The Securities and Exchange Board of India (SEBI) is considering a significant change in mutual fund regulations to enhance the debt market’s efficiency and flexibility with Credit Default Swaps (CDS).
What’s Happening? Currently, mutual funds can buy Credit Default Swaps (CDS) only for hedging purposes in specific Fixed Maturity Plans (FMPs) with more than a year of maturity. SEBI’s new proposal aims to expand this ability.
Key Points of the Proposal
- Broader Access: All mutual fund schemes, not just specific FMPs, would be able to buy CDS for hedging purposes.
- Selling CDS: Mutual funds will also be permitted to sell CDS, which is a new capability, broadening their investment strategies.
- Exclusions: The proposal excludes Overnight and Liquid schemes from these new provisions.
What Are Credit Default Swaps (CDS)?
CDS are financial instruments that act like insurance policies for bonds. If a bond issuer defaults, the CDS seller compensates the buyer. This allows investors to manage risk more effectively.
Why Is This Important?
- Risk Management: Mutual funds can better protect their investments against defaults.
- Market Efficiency: Increased CDS activity can lead to a more dynamic and resilient debt market.
- Investor Confidence: Enhanced risk management tools can boost investor confidence in mutual funds.
Public Feedback: SEBI is inviting public comments on this proposal until July. This feedback will be crucial in shaping the final regulations.
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Conclusion
This move by SEBI could revolutionize how mutual funds operate, making them more robust and adaptable. For more details, you can read the full article on Zee Business.
