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RBI by notification dated 25.06.2026 has notified the RBI (Credit Derivatives) Directions, 2026 (“CD Directions”)1 to supersede the Operational Instructions - Transactions in Credit Default Swap (CDS) by Foreign Portfolio Investors dated 10.02.2022 (“Earlier Directions”).
The salient features of the CD Directions are as follows:
(i) Applicability: The CD Directions apply to all credit derivative transactions undertaken in the Over-theCounter (“OTC”) market and on recognised stock exchanges in India. Residents and persons resident outside India may participate in the credit derivatives market to the extent permitted under the CD Directions. The CD Directions apply prospectively to all transactions entered into after their commencement, while existing transactions shall continue to be governed by the Earlier Directions until expiry of the respective contracts.
(ii) Permitted products: Market-makers and users may undertake transactions in Credit Default Swaps (“CDS”) and Total Return Swaps (“TRS”) subject to the conditions prescribed under the CD Directions.
(iii) Market-makers and User Classification:
(a) Scheduled commercial banks (excluding Small Finance Banks, Payment Banks, Local Area Banks and Regional Rural Banks), Standalone Primary Dealers, Upper- and Middle-Layer Non-Banking Financial Companies (“NBFCs”) and specified financial institutions shall be eligible to act as market-makers.
(b) Users shall be classified by market-makers as either retail or non-retail. The CD Directions prescribe the categories of entities eligible to be classified as non-retail users, including regulated financial institutions, AIFs, Foreign Portfolio Investors (“FPIs”), and eligible resident companies with (a) minimum net worth of INR 500 crore; or (b) minimum turnover of INR 1,000 crore, as per the latest audited financial statements.
(iv) Participation framework for CDS and TRS: Resident retail users (other than individuals) may purchase CDS or TRS contracts only for hedging purposes, whereas non-retail users may undertake such transactions without any restriction on purpose. Specified regulated entities, including insurance companies, pension funds, mutual funds, AIFs and FPIs, may act as protection sellers in CDS transactions subject to the conditions prescribed under the CD Directions and approval of their respective regulators, wherever applicable. Marketmakers shall not offer CDS or TRS contracts to individuals. The CD Directions prescribe specific conditions governing participation of persons resident outside India, including FPIs, in TRS transactions, investment limits, settlement requirements, and restrictions on eligible reference assets.
(v) Reference entities and eligible instruments: The CD Directions permit resident entities issuing eligible debt instruments to act as reference entities. Money market debt instruments, rated INR corporate bonds and debentures, specified unrated infrastructure bonds and bonds with call/put options shall be eligible as reference obligations or reference assets. Structured obligations, asset-backed securities and mortgage-backed securities shall not qualify as eligible reference obligations or reference assets.
(vi) Operational requirements:
(a) The CD Directions prohibit market participants from entering into CDS or TRS transactions where the reference entity is a related party to either counterparty, except where the counterparties are government-related entities. Further, market participants shall not undertake credit derivative transactions where regulatory restrictions prohibit them from assuming similar exposures in the cash market or where such transactions violate any applicable regulatory restriction.
(b) Market participants may exit credit derivative contracts by unwinding the contract with the original counterparty or assigning the contract to another eligible market participant through novation in accordance with the applicable RBI framework. The CD Directions further permit bilateral settlement or settlement through an RBI-approved clearing and settlement arrangement. Credit derivative contracts may be cash settled, physically settled or, in the case of CDS contracts, settled through auction. TRS contracts undertaken by persons resident outside India, other than FPIs, shall be cash settled.
(c) The CD Directions require market makers to ensure that users entering into credit derivative transactions for hedging purposes have an underlying exposure to the relevant reference asset or reference obligation. Further, the notional amount of the credit derivative contract shall not exceed the face value of the underlying exposure and the tenor of such contract shall not extend beyond the maturity of the underlying exposure or the immediately succeeding standard CDS or TRS maturity date. Users shall exit their hedging positions within one month of ceasing to hold the underlying exposure.
(vii) Standardisation of contracts: The CD Directions require the Fixed Income Money Market and Derivatives Association of India to specify settlement basis and market conventions for credit derivative contracts based on international best practices. The CD Directions also require CDS contracts to constitute a direct claim against the protection seller and prohibit contractual terms that permit unilateral cancellation by the protection seller, delay credit event payments or provide recourse against the protection buyer for credit event losses.
(viii) Directions for exchange traded credit derivatives:
(a) Recognised stock exchanges may offer standardised single-name CDS contracts and CDS contracts on credit indices with guaranteed settlement. Exchanges shall obtain prior approval of the RBI for product design, any modification thereto, eligible participants, and other related features. SEBI shall prescribe the operational guidelines for execution and settlement of such contracts. Exchange-traded CDS contracts shall reference only eligible entities and obligations specified under the CD Directions. Credit indices shall comprise only eligible debt instruments and shall be published or administered in accordance with the framework prescribed by the RBI or SEBI, as applicable. Retail users may participate in exchange-traded CDS only for hedging purposes. Such users shall: (a) hold exposure to the eligible reference obligation or the underlying debt instrument(s) forming part of the credit index; (b) not purchase CDS contracts exceeding the face value of the reference obligation held by them; and (c) not purchase CDS contracts with a tenor extending beyond the maturity of the reference obligation or the immediately succeeding standard CDS maturity date.
(b) FPIs may participate in exchange-traded CDS as protection buyers or protection sellers, subject to the conditions prescribed under the CD Directions. Exchanges shall report the gross notional amount of protection sold by FPIs to Clearing Corporation of India Limited on a daily basis or at such intervals as may be specified by the RBI. Further, FPIs shall not sell protection through CDS contracts where the reference obligation comprises specified shortterm debt instruments or indices referencing such instruments.
(c) Exchanges may offer futures contracts on credit indices with guaranteed settlement, subject to prior approval of the RBI. Such contracts shall use only eligible credit indices constituted and administered in accordance with the requirements prescribed under the CD Directions and the applicable directions issued by SEBI. FPIs participating in futures on credit indices shall be subject to comply with the prescribed investment limits for corporate debt securities. Further, the aggregate gross short position of an FPI shall not exceed its consolidated long position in eligible corporate debt securities and futures on credit indices. FPIs shall also not participate in futures contracts where the underlying credit index includes money market debt instruments or specified short-term debt instruments.
The CD Directions have come into force, since the day they were issued, i.e., 25.06.2026.
Footnote
1 Reserve Bank of India (Credit Derivatives) Directions, 2026.
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