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Informist, Friday, Feb. 6, 2026

MUMBAI – The Reserve Bank of India Friday issued the draft regulatory framework to enable the introduction of derivatives on credit indices and total return swaps on corporate bonds, and sought feedback on the same by Feb. 27. 

Under the proposed norms, non-retail users with a minimum turnover of INR 10 billion, as per the latest audited financial statements, will be eligible to offer credit derivative products. Under the extant guideline, only resident companies and non-retail users with a minimum net worth of INR 5 billion are permitted. Credit derivative is a derivative contract, whose value is derived from the credit risk of an underlying debt instrument or from an index of underlying debt instruments. 

The draft norms further noted that the settlement basis and market conventions for credit derivative contracts is mandated to be specified by the Fixed Income Money Market and Derivatives Association of India, in consultation with market participants and based on international best practices. "FIMMDA may also prescribe standard documentation procedures for credit derivative transactions. Market participants may, alternatively, use a standard master agreement for credit derivative contracts," it said.

It also reccommended that the exchanges may offer standardised single-name credit derivative contracts on credit indices with guaranteed settlement. Exchanges would be allowed to offer futures contracts on credit indices with guaranteed settlement only if credit index used as underlying for futures contracts is composed solely of eligible debt instruments. 

The draft directions allow participation of foreign portfolio investors in futures on credit indices only if the aggregate long position assumed by FPIs under the investment limits for corporate debt securities is proposed to be approximately under the investment limits for corporate debt securities, which is 15% of the outstanding stock of corporate bonds via general route. The norms also propose that total gross short position of any FPI should not exceed its consolidated long position in corporate bonds and debentures and in future contracts on credit indices, at any point in time. Moreover, FPIs are not permitted to participate in future contracts on credit indices where the underlying credit index includes money market debt instruments, it said. 

The guidelines propose to allow all banks, except small finance banks, payment banks and local area and regional rural banks, to act as market makers to undertake transaction in total return swaps contracts. Non-banking financial companies, including standalone primary dealers and housing finance companies, with minimum net owned funds of INR 5 billion, as per the audited balance sheet as on Mar. 31 of the previous financial year, are also proposed to be allowed. Total return swap is a credit derivative contract under which one counterparty commits to transfer the entire economic performance of a reference asset to the other counterparty, and, in return, receives a pre-determined fixed or floating rate linked to a benchmark.

A market-maker is proposed to be allowed to offer total return swaps to a resident, other than an individual. On the other hand, offering total return swaps to a non-resident should only be for the purpose of hedging, the draft directions recommended. The norms also proposed to make money market debt instruments, rated rupee corporate bonds and debentures, and unrated rupee corporate bonds and debentures issued by the special purpose vehicles set up by infrastructure companies to be eligible for a reference obligation in a reference asset in a total return swaps contract.

Further, any floating interest rate used in a total return swap is required to be a benchmark published by a financial benchmark administrator, which is duly authorised by the RBI, it said.  End

Reported by Pratiksha

Edited by Tanima Banerjee

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