Source: ET
Context:
The Reserve Bank of India (RBI) has issued draft guidelines for derivatives trading in:
- Corporate bond indices
- Total Return Swaps (TRS)
These measures were announced by Finance Minister Nirmala Sitharaman in the Union Budget to deepen India’s corporate bond market.
Why this move?
RBI aims to:
- Improve credit risk management
- Enhance liquidity and price discovery
- Facilitate corporate bond issuance across ratings
- Broaden India’s credit risk transfer toolkit
What is a Total Return Swap (TRS)?
A TRS is a derivative where:
- One party receives the total return of a bond (coupon + price movement)
- Without owning the underlying bond
- The provider (typically a bank) holds the bond and receives a fixed or floating payment
Enables synthetic exposure to credit risk.
Key Provisions in the Draft Norms
1. Eligible Participants
- Residents (non-individuals):
- TRS permitted without restriction on purpose
- Individuals:
- Not allowed to participate in TRS
- Non-residents:
- TRS allowed only for hedging
2. Reference / Underlying Assets
Derivatives may reference indices comprising:
- Money market debt instruments
- Rated corporate bonds and debentures
- Unrated bonds/debentures issued by SPVs of infrastructure companies
3. Interest Rate Benchmark
- Floating leg of TRS / index derivatives must be linked to:
- Benchmarks published by financial benchmark administrators
4. Settlement Norms
- To be specified by Fixed Income Money Market and Derivatives Association of India (FIMMDA)
- After consultation with market participants
