Tuesday, May 15, 2007

Debt markets to have credit default swaps

The next level for the debt markets in India is not far from realization.The RBI is expected to issue guidelines for the introduction of credit derivatives and set the regulatory framwork for its issuance today.This is after the the credit market has soared more than 27% in the last tweleve months.

RBI claims that it has reached the "adequate comfort level for the introduction of such products".However it may take several months for the banking industry to standardize the terms for trading these instruments.

There is a possibility that the government initially sets aside these instrument to be secured against an asset before allowing the markets to do away with them at a later stage.Also there is much speculation about whether or not offshore FI's will be allowed to trade in them.

Interest rate derivatives were the only derivative products allowed by the regulators to hedge against foreign currency risk before 1999.Allowing credit derivatives to be traded after the recent inclusion of derivatives on equity products(as recently as 2001)will cerainly lead the markets towards more stability.

Source: Mint

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