Month: February 2021

The Reserve Bank of India (RBI) plans to allow retail users undertake transactions in permitted credit derivatives for hedging their underlying credit risk, according to its Draft guidelines on Credit Default Swaps (CDS).

Non-retail users shall be allowed to undertake transactions in credit derivatives for both hedging and other purposes.

The RBI has come up with ‘Reserve Bank of India (Credit Derivatives) Directions, 2021 – Draft’ as development of CDS market is sine qua non for the development of a liquid market for corporate bonds, especially for the bonds of lower rated issuers.

CDS is a credit derivative contract in which one counterparty (protection seller) commits to compensate the other counterparty (protection buyer) for the loss in the value of an underlying debt instrument resulting from a credit event with respect to a reference entity.

The protection buyer makes periodic payments (premium) to the protection seller until the maturity of the contract or the credit event, whichever is earlier.

CDS is a tool to transfer and manage credit risk in an effective manner through redistribution of risk. The RBI will allow only single-name CDS contracts.

According to the draft Directions, Exchanges may offer standardised single-name CDS contracts with guaranteed cash settlement. Retail users shall undertake transactions in exchange-traded CDS only for hedging their underlying credit risk.

User classification

Any user who is not eligible to be classified as a non-retail user will be classified as a retail user.

Non-retail users will include insurance companies, pension funds, mutual funds, alternate investment funds, foreign portfolio investors. These entities will also be eligible to act as protection seller in CDS.

Standalone primary dealers (SPDs) and non-banking finance companies (NBFCs), including housing finance companies (with minimum net owned funds of ₹500 crore) and resident companies (with minimum networth of ₹500 crore), too, will be classified as non-retail users.

Eligible debt instruments

Debt instruments which will be eligible to be a reference / deliverable obligation in a CDS contract include Commercial Papers, Certificates of Deposit and Non-Convertible Debentures of original maturity up to one year; Rated Indian Rupee (INR) denominated corporate bonds (listed and unlisted); and Unrated INR bonds issued by the Special Purpose Vehicles set up by infrastructure companies.

The RBI said the reference/deliverable obligations shall be in dematerialised form only.

Asset-backed securities/mortgage-backed securities and structured obligations such as credit enhanced/guaranteed bonds, convertible bonds, bonds with call/put options etc. shall not be permitted as reference and deliverable obligations.

Market-makers – entities which can buy and sell protection from/to users and other market-makers in order to provide liquidity to the market – will include Scheduled Commercial Banks (except Small Finance Banks, Payment Banks, Local Area Banks and Regional Rural Banks) and NBFCs, including HFCs, and SPDs with minimum net owned funds of ₹500 crore.

They will also include Export-Import Bank of India, National Bank of Agriculture and Rural Development, National Housing Bank and Small Industries Development Bank of India.

Restrictions

The RBI said market-makers and users shall not enter into CDS transactions if the counterparty is a related party or where the reference entity is a related party to either of the contracting parties.

Further, market-makers and users shall not buy/sell protection on reference entities if there are regulatory restrictions on assuming similar exposures in the cash market or in violation of any other regulatory restriction, as may be applicable.

India has reported isolated cases of two new variants of SARS-CoV2 virus that first emerged in South Africa and Brazil in recent months. While there were four reported cases of the South African variant, the sole case of the Brazilian variant was detected in a person who arrived from a South American country and returned in the first week of February.

Coming on the heels of the emergence of the UK variant, which has spread to 186 countries, including India, there are concerns over the two new strains that are said to have higher transmissibility. According to Balram Bhargava, the Director General of Indian Council of Medical Research (ICMR), both strains have mutations in the receptor binding domain of the spike protein of the virus (which the virus uses to latch onto the protein in the human lung cells), making it easy for them to infect.

According to him, the South African variant was detected in two persons who arrived from South Africa, one person each from Angola and Tanzania. He said ICMR’s National Institute of Virology is trying to isolate and culture the variant.

“The South Africa variant is worrying because it can significantly escape antibodies as well as reduce the efficacy of the vaccines,” said a genomic expert involved in studying these Covid-19 strains.

Similarly, the Brazilian variant, which first emerged in January this year, was suspected to be the reason for the spike in fresh cases, particularly in the Manaus region in Brazil. The strain has been isolated and cultured in ICMR-NIV, and scientists are attempting to assess the effectiveness of the current Covid-19 vaccines against the strain. The UK strain, on the other hand, was found in 187 people so far.

Health Secretary Rajesh Bhushan, however, indicated that there would not be a ban on flights from Brazil as they have found that testing at airports is a better strategy. However, the worry is that there are no direct flights from either of these countries, indicating that travellers from South Africa and Brazil could be entering through multiple transit points.

He said the Health Ministry would be holding a meeting with officials from Ministry of Civil Aviation to chalk out a testing strategy. As of now, all infected persons and their contacts have been tested and quarantined.

Progress of vaccination

The Covid vaccination, which completed a month on Tuesday, however, is only making slow progress.

Though all healthcare workers need to be given the first dose by February 24, only 60 per cent of them have been given the first shot so far.