SEBI looks to allow Mutual Funds to sell CDS schemes; Reform CDS buying rules

SEBI is considering allowing mutual funds to sell Credit Default Swaps (CDS) and revising rules regarding their purchase. A CDS acts as insurance against bond defaults, with one party compensating bond investors in case of default. SEBI's consultation paper, released on June 7, seeks public feedback until July 1. \r

Mutual funds were previously limited to purchasing CDS but may now sell them backed by cash, government securities, or treasury bills. However, selling CDS is proposed to be restricted for overnight and liquid schemes. Mutual funds can only purchase CDS from rated programmes and are now permitted to buy CDS on below investment grade securities. \r

Additionally, the total CDS exposure, both bought and sold, should not exceed 10% of the mutual fund's AUM.