1. Credit Default Swaps (CDS) is a kind of derivative, rather a credit derivative.
2. Other types of credit derivatives are:
1. ==**Credit default swaps (CDS)**==
2. Total return swaps
3. Credit-linked notes - funded
In both CLN and TRS, the principal loss risk is transferred. In CLN, money comes upfront so the bond holder earns roughly the risk-free rate. In TRS, since principal is not given upfront by the protection seller to the protection buyer(bond holder), the bond holder earns slightly more than the risk-free rate.
4. Credit spread options
3. What is CDS? [^1]
1. CDS is a bilateral derivative contract on one or more _reference assets_ in which the protection buyer pays a premium through the life of the contract in return for a _credit event payment_ by the protection seller following a _credit event_ of the reference entities. In most instances, the protection buyer makes quarterly payments to the protection seller. The periodic payment (premium) is typically expressed in annualised basis points of a transaction’s notional amount.
2. If any one of the credit events occurs during the life of the contract, the protection buyer will receive from the protection seller, a credit event payment, which will depend upon whether the terms of a particular CDS call for a physical or cash settlement. Generally, the legal framework of CDS – i.e., the documentation evidencing the transaction – is based on a confirmation document and legal definitions set forth by the International Swaps and Derivatives Association, Inc. (ISDA).
3. If a credit event occurs, the contract is settled through one of the types of settlement specified in the contract.
4. Market Makers & Users:
1. Scheduled commercial banks (but only public sector banks, private banks, foreign banks) are allowed to be market markers (that is provide both buy and sell prices) as well as users. A user like bank can buy CDS to hedge a Banking Book or Trading Book exposure.
2. Standalone [Central Bank Liquidity for Standalone Primary Dealers](Primary%20Dealers%20(PDs).md#Central%20Bank%20Liquidity%20for%20Standalone%20Primary%20Dealers)
3. NBFCs
1. NBFCs were [not allowed](RBI_Notification_20111226_Credit%20Default%20Swaps%20–%20NBFCs%20as%20Users.pdf) as market-makers but only as users.
5. Users (not allowed to short CDS positions/sell CDS/offer credit protection/incur risk of default of the borrower):
1. Residents,
2. Non-residents, who are eligible to invest in corporate bonds and debentures under the Foreign Exchange Management (Debt Instruments) Regulations, 2019 dated [October 17, 2019](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12099&Mode=0), as amended from time to time.
6. As of Feb-2026, credit derivatives transactions are now undertaken only in over-the-counter (OTC) markets
**Instruments allowed**
7. ==As of Jan-2026, only single-name CDS contracts type of credit derivative are permitted.== In this, the protection seller compensates if **one** specific company defaults. So a portfolio/structured/complex CDS products were not allowed
8. [Feb 6, 2026](RBI_Press%20Release_20260226_RBI%20releases%20draft%20revised%20Master%20Direction%20–%20Reserve%20Bank%20of%20India%20(Credit%20Derivatives)%20Directions,%202022.pdf) - Draft Revised [Master Direction – Reserve Bank of India (Credit Derivatives) Directions, 2022](https://rbi.org.in/scripts/Bs_viewcontent.aspx?Id=4856)
1. In the draft directions, RBI also included Total Return Swaps (TRS) means a credit derivative contract under which one counterparty (total return payer) commits to transfer the entire economic performance of a reference asset to the other counterparty (total return receiver), and, in return, receives a pre-determined fixed or floating rate linked to a benchmark.
9. Credit Default Swaps on government securities - There are sovereign CDS markets internationally. But there is no CDS market on Indian government securities. So let us discuss the framework for RBI's framework for CDS on corporate bonds
### Credit Default Swaps on Corporate Bonds
1. March 2003 - The Working Group on Introduction of Credit Derivatives in India, chaired by Shri B. Mahapatra, submitted its report.
2. [March 26, 2003](RBI_Notification_20030326_Draft%20guidelines%20for%20introduction%20of%20Credit%20Derivatives%20in%20India.pdf) - Based on the group's suggestions, draft guidelines on introduction of credit derivatives were brought out on March 26, 2003, but the implementation of it was deferred given the risk prevalent risk management practices of the banks.[^1]
3. Oct 27, 2010 - In the Second Quarter Review of Monetary Policy of 2009-10, it was indicated that as a part of the gradual process of financial sector liberalisation in India, credit derivatives would be introduced in a calibrated manner.
4. [May 16, 2007](RBI_Notification_20070516_Draft%20Guidelines%20on%20Credit%20Default%20Swaps.pdf) - draft guidelines were issued on CDS
5. Oct 24, 2007 - revised draft was placed for comments for a second round of consultation.
6. [Jun 19, 2008](RBI_Press%20Release_20080619_Introduction%20of%20Credit%20Derivatives%20in%20India-Review%20of%20Status.pdf) - The status was reviewed in the wake of the global financial crisis and introduction of CDS was kept in abeyance so as to be able to draw upon the experience of developed countries
7. [Oct 27, 2010](RBI_MPS_200910_Q2.pdf) - In the Second Quarter Review of Monetary Policy of 2009-10, it was indicated that as a part of the gradual process of financial sector liberalisation in India, credit derivatives would be introduced in a calibrated manner. RBI constituted the [Internal Group](RBI_Group-Committee_20110223_Report%20of%20the%20Internal%20Group%20on%20Introduction%20of%20Credit%20Default%20Swaps%20for%20Corporate%20Bonds_R.%20N.%20Kar.pdf) on Introduction of Credit Default Swaps for Corporate Bonds (CBs) to finalise the operational framework for the introduction of plain vanilla OTC single-name CDS for corporate bonds in India.
8. [Aug 4, 2010](https://rbidocs.rbi.org.in/rdocs//PublicationReport/Pdfs/DCDS040810FS.pdf) - A draft report of the group was published by RBI
9. [Feb 23, 2011](RBI_Group-Committee_20110223_Report%20of%20the%20Internal%20Group%20on%20Introduction%20of%20Credit%20Default%20Swaps%20for%20Corporate%20Bonds_R.%20N.%20Kar.pdf) - The group submitted its report
10. [May 23, 2011](RBI_Notification_20110523_Guidelines%20on%20Credit%20Default%20Swaps%20(CDS)%20for%20Corporate%20Bonds.pdf) - ==Guidelines on Credit Default Swaps (CDS) for Corporate Bonds was issued effective from October 24, 2011, based on recommendations of the [Internal Group](RBI_Group-Committee_20110223_Report%20of%20the%20Internal%20Group%20on%20Introduction%20of%20Credit%20Default%20Swaps%20for%20Corporate%20Bonds_R.%20N.%20Kar.pdf).==
1. [Box V.1 Guidelines on Credit Default Swaps (CDS) for Corporate Bonds](RBI_Annual%20Report_2011.pdf#page=112&selection=72,0,72,60) in RBI's Annual Report-2011
11. [October 19, 2011](RBI_Notification_20111019_Credit%20Default%20Swaps%20-%20Derivative%20under%20RBI%20Act,%201934.pdf) - Credit Default Swap was specified as a derivative under the RBI Act, 1934 (for the purposes of Chapter IIID of the RBI Act).
12. [October 20, 2011](RBI_Press%20Release_20111020_RBI%20changes%20Date%20for%20Operationalisation%20of%20CDS%20Guidelines%20for%20Corporate%20Bonds.pdf) - RBI decided to postpone the implementation to facilitate putting in place the necessary infrastructure.
13. [October 20, 2011](RBI_Notification_20111020_Introduction%20of%20Credit%20Default%20Swaps%20for%20Corporate%20Bonds-%20Date%20for%20Operationalisation%20Changed.pdf) - RBI announced to operationalise CDS guidelines issued in May 2011 by the end of November 2011.
14. ==[Nov 30, 2011](RBI_Press%20Release_20111130_Introduction%20of%20Credit%20Default%20Swaps%20(CDS)%20for%20Corporate%20Bonds.pdf) - CDS on corporate bonds were introduced effective Dec 1, 2011. ==
15. [Nov 30, 2011](RBI_Notification_20111130_Credit%20Default%20Swaps%20(CDS)%20for%20Corporate%20Bonds-Reporting%20Platform.pdf) - All CDS trades in corporate bonds were required to be reported within 30 minutes of the trade to the Clearing Corporation of India Limited (CCIL) trade repository called CCIL Online Reporting Engine (CORE) beginning December 1, 2011.
16. [November 30, 2011](RBI_Notification_20111130_Prudential%20Guidelines%20on%20Credit%20Default%20Swaps%20(CDS).pdf) - It laid down guidelines on capital adequacy, exposure norms, and provisioning for banks, for CDS transactions undertaken by Indian banks domestically or through their overseas branches/subsidiaries/joint ventures as well as Indian operations of foreign banks.
17. [January 07, 2013](RBI_Notification_20130107_Revised%20Guidelines%20on%20Credit%20Default%20Swaps%20(CDS)%20for%20Corporate%20Bonds.pdf) - *(withdrawn)*Revised Guidelines on Credit Default Swaps (CDS) for Corporate Bonds was issued.
18. [Feb 6, 2026](RBI_Press%20Release_20260226_RBI%20releases%20draft%20revised%20Master%20Direction%20–%20Reserve%20Bank%20of%20India%20(Credit%20Derivatives)%20Directions,%202022.pdf) - Draft Revised [Master Direction – Reserve Bank of India (Credit Derivatives) Directions, 2022](https://rbi.org.in/scripts/Bs_viewcontent.aspx?Id=4856)
1. In the draft directions, RBI also included Total Return Swaps (TRS) means a credit derivative contract under which one counterparty (total return payer) commits to transfer the entire economic performance of a reference asset to the other counterparty (total return receiver), and, in return, receives a pre-determined fixed or floating rate linked to a benchmark.
### Reporting
1. All OTC CDS transactions are required to be reported within 30 minutes of the transaction, to the trade repository [(CCIL-TR)](https://www.ccilindia.com/mm-tr-derivatives) of Clearing Corporation of India Ltd. (CCIL).
### FPIs
1. Participation by FPIs are subject to the provisions in these instructions - [Transactions in Credit Default Swap (CDS) by Foreign Portfolio Investors (issued on February 10, 2022)](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12227&Mode=0) – Operational Instructions, as amended from time to time
### Issues
1. Major reason cited for the lack of trading interest in CDS was restriction on netting of Mark to market (MTM) position for capital adequacy and exposure norms. The Reserve Bank’s earlier instructions on computation of exposure arising out of OTC derivative contracts did not permit bilateral netting of exposures due to uncertainty on legal enforceability of close-out netting in the event of liquidation of statutory corporations. [^2]
2. 2020 - RBI allowed bilateral netting for Qualified Financial Contracts (QFCs), which include over-the-counter (OTC) derivatives such as Credit Default Swaps (CDS) with the passage of Bilateral Netting of Qualified Financial Contracts Act, 2020, which came into force on October 1, 2020.
## Master Directions
1. [Master Direction – Reserve Bank of India (Credit Derivatives) Directions, 2022](https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12226)
1. [Feb 6, 2026](RBI_Press%20Release_20260226_RBI%20releases%20draft%20revised%20Master%20Direction%20–%20Reserve%20Bank%20of%20India%20(Credit%20Derivatives)%20Directions,%202022.pdf) - Draft Revised [Master Direction – Reserve Bank of India (Credit Derivatives) Directions, 2022](https://rbi.org.in/scripts/Bs_viewcontent.aspx?Id=4856)
2. [February 10, 2022](RBI_MPS_20210210.pdf) - [Master Direction – Reserve Bank of India (Credit Derivatives) Directions, 2022](https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12226), as amended from time to time,
1. read with on [Transactions in Credit Default Swap (CDS) by Foreign Portfolio Investors (issued on February 10, 2022)](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12227&Mode=0) – Operational Instructions, as amended from time to time. Participation by FPIs are subject to the provisions in these instructions.
2. It superseded following:
1. [Circular dated January 07, 2013](RBI_Notification_20130107_Revised%20Guidelines%20on%20Credit%20Default%20Swaps%20(CDS)%20for%20Corporate%20Bonds.pdf) - Revised Guidelines on Credit Default Swaps (CDS) for Corporate Bonds.
2. [Circular dated May 23, 2011](RBI_Notification_20110523_Guidelines%20on%20Credit%20Default%20Swaps%20(CDS)%20for%20Corporate%20Bonds.pdf) - Guidelines on Credit Default Swaps (CDS) for Corporate Bonds (were issued based on recommendations of the [Internal Group](RBI_Group-Committee_20110223_Report%20of%20the%20Internal%20Group%20on%20Introduction%20of%20Credit%20Default%20Swaps%20for%20Corporate%20Bonds_R.%20N.%20Kar.pdf) on Introduction of Credit Default Swaps for Corporate Bonds, which was constituted by the Reserve Bank to finalise the operational framework for the introduction of plain vanilla OTC single-name CDS for corporate bonds in India.)
3. [Feb 16, 2021](RBI_Press%20Release-20210216_RBI%20releases%20Draft%20Reserve%20Bank%20of%20India%20(Credit%20Derivatives)%20Directions,%202021%20under%20Section%2045%20W%20of%20the%20RBI%20Act,%201934.pdf) - RBI releases Draft Reserve Bank of India (Credit Derivatives) Directions, 2021 under Section 45 W of the RBI Act, 1934
2. **Others**
1. ==[Directions for OTC derivatives](Forex%20Markets.md#^eca5a1)==
2. [Reserve Bank of India (Commercial Banks – Asset Liability Management) Directions, 2025](https://rbi.org.in/scripts/NotificationUser.aspx?Id=13147)
3. [Reserve Bank of India (Commercial Banks – Prudential Norms on Capital Adequacy) Directions, 2025](https://rbi.org.in/scripts/NotificationUser.aspx?Id=13159)
1. These directions are issued separately for Regional Rural Banks (RRBs), Payments Banks, Small Finance Banks [(since 2014)](https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=32614), Local Area Banks
4. [Reserve Bank of India (Non-resident Investment in Debt Instruments) Directions, 2025](https://rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12765)
The Reserve Bank has issued the following regulations to regulate non-resident investment in debt instruments in India. This Master Direction consolidates all the directions issued through various circulars under the below 4 regulations:
1. October 17, 2019 - [FEM( Debt Instruments) Regulations, 2019](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12099), as amended from time to time
2. December 17, 2018 - [FEM (Borrowing and Lending) Regulations, 2018](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11441), as amended from time to time
3. April 1, 2016 - [FEM (Deposit) Regulations, 2016](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10325&Mode=0), as amended from time to time
4. May 3, 2000 - [FEM (Permissible Capital Accounts Transactions) Regulations, 2000](https://rbi.org.in/scripts/NotificationUser.aspx?&Id=155), as amended from time to time
### Regulations
1. Foreign Exchange Management Act, 1999 (42 of 1999)
2. October 17, 2019 - [FEM (Debt Instruments) Regulations, 2019](https://rbi.org.in/scripts/Bs_viewcontent.aspx?Id=4757)
1. It replaced the Foreign Exchange Management (Transfer of Issue of Security by a Person Resident outside India) Regulations, 2017
### References
1. RBI. (2003). Report of The Working Group on Introduction of Credit Derivatives in India. [Link](https://rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=309) | [pdf](RBI_Group-Committee_20030326_Report%20of%20The%20Working%20Group%20on%20Introduction%20of%20Credit%20Derivatives%20in%20India.pdf)
2. RBI. (Feb 23, 2011). Report of the Internal Group on Introduction of Credit Default Swaps for Corporate Bonds (Jan, 2011) (Chairman R. N. Kar). [Link](https://rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=628) | [pdf](RBI_Group-Committee_20110223_Report%20of%20the%20Internal%20Group%20on%20Introduction%20of%20Credit%20Default%20Swaps%20for%20Corporate%20Bonds_R.%20N.%20Kar.pdf)
3. RBI. (Mar 29, 2022). OTC Derivatives in Emerging Market and Developing Economies: The Role of Global Liquidity and Regulatory Reforms. RBI - Occasional Papers - Vol. 42, No.1, 2021. [Link](https://rbi.org.in/scripts/Bs_viewcontent.aspx?Id=4111)
4. https://www.isda.org/
[^1]: RBI. (Feb 23, 2011). Report of the Internal Group on Introduction of Credit Default Swaps for Corporate Bonds (Chairman R. N. Kar). [Link](https://rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=628) | [pdf](RBI_Group-Committee_20110223_Report%20of%20the%20Internal%20Group%20on%20Introduction%20of%20Credit%20Default%20Swaps%20for%20Corporate%20Bonds_R.%20N.%20Kar.pdf)
[^2]: RBI. (Sept 10, 2015). Financial Market Regulation in India – Looking Back, Looking Ahead. A Speech by Harun R. Khan Harun, Deputy Governor, Reserve Bank of India at the FIMMDA – PDAI 16th Annual Conference 2015 at Prague on August 17, 2015. [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=970)