Fimmda to set up panel to determine procedures for cash, auction settlements of credit derivatives

Reserve Bank of India (RBI) on Thursday asked money market body Fimmda to set up a credit derivatives determinations committee to determine the procedures for cash and auction settlements of credit derivatives. The central bank has issued the master directions on credit derivatives 2022 as part of reviewing the Credit Default Swap (CDS) guidelines or directions for money market instruments.

The procedure for cash settlement and auction settlement will be determined by the Credit Derivatives Determinations Committee (CDDC) as specified which will be set up by Fimmda.

CDS contracts can be cash settled, physically or through auctions, but the procedures will be decided by the panel. It will have market-makers and users as its members with voting rights.


The committee may also include central counterparties as observer members and legal/audit/consultancy firms as consultative members, RBI said.

The revised guidelines for the operations of credit derivatives, which will come into force from May 9, 2022, will be applicable to all credit derivatives transactions undertaken in Over-The-Counter (OTC) markets and on recognised stock exchanges.

According to the new directions, retail users shall be allowed to buy protection only for the purpose of hedging while non-retail users shall be permitted to buy protection for hedging or otherwise.

The central bank said the market-makers shall ensure that all CDS transactions by retail users are undertaken for the purpose of hedging.

Retail users shall exit their CDS position within one month from the date they cease to have underlying exposure and CDS contracts involving retail users shall be mandatorily physically settled.

CDS is a credit derivative contract in which one counterparty (seller) commits to pay to the other counterparty (buyer) in case of a credit event with respect to a reference entity.