Irda unveils rules for credit default swap investment

MUMBAI: Insurance companies are now allowed to hedge interest rate risk as the Insurance Regulatory and Development Authority ( Irda) on Thursday issued the final guidelines on investment into credit default swap ( CDS).

Credit default swaps are agreements where the seller of the CDS compensates the buyer in case of a default. Though RBI had allowed banks to pass on the credit risk to others a year ago, the market has not taken off. Irda said that the credit default swaps could be used only to manage credit risk in case of a default.

"The category of the investment will not change pursuant to buying CDS on such underlying," Irda said.

Insurers are allowed to use CDS on listed corporate bonds as underlying. Companies can, however, buy unlisted rated bonds of infrastructure companies. Also, insurers can invest in unlisted and unrated bonds issued by the special purpose vehicles set up by the infrastructure companies.

The regulator has disallowed companies from any CDS transaction between entities belonging to a promoter group. Insurers cannot be purchased on short-term instruments with maturity up to one year such as commercial papers, certificates of deposit, non-convertible debentures.