the CDS protection sold by the FPI will be released upon the exit of the CDS position by the FPI.

While the underlying debt instruments for such transactions will be subject to investment limits for corporate bonds as prescribed by RBI, the notional amount of protection sold by FPIs and the underlying debt instruments will not be subject to restrictions such as minimum residual maturity requirement, concentration limit or single / group investor-wise limits that are otherwise applicable to FPI investments in corporate bonds.