Sebi allows mutual fund industry to buy, sell credit default swaps

The Securities and Exchange Board of India (SEBI) has permitted mutual funds to participate in the buying and selling of credit default swaps (CDS). This regulatory change aims to enhance the risk management capabilities of mutual funds and provide them with additional tools to hedge credit risk. Mutual funds can now use CDS to protect their portfolios against potential defaults by issuers of debt securities. The move is expected to increase liquidity in the CDS market and offer mutual funds greater flexibility in managing their credit exposures. SEBI has outlined specific guidelines for mutual funds to follow when engaging in CDS transactions, including risk assessment, valuation, and disclosure requirements. This development is part of SEBI’s broader efforts to strengthen the regulatory framework for mutual funds and ensure the stability of the financial markets. The introduction of CDS trading for mutual funds is anticipated to benefit investors by enhancing the overall risk-return profile of mutual fund schemes.