I. Introduction
On 25 June 2026, the Reserve Bank of India (“RBI”) issued the Master Direction – Reserve Bank of India (Credit Derivatives) Directions, 2026 (“2026 Directions”), with immediate effect. The 2026 Directions supersede the 2022 framework—which was limited to single-name Credit Default Swaps (“CDS”) on corporate bonds—and introduce a materially expanded product suite: CDS on credit indices, Total Return Swaps (“TRS”) on corporate bonds, and futures on credit indices traded on recognised stock exchanges.
The 2026 Directions emerge from the RBI’s Bi-monthly Monetary Policy Statement of February 2026 and represent a considered response to public consultation. They reflect the RBI’s intent to deepen India’s credit risk transfer market, enhance price discovery in corporate debt, and provide legitimate hedging tools to a wider class of participants—including, carefully, Foreign Portfolio Investors (“FPIs”). For sophisticated market participants, the 2026 Directions create both opportunity and compliance obligation.
II. Background
The predecessor framework—Master Direction FMRD.DIRD.11/14.03.004/2021-22 dated 10 February 2022—authorised single-name CDS on corporate bonds in OTC markets. The 2022 regime was conservative by design: it restricted protection sellers among institutional users, required a minimum net worth threshold, and did not contemplate index-based instruments or TRS. Exchange-traded credit derivatives were not operationalised under that framework.
The limitations of the 2022 framework created several well-documented gaps:
- The absence of credit index products precluded efficient portfolio-level hedging and limited the ability of market-makers to lay off concentrated single-name exposures.
- The absence of TRS meant that investors seeking synthetic exposure to corporate bond returns—without acquiring the bonds outright—had no regulated route to do so in India.
- FPI participation as protection sellers was effectively constrained, reducing market liquidity and limiting the deepening of a two-sided market.
- The absence of exchange-traded instruments meant individual investors had no access to credit risk transfer tools, however sophisticated they may have been.
The 2026 Directions address each of these gaps, though—as we discuss—not without residual ambiguity.
III. Analysis of Key Changes
1. Expanded Product Suite (Paragraphs 4.1 and 6)
The 2026 Directions introduce three principal products: (i) single-name and index CDS in OTC markets; (ii) TRS on eligible corporate bonds and indices in OTC markets; and (iii) futures on credit indices on recognised stock exchanges. The inclusion of TRS is the most commercially significant addition. Under a TRS, the total return payer transfers the entire economic performance (income plus capital appreciation or depreciation) of a reference asset to the total return receiver in exchange for a fixed or floating benchmark payment. This instrument enables synthetic long exposure to corporate credit without direct bond acquisition—a structure of material interest to hedge funds, insurance companies and FPIs managing duration and credit risk.
2. Market-Maker Eligibility (Paragraph 4.2.1)
Eligible market-makers now explicitly include NBFCs in the Upper and Middle Layers (including Housing Finance Companies), in addition to Scheduled Commercial Banks (excluding Small Finance Banks, Payment Banks, Local Area Banks and Regional Rural Banks) and Standalone Primary Dealers. The Development Finance Institutions—EXIM Bank, NABARD, NHB, SIDBI and NaBFID—are also included. This responds directly to feedback that governance and capital depth should determine eligibility, rather than entity type alone.
At least one party to any credit derivative transaction must be a market-maker or an RBI-authorised central counterparty. This bilateral structuring requirement remains unchanged from the 2022 regime.
3. Retail / Non-Retail User Classification (Paragraph 4.2.2)
The 2026 Directions introduce a formal classification framework. Non-retail users include regulated institutional investors (NBFCs, insurers, pension funds, mutual funds, AIFs), companies with net worth of ₹500 crore or turnover of ₹1,000 crore, and FPIs. All other users are retail. Importantly, any non-retail eligible user may elect to be classified as retail.
Retail users (other than individuals) may access credit derivatives only for hedging purposes—both in OTC markets and on exchanges. Individuals may access credit derivatives exclusively on exchanges. Market-makers are expressly prohibited from offering OTC CDS or TRS to individuals, a restriction that reflects the RBI’s intent to manage systemic and conduct risk at the retail end of the market.
4. Protection Sellers (Paragraphs 4.3.1 and 6.1)
Among non-retail users, only regulated entities—insurers (IRDAI), pension funds (PFRDA), mutual funds (SEBI), AIFs (SEBI), and FPIs (SEBI)—may act as protection sellers in OTC CDS. Resident companies, even large corporates meeting the net worth threshold, may not sell protection. This asymmetry reflects the RBI’s concern about unregulated entities accumulating concentrated credit exposure through the derivatives market.
FPI participation as protection sellers is subject to a sector-wide cap of 5 per cent of outstanding corporate bond stock, monitored by CCIL on the basis of market-maker reporting. FPIs may not sell protection on instruments with residual maturity below one year or with near-term optionality. Debt instruments received by FPIs pursuant to physical settlement of CDS will be reckoned under the FPI corporate bond investment limit.
5. Total Return Swaps (Paragraph 4.3.2)
Non-resident access to TRS is governed by a nuanced framework. A person resident outside India may (i) receive a TRS for hedging, or (ii) be the total return receiver under a fully funded structure—meaning the non-resident must deposit the full notional amount of the reference asset with the market-maker in India. The fully funded structure is novel and addresses the FX risk concern that would arise from leveraged synthetic exposure. TRS notional amounts under the fully funded structure count toward FPI corporate bond investment limits.
Back-to-back transactions through overseas branches, IFSC Banking Units, or wholly owned banking subsidiaries are permitted, subject to the overseas entity holding requisite dealer or market-maker status in its jurisdiction. The prohibition on writing offshore derivative instruments (ODIs) with a TRS as underlying is expressly stated and should be carefully noted by non-resident investors with existing ODI programmes.
6. Reference Entities and Eligible Obligations (Paragraph 4.4)
Eligible reference obligations include money market debt instruments, rated INR corporate bonds and debentures, and unrated INR bonds issued by infrastructure SPVs. Asset-backed securities, mortgage-backed securities, structured credit-enhanced bonds and convertible bonds are expressly excluded. Government securities are separately governed under the Rupee Interest Rate Derivatives framework. The RBI declined to expand the eligible universe to loans or masala bonds at this stage, citing the additional complexity of loan-based credit derivatives and the need for market development before structured product derivatives are introduced.
Credit indices used as reference must be published by an RBI-authorised financial benchmark administrator or (for exchange-traded instruments) administered in accordance with SEBI’s Index Providers Regulations. Indices partially based on money market instruments must, in all cases, be administered by an RBI-authorised benchmark administrator.
7. Settlement Mechanics (Paragraph 4.5.1)
Settlement may be cash, physical or, for CDS, auction-based. The procedure for cash and auction settlement is to be determined by the Credit Derivatives Determinations Committee (“CDDC”) established under FIMMDA. Transactions with non-residents may, for the first time, be settled in foreign currency—provided the market-maker holds an AD Cat-I licence or is an authorised SPD under FEMA. This responds to market feedback seeking currency flexibility analogous to that available in the INR interest rate derivatives market.
8. Credit Derivatives Determinations Committee (Paragraph 5)
FIMMDA is tasked with establishing a CDDC comprising market-makers and users as voting members. The CDDC will make binding determinations on credit events, succession events, substitution events and successor reference entity identification. It will also conduct auction settlement processes. This closely mirrors the ISDA Determinations Committee model, adapted to Indian market conditions. Its decisions will bind both OTC and exchange-traded participants.
9. Exchange-Traded Credit Derivatives (Paragraph 6)
Stock exchanges may now offer standardised single-name CDS, CDS on credit indices, and futures on credit indices, with guaranteed settlement. Product design and participant eligibility require prior RBI approval; operational guidelines will be prescribed by SEBI. Exchange-traded CDS opens a regulated channel for individual investors to participate in credit risk transfer, subject to hedging restrictions. FPIs may transact in exchange-traded CDS as both protection buyers and sellers; their gross short positions in credit index futures may not exceed their consolidated long position in corporate bonds and credit index futures.
IV. Conclusion
The 2026 Directions represent the most substantive reform of India’s credit derivatives market since its inception. The introduction of TRS and index instruments meaningfully expands the toolkit available for credit risk management and, for international investors, creates new avenues for synthetic exposure to Indian corporate credit. Several observations are warranted from a practitioner’s perspective.
- The retail/non-retail classification framework provides a clear and workable basis for market-makers to structure their product offerings and comply with suitability obligations.
- The CDDC construct, modelled on the ISDA framework, provides much-needed market infrastructure for credit event determinations—a gap that has historically limited confidence in single-name CDS.
- Foreign currency settlement eligibility for non-resident transactions is a meaningful concession that should support cross-border product development.
- The fully funded TRS structure, while operationally demanding, provides a clear and conservative pathway for non-resident synthetic exposure.
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This Banking & Finance update is intended for general guidance only and does not constitute legal advice. For more information, please reach out to Shubham Sharma at 2636@cnlu.ac.in.
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