Capital markets regulator Securities and Exchange Board of India (Sebi) has allowed mutual funds (MFs) to participate in the credit default swaps (CDS) market and in repo in corporate debt securities but with some riders.
Market experts said the move would help deepen the corporate bond market and also help MFs actively manage credit risk in their portfolio. MFs, however, will be permitted to buy credit protection only to hedge their credit risk on corporate bonds they hold and are not permitted to enter short positions in the CDS contracts. The Reserve Bank of India last year had allowed banks to begin hedging their banking and trading books using CDS but the market has seen only a handful of trades since then.
Similarly, in the corporate bond market, MFs will only be allowed to participate in repo for securities rated AA or above. This move will allow MFs to temporarily refinance their bond portfolio without actually selling.