{"id":62548,"date":"2023-02-03T17:29:01","date_gmt":"2023-02-03T11:59:01","guid":{"rendered":"https:\/\/enterslice.com\/learning\/?p=62548"},"modified":"2024-05-30T12:35:57","modified_gmt":"2024-05-30T07:05:57","slug":"sebi-allowed-participation-of-aifs-in-credit-default-swap","status":"publish","type":"post","link":"https:\/\/enterslice.com\/learning\/sebi-allowed-participation-of-aifs-in-credit-default-swap\/","title":{"rendered":"SEBI Allowed Participation of AIFs in Credit Default Swap"},"content":{"rendered":"

The credit default swap is a financial derivative which allows the investor to offset or swap their credit risk with that of other investor. To swap the risk of default, the lender buys a credit default swap from other investors who agree to reimburse them if the borrower defaults. In simple terms, the CDS is a financial swap agreement indicating that the seller of CDs will compensate the buyer if there is any event of debt default or other credit events. It means the seller insures the buyer against any asset default. The Securities and Exchange Board of India undertakes the management of CDS in the securities market<\/a>. Through an amendment<\/a> in SEBI (AIF) Regulation 2012, the SEBI has allowed the AIFs to participate in the CDS as a protection buyer and seller. Regulations 16 (1) (aa), 18 (ab) and 20(11) of the Alternative Investment Fund<\/a><\/strong> (AIF) regulations further enable the AIFs to participate in CDS in terms of the conditions specified by the SEBI from time to time. The SEBI specifies one such list of conditions on 12th<\/sup> January 2023. The present article will discuss the related conditions discussed under the guidelines.<\/p>\n\n\n\n

Conditions Applicable on Category I, II and III AIFs for Buying CDS<\/strong><\/h2>\n\n\n\n

The conditions applicable to category I, II and III AIFs for buying credit default swaps are:<\/p>\n\n\n\n

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  1. The category I and II AIFs can buy CDS only for the purpose of hedging based on underlying investment in debt securities.<\/li>\n\n\n\n
  2. The category III AIF can buy CDS for the purpose of hedging or otherwise within the permissible leverage as mentioned in “Circular for operational, prudential and reporting requirements for Alternative Investment Funds “dated 29th<\/sup> July 2013.<\/li>\n<\/ol>\n\n\n\n

    Conditions Applicable to Category II and III AIFs for Selling CDS<\/strong><\/h2>\n\n\n\n

    The conditions applicable to category II and III AIFs for selling credit default swaps are:<\/p>\n\n\n\n

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    1. The category III AIF can sell CDS provided the effective leverage undertaken is well within the permissible limits as mentioned in “Circular for operational, prudential and reporting requirements for Alternative Investment Funds” dated 29th<\/sup> July 2013.<\/li>\n\n\n\n
    2. Category II and III AIFs can sell the CDS by setting aside the unencumbered government bonds or treasury bills equal to the amount of the said CDS exposure. Such securities that are kept aside may also be used for maintaining the applicable margin requirements for the said CDS exposure. Further, the exposure to credit default swap undertaken will not amount tantamount to leverage.<\/li>\n\n\n\n
    3. The total exposure to an investee company, including the exposure through CDS, should be within the applicable concentration limit norm as mentioned in the AIF regulations.<\/li>\n<\/ol>\n\n\n\n

      Other Conditions Applicable For Transacting Credit Default Swap<\/strong><\/h2>\n\n\n\n

      The other conditions applicable for transacting credit default swaps are:<\/p>\n\n\n\n