The Securities and exchange board of India has allowed alternative investment funds) to participate in credit default swaps (CDS) as protection for both buyers and sellers.
Category I and Category II AIFs may buy CDS on underlying investment in debt securities, only for the purpose of hedging. Category III AIFs may buy CDS for hedging or otherwise, within permissible leverage, the regulator said on Thursday.
Category II and Category III AIFs may sell CDS by earmarking unencumbered government bonds and treasury bills equal to the amount of the said CDS exposure. Such earmarked securities may be used for maintaining applicable margin requirements for the said CDS exposure. Such exposure will not tantamount to leverage.
Total exposure to an investee company, including exposure through CDS, will be within the limit of applicable concentration norm as specified in AIF regulations.
AIFs shall report details of CDS transaction to the custodian, by the next working day.
Any unhedged position, which shall result in gross unhedged positions across all CDS transactions exceeding 25% of investable funds of the scheme of an AIF, shall be taken only after intimating to all unit holders of the scheme.