The RBI on Friday said it will review the guidelines on credit default swaps (CDS) to facilitate the development of the credit derivatives market.

A derivative is a product whose value is derived from the underlying assets. This can be stocks, commodities or currency and even interest rates.

An over-the-counter derivative is that which is traded between two parties without going through an exchange or other intermediaries.

A CDS is an OTC derivative in which a protection seller commits to compensate the protection buyer for any loss resulting from a credit event with respect to a reference entity or an obligation and in return, the latter makes periodic payments to the protection seller until the maturity of the contract or the credit event, whichever is earlier.

“It has been decided to review the extant guidelines on CDS and issue draft directions for public comments shortly,” RBI governor Shaktikanta Das said. He added that the revised directions are expected to facilitate the development of credit derivatives market and a liquid and vibrant market for corporate bonds, especially for low-rated issuers.

The RBI also announced draft norms for market-makers or entities who provide bid and offer prices to users in order to provide liquidity to the market.

Here, the central bank said that the board of directors or equivalent forum of the market-maker should approve written policies which define the overall framework within which the derivative business shall be conducted and the related risks managed.