The Reserve Bank of India (RBI) has permitted all funding agencies to take part in the Credit Default Swap (CDS) market to help them to protect their risk.
The RBI has stated that the decision has been taken to allow all the banks across India like the EXIM Bank, NABARD, NHB and SIDBI to take part in the CDS market as user to hedge the underlying credit risk in corporate bonds in their portfolio.
The CDS works as a guarantee in which the purchaser of a credit swap gets credit protection, while the seller in the deal guarantees the credit worthiness of the product. By doing so, the risk of default gets transferred from the holder of the fixed income security to the seller.
The RBI has stated that the decision has been taken to allow all the banks across India like the EXIM Bank, NABARD, NHB and SIDBI to take part in the CDS market as user to hedge the underlying credit risk in corporate bonds in their portfolio.
The CDS works as a guarantee in which the purchaser of a credit swap gets credit protection, while the seller in the deal guarantees the credit worthiness of the product. By doing so, the risk of default gets transferred from the holder of the fixed income security to the seller.