SEBI Update – Flexibility in participation of Mutual Funds in Credit Default Swaps (CDS)

SEBI circular, issued on September 20, 2024, provides enhanced flexibility for Mutual Funds (MFs) in participating in Credit Default Swaps (CDS). It introduces the following key changes:

1. Buying CDS: Mutual Funds can now buy CDS for hedging their credit risk on debt securities in their portfolios. However, the exposure should not exceed the debt security exposure. If the protected debt security is sold, the corresponding CDS position must be closed within 15 days. Only sellers with an investment-grade rating or above can offer CDS to MFs.
2. Selling CDS: MFs can now sell CDS as part of synthetic debt securities, covered with cash, government securities, or T-bills. Liquid schemes cannot sell CDS. The value of the cover used to secure CDS must be reviewed daily.
3. Limits and Exposure: The exposure from CDS (both bought and sold) must not exceed 10% of a scheme’s Assets Under Management (AUM) and must comply with overall derivative limits set out in the Scheme Information Document (SID).
4. Valuation and Accounting: The Association of Mutual Funds in India (AMFI) will issue guidelines in consultation with SEBI for the valuation and accounting of CDS transactions.
5. Disclosures: Periodic scheme portfolio disclosures must include CDS transactions, particularly the credit rating of CDS sellers and details of transactions with associate or group companies of sponsors.

Link – https://www.sebi.gov.in/legal/circulars/sep-2024/flexibility-in-participation-of-mutual-funds-in-credit-default-swaps-cds-_86871.html