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IRDA allows insurance companies to deal in credit default swaps

The insurance regulator allowed insurers to use only as users (protection buyers) of CDS subject to condition to hedge their risks

New Delhi: Insurance Regulatory and Development Authority (IRDA) has permitted the use of credit default swap (CDS), a derivative instrument that offers credit protection, for insurance companies to hedge their risk, reports PTI.


Insurers are allowed only as users (protection buyers) of CDS subject to condition, IRDA said in a final guideline for investment in CDS.


The CDS is a guarantee in which the buyer of a credit swap receives credit protection, whereas the seller of the swap guarantees the credit worthiness of the product.


By doing this, the risk of default is transferred from the holder of the fixed income security to the seller of the swap.


The permission by IRDA comes almost a year after RBI allowed banks and financial institutions to deal with such instruments.


The guidelines said: "The CDS are permitted as a hedged to manage the credit risk covering the credit event. The category of the investment will not change pursuant to buying CDS on such underlying."


Insurers are allowed to use CDS on listed corporate bonds as underlying. Companies can, however, buy unlisted rated bonds of infrastructure companies. Also, insurers can invest in unlisted and unrated bonds issued by the special purpose vehicles set up by the infrastructure companies.


It has disallowed companies from any CDS transaction between entities belonging to a promoter group. Insurers cannot be purchased on short-term instruments with maturity up to one year such as commercial papers, certificates of deposit, non-convertible debentures.


Besides, the regulator directed that "all CDS transactions shall be reported to the investment committee, audit committee and to the board on a quarterly periodicity".


It also said the board of the insurance companies should amend its investment policy and put in place necessary risk management framework covering including type of assets on which protect can be bought, valuation norms and reporting and monitoring norms.


Recently, market regulator SEBI allowed mutual funds to participate in CDS transactions. SEBI said mutual funds can participate in the CDS market for hedging their debt risks, but can not enter into short positions in the CDS contracts.


In April, the Reserve Bank had allowed all financial institutions to participate in CDS market.


All India financial institutions, namely, EXIM Bank, NABARD, NHB and SIDBI were allowed to participate in the CDS market as user to hedge the underlying credit risk in corporate bonds in their portfolio, RBI had then said.


Government proposes high-level committee to check investment frauds

Finance Ministry has requested all states and union territories to set up such a committee to enable enhanced information-sharing among the concerned agencies

New Delhi: With an aim to safeguard the investors from possible frauds involving collective investment schemes, the government has proposed a high-level committee of members from Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Corporate Affairs Ministry and Economic Office Wing (EOW) of state police departments, reports PTI.


The Finance Ministry has requested all states and union territories to set up such a committee to enable enhanced information-sharing among the concerned agencies.


The committee would help enable "enhanced sharing of information among the concerned agencies regarding unregulated activities and entities raising money from public with a view to defraud people," Minister of State for Finance Namo Narain Meena informed the Lok Sabha in a written reply.


The minister was replying to a question on whether the International Advisory Board of capital market regulator SEBI has underlined the need for an independent and separate regulator for such unregulated investment schemes and the steps taken by the government in this regard.


The minister said that "the Department of Financial Services has requested all the state governments/union territories to set up a committee, including representation from the Reserve Bank of India, SEBI, Ministry of Corporate Affairs and the Economic Offence Wing of the State Police..."


The International Advisory Board of SEBI in its last meeting on November 3-4 had discussed various regulatory issues with regard to the unregulated collective investment schemes and capital adequacy norms.


The recommendations of this International Advisory Board (IAB), along with the action taken by the regulator thereon, are reported to SEBI's board.


The IAB had observed that the regulation of such schemes is not the primary objective of a securities market regulator and would require substantial resources.


It was also underlined that such schemes are often localised and there is a criminal enforcement angle attached to the regulation of such schemes.


It was, therefore, suggested that state government's role is very important for regulating these schemes, while the need for an independent and separate regulator with sufficient resources was also underlined.


Last month, SEBI Chairman UK Sinha had also said that operators of such schemes take benefit of loopholes in the existing regulatory framework, although the regulator takes action whenever it suspects anything wrong and gets evidence.


"People make all sorts of excuses - in some cases they claim they are under the state government, in some cases they are saying they are registered with the Ministry of Corporate Affairs, in some cases they are saying they are housing companies and in some cases they claim to be NBFCs.



Vaibhav Dhoka

5 years ago

We need to overhaul full regulatory bodies their function and jurisdiction,their enforcing and investigative wings.Above all we must have judiciary who can deliver timely justice,otherwise the complaints and investigation drags for decades with no re miser for investors.As there is no punishable action new fraud or new process ti cheat crops up.

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