The Hindu Business Line : Banks, PDs allowed to use credit default swaps

Mumbai May 17 The Reserve Bank of India has allowed banks and primary dealers to use plain vanilla credit default swaps to buy and sell protection against credit defaults.

The participants in the credit derivative market can be broadly divided into protection buyers and protection sellers.

For now, only banks and PDs will offer these products. However, the apex bank will consider allowing insurance companies and mutual funds and when their respective regulators permit them to deal in credit default swaps.

The RBI has said all parties should be Indian and the deals have to take place in rupees.

They will act as protection buyer or protection seller as and when their respective regulators permit them to transact in credit default swaps, said the RBI draft guidelines.

Credit default swap is a type of credit derivative in which a party sells the credit risk of its default borrower for a fee to another party. Commercial banks use credit default swaps to manage the credit risk while lending large loans to corporates.

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