Introduction
On June 25, 2026, the Reserve Bank of India notified the Master Direction – Reserve Bank of India (Credit Derivatives) Directions, 2026 vide Notification No. FMRD.DIRD.03/14.03.004/2026-27. The Directions were issued under cover of communication RBI/FMRD/2026-27/407 dated the same day, signed by Dimple Bhandia, Chief General Manager, Financial Markets Regulation Department. With immediate effect from the date of notification, this framework replaces the earlier credit derivatives regime and introduces two significant new products into the Indian debt market: derivatives on credit indices and total return swaps (TRS) on corporate bonds.
The origin of this reform traces back to Paragraph 13 of the Statement on Developmental and Regulatory Policies, issued as part of the Bi-monthly Monetary Policy Statement for 2025-26 dated February 6, 2026. Pursuant to that announcement, the RBI released draft directions for public comments on February 6, 2026. After examining stakeholder feedback from banks, non-banking financial companies and institutional investors, the central bank finalised and issued the present Directions.
Statutory Basis: Section 45W and Section 45U of the RBI Act, 1934
The Directions have been issued in exercise of powers conferred under Section 45W of the Reserve Bank of India Act, 1934, read with Section 45U of the Act. Section 45W empowers the RBI to regulate the financial system of the country to the advantage of the country, including money, foreign exchange and government securities markets in India, and this provision has historically been the source of the RBI’s authority over OTC derivatives and money market instruments. Section 45U supplies the definitions applicable to derivatives, repo and reverse repo for the purposes of Chapter IIID of the Act.
Critically, the 2026 Directions expressly supersede FMRD.DIRD.11/14.03.004/2021-22 dated February 10, 2022 and the corresponding A.P. (DIR Series) Circular No. 23 dated February 10, 2022, which together constituted the 2022 credit derivatives framework limited largely to single-name credit default swaps. The Directions also draw upon the Foreign Exchange Management Act, 1999, the Foreign Exchange Management (Debt Instruments) Regulations, 2019 (Notification No. FEMA.396/2019-RB dated October 17, 2019), and the Master Direction – Reserve Bank of India (Non-resident Investment in Debt Instruments) Directions, 2025 dated January 7, 2025, for provisions concerning non-resident participation.
Applicability and Commencement
The Directions apply to credit derivatives transactions undertaken both in Over-the-Counter (OTC) markets and on recognised stock exchanges in India. They came into force on June 25, 2026, with immediate effect, and Paragraph 12 clarifies that they apply to all credit derivative transactions entered into from the commencement date, while contracts already undertaken under the superseded 2022 framework continue to be governed by that framework until the expiry of those contracts. This transitional clause is important for market-makers holding legacy CDS books, since it avoids retrospective disruption of existing exposures.
Key Definitions Governing the Framework
Paragraph 2 of the Directions sets out an extensive definitions clause, several of which merit specific attention for compliance purposes.
A Credit Default Swap (CDS) is defined as a contract where the protection seller commits to pay the protection buyer upon a credit event affecting a reference entity, in exchange for periodic premium payments until maturity or the credit event, whichever occurs first. A Total Return Swap (TRS) is a contract under which the total return payer transfers the entire economic performance of a reference asset to the total return receiver, in return for a pre-determined fixed or floating rate linked to a benchmark.
The Directions distinguish three settlement types: cash settlement, where the protection seller pays the notional amount less the expected recovery value; physical settlement, where the protection buyer delivers an eligible deliverable obligation against payment of the notional amount; and auction settlement, where the settlement price is determined through an auction mechanism administered under the Credit Derivatives Determinations Committee framework discussed below.
The term ‘Corporate bonds and debentures’ is defined to mean non-convertible debt securities creating or acknowledging indebtedness, issued by a body corporate, trust, or statutory body, but expressly excludes money market debt instruments, security receipts, securitised debt instruments and government bonds. ‘Market-maker’ and ‘user’ are defined in contradistinction to each other, a market-maker provides prices to users and other market-makers, while a user is any person undertaking derivative transactions other than as a market-maker. Definitions for ‘substitution event’ and ‘succession event’ anchor the operational role of the Credit Derivatives Determinations Committee, since these events trigger a replacement of the reference obligation or reference entity respectively.
Eligible Participants and Market-Makers
Paragraph 3 establishes that residents, and persons resident outside India to the extent specified, are eligible to participate in the credit derivatives market.
Paragraph 4.2.1 lists the entities eligible to act as market-makers: Scheduled Commercial Banks (excluding Small Finance Banks, Payment Banks, Local Area Banks and Regional Rural Banks), Standalone Primary Dealers, NBFCs in the Upper Layer and Middle Layer (including Housing Finance Companies), and the Export Import Bank of India, NABARD, National Housing Bank, SIDBI and the National Bank for Financing Infrastructure and Development (NaBFID). If an NBFC ceases to satisfy market-maker eligibility criteria, it must stop acting as a market-maker but remains bound to honour obligations under existing contracts until their maturity or termination. Notably, at least one counterparty to every credit derivative transaction must be a market-maker or an RBI-authorised central counterparty, a structural safeguard carried forward, in substance, from the earlier regime.
Retail and Non-Retail User Classification
Paragraph 4.2.2 introduces a formal user classification framework. Market-makers must classify users as either retail or non-retail. Entities eligible for non-retail classification include NBFCs other than market-makers, IRDAI-regulated Insurance Companies, PFRDA-regulated Pension Funds, SEBI-regulated Mutual Funds and Alternative Investment Funds, resident companies with a minimum net worth of ₹500 crore or minimum turnover of ₹1,000 crore as per their latest audited financial statements, SEBI-registered Foreign Portfolio Investors (FPIs), and any entity otherwise eligible to act as a market-maker. Any user not falling within these categories is classified as retail, though a non-retail-eligible entity retains the option to voluntarily seek retail classification. This distinction matters because it directly governs the purposes for which a user may transact, as explained below.
Protection Buyers and Sellers Under Credit Default Swaps
Paragraph 4.3.1 restricts a resident retail user, other than an individual, to buying CDS protection only for hedging purposes, whereas a non-retail user may buy protection without restriction as to purpose. Eligible protection sellers under CDS contracts are limited to IRDAI-regulated Insurance Companies, PFRDA-regulated Pension Funds, SEBI-regulated Mutual Funds, SEBI-regulated Alternative Investment Funds, and SEBI-registered FPIs and even these institutional categories may act as protection sellers only subject to their respective regulator’s approval. Market-makers are barred from offering CDS contracts to individuals altogether.
FPI Participation Limits in CDS
FPI participation carries additional quantitative and qualitative conditions under Paragraph 4.3.1(v). The aggregate notional amount of CDS protection sold by all FPIs is capped at 5% of the outstanding stock of corporate bonds, with the Clearing Corporation of India Ltd. (CCIL) responsible for disseminating limit utilisation based on reporting by market-makers and stock exchanges; once the limit is exhausted, FPIs cannot sell further protection. Debt instruments received by FPIs as deliverable obligations, or purchased to meet deliverable obligations in physical settlement, are reckoned within the investment limits for corporate bonds prescribed under A.P. (DIR Series) Circular No. 05 dated April 6, 2026.
However, such instruments are exempted from the minimum residual maturity requirement and issue-wise limit otherwise applicable to FPI corporate bond investment under the Non-resident Investment in Debt Instruments Directions, 2025. A market-maker cannot offer a CDS contract to an FPI where the reference obligation or index includes a money market instrument, an instrument with residual maturity under one year, or a bond with call/put options exercisable within one year of the contract date.
Total Return Swaps: Domestic and Cross-Border Structuring
Paragraph 4.3.2 governs TRS participation. A resident retail user, other than an individual, may enter a TRS only for hedging, while a resident non-retail user faces no purpose restriction. For non-resident participation, a market-maker may offer TRS to a person resident outside India, including an FPI, for hedging purposes, or as a fully funded structure in which the non-resident total return receiver provides the market-maker the full notional amount of the reference asset upfront provided no offshore derivative instrument is written with the TRS as underlying.
Market-makers may also transact with non-residents directly, or on a back-to-back basis through overseas branches, IFSC Banking Units, or wholly owned subsidiaries and joint ventures, subject to conditions including that the overseas entity is authorised as a dealer or market-maker under host-jurisdiction law and that any Indian-incorporated wholly owned subsidiary or joint venture must be a banking entity. The notional amount of a fully funded TRS with a non-resident is reckoned within the corporate bond investment limits under the 2025 Non-resident Investment Directions, and where the reference asset is an unlisted corporate bond, end-use restrictions under Paragraph 4.4(vi) of those Directions apply. As with CDS, market-makers cannot offer TRS to individuals, and the same maturity-based restrictions applicable to FPIs in CDS apply to non-resident TRS counterparties.
Eligible Reference Entities, Obligations and Assets
Under Paragraph 4.4, the reference entity in any credit derivative contract must be a resident entity eligible to issue the debt instruments specified as eligible reference obligations or reference assets. These eligible instruments are: money market debt instruments, rated INR corporate bonds and debentures, and unrated INR corporate bonds and debentures issued by Special Purpose Vehicles set up by infrastructure companies. Bonds carrying call or put options remain eligible, but asset-backed and mortgage-backed securities, along with structured obligations such as credit-enhanced, guaranteed, or convertible bonds, are expressly excluded. Every reference obligation, deliverable obligation and reference asset must be held in dematerialised form.
Where the underlying is an index rather than a single instrument, the index must be published by a financial benchmark administrator authorised by the RBI under the Reserve Bank of India (Financial Benchmark Administrators) Directions, 2023 dated December 28, 2023, or authorised under the SEBI (Index Providers) Regulations dated March 8, 2024. An index based wholly or partly on money market instruments must specifically be published by an RBI-authorised benchmark administrator.
Operational Directions: Unwinding, Settlement and Related-Party Restrictions
Paragraph 4.5.1 prohibits market participants from entering CDS or TRS transactions where the reference entity is a related party to either counterparty, although two or more government-related entities are not treated as related parties for this purpose. Participants also cannot undertake transactions that would circumvent regulatory restrictions applicable to them in the cash market.
Exit from a position is permitted either through unwinding with the original counterparty or through novation to another eligible participant, governed by the RBI’s 2013 circular on Novation of OTC Derivative Contracts (DBOD.No.BP.BC.76/21.04.157/2013-14), though specific paragraphs of that circular are disapplied to credit derivatives under the present Directions. Settlement may occur bilaterally or through an RBI-approved clearing arrangement; where a market-maker is an Authorised Dealer Category-I bank or an authorised Standalone Primary Dealer transacting with a non-resident, settlement may be in INR or foreign currency. CDS contracts may be cash-settled, physically settled, or settled through auction, with the settlement procedure determined by the Credit Derivatives Determinations Committee. TRS contracts with a non-resident who is not an FPI must be cash settled. Any floating rate used in a TRS must reference a benchmark published by an RBI-authorised financial benchmark administrator.
Hedging Conditions Applicable to Users
Paragraph 4.5.2 requires that where a credit derivative is offered for hedging, the market-maker must ensure the user holds exposure to the reference asset, eligible reference obligation, or a constituent debt instrument of the relevant index; that the notional amount purchased does not exceed the face value of the underlying holding; and that the tenor does not extend beyond the maturity of the underlying exposure or the standard maturity date immediately following it. Market-makers may call for supporting information or documents, which users are obliged to furnish. A user must exit the hedging position within one month of ceasing to hold the underlying exposure, a time-bound requirement intended to prevent hedges from converting into speculative positions.
Standardisation, FIMMDA and Contractual Safeguards
Paragraph 4.5.3 assigns FIMMDA (the Fixed Income Money Market and Derivatives Association of India) responsibility for prescribing settlement conventions, market conventions and standard documentation for credit derivative contracts, in consultation with market participants and international best practice, while permitting participants to alternatively adopt a standard master agreement. Importantly, a CDS contract must represent a direct claim on the protection seller: it cannot allow unilateral cancellation by the seller (barring buyer default), cannot delay timely credit event payment once conditions are met, and cannot grant the seller recourse against the buyer for credit event losses.
Customer Protection, Reporting and the Determinations Committee
Under Paragraph 4.5.4, market-makers must comply with the Master Direction – Reserve Bank of India (Market-makers in OTC Derivatives) Directions, 2021, and the Reserve Bank of India (Prevention of Market Abuse) Directions, 2019. Paragraph 4.5.5 mandates reporting of every OTC credit derivative transaction to the CCIL trade repository within 30 minutes, along with subsequent reporting of amendments, unwinding, novation, settlement and any credit, substitution or succession event, in formats approved by the RBI.
Paragraph 5 requires FIMMDA to constitute a Credit Derivatives Determinations Committee, comprising market-makers and users as voting members, with central counterparties as observer members and legal, audit or consultancy firms as consultative members. The Committee makes binding factual determinations on matters such as the occurrence of a credit event, substitution event or succession event, and the identity of a successor reference entity. It may also conduct auctions to determine the reference settlement price, subject to procedures ensuring fairness and transparency, and its decisions bind all market participants.
Exchange-Traded Credit Derivatives and Futures on Credit Indices
Paragraph 6 extends the framework to recognised stock exchanges. Exchanges may offer standardised single-name CDS and CDS on credit indices with guaranteed settlement, subject to prior RBI approval for product design and eligible participants, while SEBI prescribes operational execution and settlement guidelines. Retail users on exchanges may transact in CDS only for hedging, subject to the same exposure, notional and tenor conditions applicable in the OTC market. FPIs may act as both protection sellers and buyers on exchanges, subject to the same 5% aggregate limit and maturity restrictions applicable in the OTC segment, with exchanges required to report FPI protection-selling positions to CCIL daily, or intra-day if the RBI requires.
Paragraph 6.2 permits exchanges to offer futures on credit indices with guaranteed settlement, where the underlying index is composed solely of eligible debt instruments and administered per SEBI’s directions. FPI participation in credit index futures requires that the aggregate long position be reckoned within corporate bond investment limits, that gross short positions not exceed an FPI’s consolidated long position in corporate bonds and index futures at any time, and that the underlying index exclude money market instruments or short-residual-maturity debt.
Valuation, Prudential Norms and Accounting
Paragraph 7 requires market-makers to maintain robust, consistently applied and appropriately documented mark-to-market valuation methodologies for credit derivative contracts. Paragraph 8 directs market participants to comply with prudential norms and capital adequacy requirements prescribed by their respective sectoral regulators, and to follow applicable accounting standards; where neither the accounting standards nor the regulator has prescribed treatment, guidance issued by the Institute of Chartered Accountants of India applies.
RBI’s Information Powers, Data Dissemination and Enforcement
Paragraph 9 empowers the RBI to call for information, statements or clarifications from any person or agency dealing in credit derivatives, who must comply within the manner and timeframe specified. Paragraph 10 permits the RBI or an authorised agency to publish anonymised market data in public interest, and separately requires CCIL to publish the daily outstanding notional value of credit derivative contracts for each debt instrument.
Paragraph 11 sets out the consequences of violation: beyond any other penal or regulatory action available in law, the RBI may bar a person or agency from dealing in the credit derivatives market for a period not exceeding one month at a time, after affording a reasonable opportunity to be heard, and such action is made public.
Significance for India’s Corporate Bond Market
The 2026 Directions mark a structural expansion of India’s credit risk transfer toolkit, moving from a regime confined to single-name CDS on corporate bonds to one that additionally supports credit index derivatives, exchange-traded futures on credit indices, and total return swaps. By formally admitting Insurance Companies, Pension Funds, Mutual Funds, Alternative Investment Funds and FPIs as protection sellers (subject to sectoral regulator approval), the framework widens the supply side of credit protection beyond banks and NBFCs. The introduction of a dedicated Credit Derivatives Determinations Committee under FIMMDA, along with mandatory 30-minute trade reporting to CCIL, brings India’s framework closer to international post-crisis derivatives market infrastructure while retaining a supervised, institution-led model rather than an unrestricted dealer market.
Conclusion
The Master Direction – Reserve Bank of India (Credit Derivatives) Directions, 2026, issued under Section 45W read with Section 45U of the RBI Act, 1934, replaces the 2022 credit derivatives framework and establishes a considerably more detailed regulatory architecture for CDS, TRS and exchange-traded credit index products. Market-makers, institutional users and FPIs engaging with corporate bond credit risk transfer will need to revisit onboarding documentation, hedging certifications, reporting workflows and FPI limit-monitoring processes to align with the Paragraph-by-Paragraph requirements set out above, particularly given that the Directions took immediate effect from June 25, 2026, while legacy 2022-regime contracts continue on their original terms until maturity.
The regulatory developments discussed in Legal Analysis RBI Digital Payments E-Mandate 2026 complement the RBI’s evolving financial sector framework, extending from digital payment systems to the governance of sophisticated credit derivative transactions.
