The Reserve Bank of India (RBI) issued the Master Direction on Credit Derivatives, 2026 on June 25, marking the biggest overhaul of India’s credit derivatives framework since 2022. The new rules introduce Total Return Swaps (TRS) and derivatives on credit indices, moving well beyond the earlier regime that permitted only Credit Default Swaps (CDS) on corporate bonds. These directions aim to deepen India’s corporate bond market by giving market participants a wider set of tools to transfer and manage credit risk.
What Are Credit Derivatives?
Credit derivatives are financial contracts whose value is derived from the creditworthiness of an underlying entity or a basket of entities. They allow investors to separate credit risk from the underlying asset and trade it independently. In simpler terms, these instruments let a lender or bondholder transfer the risk of a borrower defaulting to another party willing to take on that risk for a fee.
The two main instruments under the new framework are Credit Default Swaps (CDS) and Total Return Swaps (TRS). A CDS is a contract in which the protection seller agrees to compensate the protection buyer if a predefined credit event occurs, such as a default or bankruptcy of the reference entity. The buyer pays regular premiums, much like an insurance policy. A TRS, on the other hand, transfers the entire economic return of a reference asset, including both interest income and any price appreciation or depreciation, from the total return payer to the total return receiver in exchange for a fixed or floating rate payment. Unlike a CDS, which covers only credit risk, a TRS transfers both credit risk and market risk.
India’s credit derivatives market has remained shallow since CDS was first permitted in 2011. The over-the-counter market saw limited activity because only a single product type was available and participation was restricted. The 2026 overhaul is designed to change this by broadening both the product suite and the participant base.
Background: From CDS-Only to a Broader Framework
The RBI first allowed Credit Default Swaps on corporate bonds in 2011 and issued comprehensive directions in February 2022 under the previous framework (Notification FMRD.DIRD.11/14.03.004/2021-22). However, the CDS market failed to gain meaningful traction. Market participants pointed to limited product diversity, low liquidity, and restrictive participation norms as key constraints.
The turning point came in the Union Budget for FY 2026-27, when the government proposed deepening India’s credit derivatives market and strengthening risk management tools for market participants. On February 6, 2026, the RBI announced plans to introduce derivatives on credit indices and total return swaps on corporate bonds through Paragraph 13 of the Statement on Developmental and Regulatory Policies, which accompanied the bi-monthly monetary policy statement. Draft directions were released the same day for public consultation, with comments accepted until late February.
After reviewing stakeholder feedback, the RBI issued the final Master Direction on Credit Derivatives, 2026 on June 25, with immediate effect. The directions have been issued under Section 45W read with Section 45U of the Reserve Bank of India Act, 1934. These sections empower the RBI to regulate transactions in derivatives, money market instruments, and securities, and to issue directions to all market participants. The new framework supersedes the 2022 directions entirely.
Key Provisions of the 2026 Master Directions
Eligible Participants and Their Roles
The directions classify participants into two broad categories: market-makers and users. At least one party to every credit derivative transaction must be a market-maker or an RBI-authorised central counterparty.
Eligible market-makers include Scheduled Commercial Banks (excluding Small Finance Banks, Payment Banks, Local Area Banks, and Regional Rural Banks), Standalone Primary Dealers, NBFCs classified in the Upper and Middle Layers under the Scale Based Regulation framework (including Housing Finance Companies), and specified All India Financial Institutions such as EXIM Bank, NABARD, National Housing Bank, SIDBI, and NaBFID.
Users are divided into retail and non-retail categories. Non-retail users include NBFCs, insurance companies regulated by IRDAI, pension funds regulated by PFRDA, SEBI-regulated mutual funds and Alternative Investment Funds (AIFs), resident companies with a net worth of at least ₹500 crore or a turnover of at least ₹1,000 crore, and SEBI-registered Foreign Portfolio Investors (FPIs). Any user who does not meet these criteria is classified as retail by default.
| Participant Type | Can Buy Protection? | Can Sell Protection? |
|---|---|---|
| Resident non-retail user | Without restriction | Yes, subject to regulatory approvals |
| Resident retail user (non-individual) | Only for hedging | Not eligible |
| Individual | Not eligible | Not eligible |
| Non-resident (including FPIs) | Only for hedging | Up to 5% aggregate cap on CDS |
The framework accepts feedback from market participants who had sought greater flexibility. The final directions permit resident non-retail users to both buy and sell credit protection without restrictions linked to underlying credit exposures, a significant relaxation from the earlier draft.
Total Return Swaps: A New Instrument
The most notable introduction is the Total Return Swap (TRS). Under a TRS contract, the total return payer transfers the full economic performance of a reference asset to the total return receiver, against a pre-determined fixed or floating benchmark-linked payment. This allows investors to gain synthetic exposure to a corporate bond without actually owning it.
For resident users, the hedging-only restriction for retail non-individual users and unrestricted access for non-retail users mirrors the CDS framework. For non-residents including FPIs, a market-maker may offer a TRS for hedging purposes, or as a total return receiver under a fully funded structure, where the non-resident provides the market-maker the full notional amount of the reference asset upfront. However, no offshore derivative instrument may be written using the TRS as underlying.
TRS contracts that use a floating interest rate must link that rate to a benchmark published by a financial benchmark administrator duly authorised by the RBI under the Reserve Bank of India (Financial Benchmark Administrators) Directions, 2023.
Exchange-Traded Credit Derivatives
For the first time, the directions explicitly permit exchange-traded credit derivatives. Stock exchanges may offer standardised single-name CDS contracts and CDS on credit indices, as well as futures on credit indices, subject to prior approval from the RBI for product design, eligible participants, and contract specifications. The Securities and Exchange Board of India (SEBI) will prescribe the operational guidelines for execution and settlement.
FPIs are permitted to trade credit index futures but cannot take short positions exceeding their consolidated long position in corporate bonds. Aggregate FPI long positions in credit index futures count toward corporate debt investment limits. Additionally, exchanges must report gross FPI protection sold to the Clearing Corporation of India Limited (CCIL) on a daily basis, or intra-day if the RBI requires.
The Credit Derivatives Determinations Committee
A key institutional innovation is the mandatory creation of a Credit Derivatives Determinations Committee under FIMMDA. The committee will consist of market-makers and users as voting members, with central counterparties as observers and legal, audit, and consultancy firms as consultative members.
When approached by participants, the committee will make binding factual determinations on credit events, substitution events, succession events, and successor reference entities. It may also conduct auctions to determine CDS settlement reference prices under fair and transparent procedures. FIMMDA, in consultation with market participants, will develop the standard procedures for cash settlement and auction settlement.
FIMMDA stands for the Fixed Income Money Market and Derivatives Association of India. Established in 1998 and headquartered in Mumbai, FIMMDA is a self-regulatory organisation that represents scheduled commercial banks, public financial institutions, primary dealers, and insurance companies. It works closely with the RBI and SEBI to develop market standards, benchmarks, and best practices for India’s fixed income and derivatives markets.
Reporting and Compliance
All over-the-counter credit derivative transactions must be reported to CCIL’s trade repository within 30 minutes of execution. Reporting also covers amendments, unwinds, novations, settlement transactions, and any credit, substitution, or succession events. CCIL, established in 2001, is India’s central counterparty for clearing and settlement of government securities, foreign exchange, and money market instruments, and also operates the trade repository for derivatives.
Market-makers must comply with the Market-makers in OTC Derivatives Directions, 2021 and the Prevention of Market Abuse Directions, 2019. The RBI may, after a hearing, bar any violator from the credit derivatives market for up to one month at a time, in addition to other penal or regulatory action, and will publicise such action.
Significance for India’s Corporate Bond Market
India’s corporate bond market has long lagged behind its peer economies. Despite being the world’s fifth-largest economy, India’s corporate bond market is relatively small at roughly 17-20% of GDP, compared to over 100% in many developed economies and 40-50% in several emerging markets. A key reason has been the absence of a deep and liquid derivatives market that allows investors to hedge credit risk effectively.
The 2026 Master Directions address this gap in three fundamental ways.
First, by introducing TRS and credit index derivatives, the framework gives investors the ability to hedge and trade credit risk across portfolios rather than just single issuers. This is expected to improve price discovery in credit spreads and help issuers across the rating spectrum access funding at more efficient costs.
Second, by widening the participant base to include insurance companies, pension funds, mutual funds, AIFs, and FPIs as eligible protection sellers, the directions bring much-needed depth and diversity to the market. This aligns with other market-deepening measures such as easing foreign portfolio investor participation and improving market-making arrangements in debt markets.
Third, the institutionalisation of the Credit Derivatives Determinations Committee under FIMMDA provides a formal mechanism for resolving credit events, reducing legal uncertainty that has historically discouraged participation.
The directions also complement the growing ecosystem of India’s financial market infrastructure. CCIL serves as the central counterparty and trade repository, while FIMMDA standardises documentation and settlement conventions. Globally, the notional outstanding volume of over-the-counter derivatives exceeds USD 840 trillion, with credit derivatives recording the fastest year-on-year growth at approximately 23% in mid-2025. India’s framework now aligns more closely with these international practices.
| Parameter | Pre-2026 Framework | Post-2026 Framework |
|---|---|---|
| Products | CDS only on corporate bonds | CDS, TRS, exchange-traded credit index derivatives/futures |
| Market-maker base | Narrow eligibility | Includes NBFC-Upper/Middle Layer, specified AIFIs |
| FPI participation | Limited | Explicit 5% aggregate CDS protection-selling cap |
| Determinations mechanism | Not formally constituted | FIMMDA-led Determinations Committee with binding authority |
| Exchange-traded products | Not specifically provided for | Permitted subject to RBI/SEBI approval |
| Reporting | Basic requirements | 30-minute reporting to CCIL trade repository |
The transition provision ensures that existing contracts under the superseded 2022 directions continue to be governed by those directions until expiry. This provides legal continuity while the market adapts to the new framework.
Key Takeaways
- The Master Direction on Credit Derivatives, 2026 was issued by the RBI on June 25, 2026, under Section 45W of the RBI Act, 1934, with immediate effect.
- The directions introduce Total Return Swaps (TRS) and exchange-traded credit index derivatives as new instruments, moving beyond the CDS-only regime.
- Resident non-retail users (including companies with net worth of ₹500 crore or turnover of ₹1,000 crore) can buy and sell credit protection without restrictions on purpose.
- FPIs can sell CDS protection up to an aggregate cap of 5% of outstanding corporate bond stock, monitored and disseminated by CCIL.
- A Credit Derivatives Determinations Committee has been mandated under FIMMDA (established 1998, headquartered in Mumbai) to make binding determinations on credit events.
- All OTC credit derivative transactions must be reported to CCIL’s trade repository within 30 minutes of execution.
- The framework supersedes the 2022 Credit Derivatives Directions and aligns India’s credit risk transfer market more closely with international practices.
