Five years after wiping out sizeable profits of Indian banks' overseas offices, credit default derivative could be making a comeback. Only last. Credit derivatives will be introduced from November, in India in the vanilla single name credit default swaps ('CDS') for corporate bonds. On Wednesday, two Indian banks were parties to the first credit default swap (CDS) transaction in India. ICICI Bank bought insurance from IDBI.


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Getting credit default swap market in India up and running

Conversely, the party that provides the credit event protection is referred to as the Protection Seller. The third party and the specific obligation, if any, on which credit event protection is credit derivatives in india bought and sold are referred to as the Reference Entity and Reference Obligation, respectively.

In most instances, the Protection Buyer makes quarterly payments to the Protection Seller. Conversely, in the instance that any one of the credit events occurs during the life of the transaction, the Protection Credit derivatives in india will receive a compensating payment.

The form of the compensation will depend on whether the terms of a particular CDS calls for a physical or cash settlement.

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In a physically settled transaction, the buyer of protection would deliver the reference obligation or an obligation credit derivatives in india equal or higher payment priority to the Protection Seller and receive the face value of the Reference Obligation.

Alternatively, in a cash settled transaction, the Protection Seller makes a cash payment to the Protection Buyer based on a formula that the two parties agree upon at the inception of the contract. Generally, the formula specifies that the Protection Seller pays the Protection Buyer the difference between par and the credit derivatives in india prevailing market value of a Reference Obligation following one of the specified credit events.

In some cases, the cash payment credit derivatives in india a fixed amount decided at the inception of the contract. Credit derivatives in india other such credit derivatives are credit default option and credit linked notes. If the fee is paid fully in advance, the transaction is referred to as a credit default option.

If the credit default swaps or options are embedded in a bond issuance, it is called a credit linked note.

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In this case, the investor in the credit linked credit derivatives in india is the protection seller, while the issuer is the protection buyer. The interest rate risk and liquidity risk of the reference assets remain with the credit derivatives in india buyer until maturity or occurrence of a credit event, whichever is earlier.

One counterparty the TR payer — the protection seeker pays the other counterparty the TR receiver — the protection provider the total return of a specified asset, the reference obligation.

In return, the TR receiver typically makes regular floating payments. These floating payments represent a funding cost of the TR payer. In effect, a TRS contract allows the TRS receiver to obtain the economic returns of an asset without having to fund the assets on its balance sheet.

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credit derivatives in india Clearly, that would be far better than having no market for credit derivatives at all. And as far as the concerns about the global credit market crisis go, all those issues are addressed by having the discipline of a central clearing house which collects daily mark-to-market margins and contains the risk in the system.

Commodity futures ban So much for the ban on commodity futures trading to contain inflation.


The price of rubber has also risen, but not as much and that of chana has remained flat. Indian Regulation mandates that Credit derivatives in india for a certain reference entity can only be bought by a User who actually owns the reference entity and can only ensure the amount that is owned by the reference entity.

It also mandates that CDS contracts cannot be traded in and out of like other securities. Instead, if the User wants to exit a contract he must discuss it with credit derivatives in india seller and unwind the contract.

He may not offset or sell the CDS contract.

Are Credit Derivatives Making A Comeback In India? | VCCircle

These two pieces of regulation solve the issue of excessive speculation, and its effects rise in the price of debt and the increase in the spread of credit riskbut by doing so, they single-handedly limit liquidity and usability of CDSs.

Credit derivatives in india conclusion CDSs have a short, but rich history. In only a couple decades they have grown quickly, and with that growth, we have seen many problems. Banks built credit derivatives in india sizeable book out of such derivatives during FY07, betting on a high risk-high rewards business.

FCCBs are bonds with an equity element although they remain debt instruments as long as investors hold on to them.

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