Sebi proposes steps to open credit default swap market for mutual funds

Sebi is considering measures to enhance mutual funds' participation and flexibility in the credit default swap (CDS) market. Proposals include permitting MFs to engage as buyers and sellers across a broader spectrum of schemes, aiming to solicit feedback by July 1. CDS enables investors to mitigate credit risk by offsetting it with another investor, akin to insurance. \r

While previous guidelines restricted MFs to being protection buyers only, limiting their ability to sell protection, the consultation paper aims to relax these constraints. MFs may now sell CDS on synthetic debt securities but must hedge their credit risk when buying CDS. \r

Sebi also contemplates allowing CDS purchases for below investment-grade debt securities, subject to conditions such as shorter squaring-off timelines and exposure limits.