CreditLime Special Report
July 12, 2010
लगे रहो सुब्बारावभाई (Lage Raho Subbaraobhai, Keep going Subbarao): Rupee Credit Default Swaps (Part 2)
Continued from Part 1…
Delayed Hopes, Current Reality (2009-2010+)
A more favourable economic and credit environment in both India and the rest of the world appears to have turned the winds in favour of re-visiting the introduction of rupee CDS now. Governor Subbarao said in RBI’s Second Quarter Review of October 2009 that:
“In 2007, the Reserve Bank had issued draft guidelines for introduction of credit default swaps (CDS) in India. However, the issuance of final guidelines was kept in abeyance keeping in view the role of credit derivatives in the recent financial crisis. It was considered appropriate to proceed with caution reflecting the lessons from the financial crisis in this regard. In order to align with the international work already conducted/ underway in the area of credit derivatives, and keeping in view the specifics of the Indian markets, it is proposed:
• to introduce plain vanilla OTC single-name CDS for corporate bonds for resident entities subject to appropriate safeguards. To begin with, all CDS trades will be required to be reported to a centralised trade reporting platform and in due course they will be brought on a central clearing platform.
The Reserve Bank is setting up an [new] internal Group to finalise the operational framework in consultation with market participants.
CreditLime has been unable to find out the exact members of the current working group preparing the upcoming draft report to contact for further information but in any case, those names should be made available along with the report when it is released in the summer.
Since the release of RBI’s Q2 Review, there have been many indications and allusions from both official and unofficial sources related to an impending introduction of onshore CDS.
- At a International Finance and Banking Conference organized by the Indian Merchants’ Chamber in November 2009, Governor Subbarao mentioned the importance of CDS as one of 6 measures to be used in helping to finance domestic infrastructure developments saying:
“A number of recent measures and several in the pipeline should facilitate greater flow of credit to the infrastructure sector. Let me recount a few important ones. First, interest rate futures have been reintroduced recently and these should aid banks in managing their interest risk more efficiently. Second, repos in corporate bonds are slated to start soon; we expect to issue final guidelines by end-November 2009. Third, in the second quarter policy review last month, we announced the introduction of plain vanilla OTC single-name credit default swaps (CDS) for corporate bonds for resident entities. Fourth, a separate category of NBFCs – infrastructure NBFCs – is being introduced. Fifth, banks will be permitted to build up capital for ‘take-out’ exposures in a phased manner. Finally, refinancing through the special purpose vehicle, India Infrastructure Finance Company Ltd. (IIFCL), is expected to leverage bank financing for Public Private Partnership (PPP) projects. These measures, along with existing ones, can be expected to enhance banks’ ability to fund infrastructure projects.”
- Rediff Business called the introduction of credit default swaps as one of the 6 things to expect in 2010 saying ” The market is also expected to be strengthened with new instruments such as credit default swaps and take-out financing.”
- Shyamala Gopinath, Deputy Governor of the RBI, spoke at the Fixed Income Money Markets and Derivatives Association–Primary Dealers Association of India (FIMMDA–PDAI) Annual Conference in Mumbai on January 4 2010 saying “On the anvil is the introduction of credit default swaps. We are at an advanced stage of introducing other currency pairs for currency futures and are examining the issue of allowing plain vanilla currency options in consultation with SEBI.” She also noted that there would still be a little wait, however, as RBI works to sort out some of the more complex issues.
- At another conference, the Foreign Exchange Dealers’ Association of India (FEDAI) Annual Conference in Nairobi Kenya in February this year, Shyamala Gopinath, speaking in absentia, was quoted saying “A lot of far reaching measures have been taken recently in terms of allowing new products such as interest rate futures, currency futures, repo in corporate bonds etc. and work is underway for introducing some others like credit default swaps. Such products are new for the Indian market and an assessment of their implication on other markets, institutional behaviour, and system as a whole would be critical. Going forward, the immediate effort would be to design prudent guidelines, a robust market infrastructure and strengthen the systemic monitoring framework for these new markets.”
- In an interview with Latha Venkatesh of CNBC-TV18, the question was asked “So the category [of corporate bonds] that is not coming into the market [or seeing enough current investor interest and demand] perhaps is the BBB [rated bonds], just below the best. One way to work one’s way out of this could be credit default swaps. Do you think that we will see that market before 2010 is over?” to which Shyamala Gopinath replied “Yes, in fact, the credit default swaps have come in for a whole lot of reforms even internationally. There are even questions being raised on whether it is a socially useful product or not. But clearly, that is not the case with the plain-vanilla credit default swaps; they have a very important role to play (in) ensuring the development of the corporate bond market itself because the existence of this instrument will promote liquidity in corporate bonds...So this is very much on our agenda and we have already looked at international practices and (are) positive that we will have the draft report placed for public comments in July and we will introduce this product, initially maybe through the OTC (over the counter) market with a reporting platform and then I think we should be going forward to improve the market structure.“
- When Latha re-iterated the original question asking, “So you are expecting that before 2010 is over, we should be able to have credit default swaps?“, Shyamala succinctly replied “Yes.“
- At the High-level Conference on The International Monetary System in Zurich, Switzerland this May, Subbarao gave the market an indication about how he uses CDS information when stating that “the very possession of an ample level of reserves helped to maintain market confidence as measured by lower spreads on credit default swaps”
If all the public allusions weren’t enough, the presence of current RBI Governor Subbarao could also be one of the most important factors driving the continued push for onshore CDS.
CreditLime Financial News Bureau
For Part 1 of this CreditLime report, click here
For Part 3 of this CreditLime report, click here
For CreditLime’s report about the introduction of onshore CDS to China, click here