SEBI/HO/IMD/PoD2/P/CIR/2024/125 September 20, 2024 — THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992

CIRCULAR SEBI/HO/IMD/PoD2/P/CIR/2024/125 September 20, 2024 All Mutual Funds/ All Asset Management Companies (AMCs)/ All Trustee Companies/ Board of Trustees of Mutual Funds/ Association of Mutual Funds in India (AMFI) Sir / Madam, Subject: Flexibility in participation of Mutual Funds in Credit Default Swaps (CDS) Under the existing regulatory framework, Mutual Funds in India are permitted to participate in CDS transactions only as users i.e, to buy credit protection only to hedge the credit risk on corporate bonds held by them. Furthermore, such transactions can be currently undertaken by Mutual Funds only in the portfolios of Fixed Maturity Plans (FMP) schemes having tenor of more than one year. Reserve Bank of India has issued a revised regulatory framework for CDS on February 10, 2022 "Master Direction – Reserve Bank of India (Credit Derivatives) Directions, 2022" in order to provide the necessary impetus for the development of CDS market by, inter alia, expanding the base of protection sellers including selling of protection by all major non-bank regulated entities including by Mutual Funds. In view of the above, after taking into consideration the recommendations of the Working Group set up to deliberate on the issue, recommendations of Advisory Committee on Mutual Funds (MFAC), inputs by AMFI and feedback received on the consultation paper on this issue, it has been decided to allow greater flexibility to Mutual Funds to both buy and sell CDS with adequate risk management. Such flexibility to participate in CDS shall serve as an additional investment product for Mutual Funds and also aid in increasing liquidity in the corporate bond market. Accordingly, clause 12.28 of the Master Circular for Mutual Funds dated June 27, 2024 stand modified as under: 12.28. Partic