🟢 FINAL MASTER DIRECTION — IN FORCE WITH IMMEDIATE EFFECT
Issued by the Reserve Bank of India, Financial Markets Regulation Department, on June 25, 2026 (RBI/FMRD/2026-27/407). The Master Direction is binding from the date of issue and supersedes the 2021-22 Credit Derivatives Directions.
Quick Reference
India's credit derivatives market has, since 2022, operated under a framework centred exclusively on Credit Default Swaps for corporate bonds. On February 6, 2026, Paragraph 13 of the Statement on Developmental and Regulatory Policies accompanying the RBI's Bi-monthly Monetary Policy Statement for 2025-26 announced plans to introduce derivatives on credit indices and Total Return Swaps on corporate bonds — and draft directions were released simultaneously on the same date for public comment. Having reviewed stakeholder feedback, the RBI finalised the framework and issued it on June 25, 2026.
Having reviewed stakeholder feedback, the RBI finalised and issued the Master Direction – Reserve Bank of India (Credit Derivatives) Directions, 2026 on June 25, 2026, under cover of letter RBI/FMRD/2026-27/407, with the substantive Directions notified separately as FMRD.DIRD.03/14.03.004/2026-27. The new framework takes immediate effect and supersedes the 2021-22 Credit Derivatives Directions and the related A.P. (DIR Series) Circular No. 23, both dated February 10, 2022.
The Directions apply to credit derivative transactions in both the OTC market and on recognised stock exchanges, and meaningfully expand the product universe — moving from a CDS-only regime to one that also accommodates TRS and exchange-traded credit index derivatives, with calibrated access for both resident and non-resident participants, including FPIs.
Scope and Effective Date of the RBI Credit Derivatives Directions 2026
The Directions are formally titled the Master Direction – Reserve Bank of India (Credit Derivatives) Directions, 2026, apply to credit derivative transactions undertaken in OTC markets (including Electronic Trading Platforms) and on recognised stock exchanges in India, and came into force on June 25, 2026 — the date of notification itself.
CDS, TRS and Credit Derivative: Key Definitions Under the 2026 Directions
📝 Selected Definitions
- Credit Default Swap (CDS) — a contract where the protection seller commits to pay the protection buyer on a credit event, in exchange for periodic premium payments until contract maturity or the credit event, whichever is earlier.
- Total Return Swap (TRS) — a contract where the total return payer transfers the entire economic performance of a reference asset to the total return receiver, against a pre-determined fixed or floating benchmark-linked payment.
- Corporate bonds and debentures — non-convertible debt securities creating or acknowledging indebtedness, excluding money market debt instruments, security receipts, securitised debt instruments, and government bonds.
- Market-maker — an entity that provides prices to users and other market-makers.
- Credit event, substitution event, succession event — pre-defined triggering events for settlement, replacement of the reference obligation, or change in the reference entity, respectively.
- Cash settlement — a CDS settlement process where the protection seller pays the protection buyer the notional amount of the CDS contract less the expected recovery value of the reference obligation.
- Physical settlement — a CDS settlement process where the protection buyer delivers any eligible deliverable obligation to the protection seller against receipt of the notional amount of the CDS contract.
- Auction settlement — a CDS settlement process where the settlement price is determined through an auction mechanism conducted by the Credit Derivatives Determinations Committee.
Eligible Participants
Two broad categories may participate: residents, and persons resident outside India, to the extent specifically permitted under the Directions (chiefly FPIs).
OTC Market: Market-Makers and Users
Market-makers and users may transact in both CDS and TRS contracts. At least one party to every transaction must be a market-maker or an RBI-authorised central counterparty.
Eligible Market-Makers
- Scheduled Commercial Banks (excluding Small Finance Banks, Payment Banks, Local Area Banks, and Regional Rural Banks)
- Standalone Primary Dealers
- NBFCs — Upper Layer and Middle Layer (including Housing Finance Companies)
- EXIM Bank, NABARD, National Housing Bank, SIDBI, and NaBFID
An NBFC that ceases to meet market-maker eligibility criteria must stop acting as a market-maker but continues to honour obligations under existing contracts until maturity or termination.
User Classification: Retail vs Non-Retail
💡 Non-Retail User Categories
- NBFCs (other than market-makers)
- IRDAI-regulated insurance companies
- PFRDA-regulated pension funds
- SEBI-regulated mutual funds and Alternative Investment Funds
- Resident companies with net worth ≥ ₹500 crore or turnover ≥ ₹1,000 crore (per latest audited financials)
- SEBI-registered FPIs
- Any entity otherwise eligible to be a market-maker
Any user not meeting these criteria is classified as retail by default. However, a user otherwise eligible for non-retail classification may opt to be treated as retail instead.
Participants in Credit Default Swaps
⚠️ FPI-Specific Conditions on CDS
- Aggregate notional CDS protection sold by all FPIs capped at 5% of outstanding corporate bond stock; CCIL disseminates limit utilisation based on market-maker and exchange reporting; FPIs cannot sell further protection once the limit is used up.
- Deliverable obligations received or purchased by FPIs for physical CDS settlement count toward their corporate bond investment limits (per A.P. (DIR Series) Circular No. 05 dated April 6, 2026); any shortfall in available limit at settlement is adjusted in the next limit review.
- FPI CDS protection sold and related deliverable obligations are exempt from the minimum residual maturity and issue-wise limits otherwise applicable to FPI corporate bond investment.
- Market-makers cannot offer FPIs a CDS where the reference obligation/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.
Participants in Total Return Swaps
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, without further restriction; or
- As 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 — provided no offshore derivative instrument is written using the TRS as underlying; or
- Directly, or back-to-back through overseas branches/IFSC Banking Units/wholly owned subsidiaries/joint ventures, provided: (a) the overseas entity is permitted to deal in the product as a dealer/market-maker under host-jurisdiction law; (b) any Indian-incorporated wholly owned subsidiary/JV transacting this way is a banking entity; and (c) the market-maker provides the RBI with any information, data, or particulars it requires in respect of these transactions in the manner and time prescribed (para 4.3.2(iii)(c)(iii)).
The fully funded TRS notional counts toward the non-resident's corporate bond investment limits, and unlisted bonds/debentures used as reference assets must meet end-use restrictions under Paragraph 4.4(vi) of the Non-resident Investment in Debt Instruments Directions, 2025. As with CDS, market-makers cannot offer TRS referencing money market instruments, sub-one-year residual maturity debt, or near-term callable/puttable bonds to non-residents, and TRS cannot be offered to individuals at all.
📌 TRS Floating Rate Benchmark Requirement
Where a TRS contract uses a floating interest rate, that rate must be a benchmark published by a financial benchmark administrator duly authorised by the RBI under the Reserve Bank of India (Financial Benchmark Administrators) Directions, 2023 (para 4.5.1(vi)). Market-makers should verify at onboarding that any floating rate index used in TRS contracts meets this authorisation requirement — non-RBI-authorised benchmarks are not permissible regardless of their market prevalence.
Eligible Reference Obligations and Assets: What Can (and Cannot) Underlie a CDS or TRS
✅ Eligible Reference Obligations/Assets
- Money market debt instruments
- Rated INR corporate bonds and debentures
- Unrated INR bonds/debentures issued by SPVs set up by infrastructure companies
- Bonds with call/put options (eligible as reference obligations/assets)
- Eligible debt indices published by an RBI-authorised financial benchmark administrator or a SEBI-authorised index provider (with money-market-linked indices requiring RBI-authorised administration specifically)
❌ Not Eligible
Asset-backed/mortgage-backed securities and structured obligations such as credit-enhanced/guaranteed bonds and convertible bonds cannot be used as reference obligations/assets. All reference/deliverable obligations and reference assets must be held in dematerialised form, and the reference entity must be a resident entity eligible to issue the relevant debt instrument.
OTC Operational Rules: Related Parties, Hedging, Settlement and Reporting
Related Parties, Unwinding and Settlement
Transactions are barred where the reference entity is a related party to either counterparty — except that two or more government-related entities are not treated as related parties for this purpose. Contracts can be exited by unwinding with the original counterparty or via novation to another eligible participant (per the December 9, 2013 Novation circular, though Paragraphs 2, 5.1 and 5.2 of that circular are excluded). Settlement is bilateral or through an RBI-approved clearing arrangement; contracts with non-residents undertaken by an AD Cat-I bank or authorised SPD can settle in INR or foreign currency. Settlement itself may be cash, physical, or — for CDS — via auction, with the Credit Derivatives Determinations Committee determining the procedure. Non-FPI non-resident TRS contracts must be cash settled.
❌ Cash-Market Exposure Restriction
Unless specifically permitted under these Directions, market participants cannot undertake CDS or TRS transactions involving reference entities, reference obligations, or reference assets where they face regulatory restrictions on assuming similar exposures in the cash market, or where doing so would violate any other applicable regulatory restriction (para 4.5.1(ii)). This restriction applies to exchange-traded participants as well (para 6.3(ii)). Compliance teams should map this restriction against each participant's sector-specific investment/exposure guidelines before onboarding credit derivative transactions.
Hedging Conditions
⚠️ Conditions for Hedging Transactions
- User must hold actual exposure to the reference obligation/asset or to one or more instruments within the underlying index (for index-linked contracts).
- Notional protection bought cannot exceed the face value of the exposure held.
- Contract tenor cannot extend beyond the maturity of the underlying exposure (or the next standard CDS/TRS maturity date immediately after it).
- Users must exit hedging positions within one month of ceasing to hold the underlying exposure.
Verification: Market-makers may call for any relevant information or documents from a user to verify compliance with the above conditions. Users are obliged to provide such information (para 4.5.2(ii)). Market-makers should build document-collection workflows into hedging onboarding to meet this obligation.
Standardisation and Contract Integrity
FIMMDA, in consultation with market participants, will prescribe settlement conventions and standard documentation (or participants may use a standard master agreement). CDS contracts must represent a direct claim on the protection seller — they cannot allow unilateral cancellation by the seller (except on buyer default), cannot delay timely credit-event payment, and cannot give the seller recourse against the buyer for credit event losses.
Customer Protection and Reporting
Market-makers must comply with the Market-makers in OTC Derivatives Directions, 2021 and the Prevention of Market Abuse Directions, 2019. All OTC credit derivative transactions must be reported to CCIL's trade repository within 30 minutes of execution. Reporting also covers all subsequent amendments, unwinds, novations, settlement transactions, and any credit, substitution, or succession events. Reporting formats are as indicated by CCIL, subject to the prior approval of the Reserve Bank (para 4.5.5(iii)) — market-makers should not assume CCIL-issued format guidance is effective until RBI approval is confirmed.
Credit Derivatives Determinations Committee
FIMMDA must constitute this Committee with market-makers and users as voting members (with adequate user representation), central counterparties as observers, and legal/audit/consultancy firms as consultative members. When approached by participants, the Committee makes binding factual determinations on credit events, substitution events, succession events, and successor reference entities, and may conduct auctions to set CDS settlement reference prices under fair, transparent safeguards it must establish. FIMMDA, in consultation with participants, will also develop the standard procedure for cash and auction settlement.
FIMMDA must also establish rules governing the Committee's activities in line with international best practices (para 5(ii)) — the Direction does not prescribe these rules itself, leaving FIMMDA to develop a governance framework. Market participants entering credit derivative contracts before these rules are published should factor in the uncertainty around how succession and substitution event determinations will be procedurally handled in early transactions.
Exchange-Traded Credit Derivatives
Exchange-Traded CDS
Exchanges may offer standardised single-name CDS and CDS on credit indices, with guaranteed settlement — subject to RBI's prior approval for product design, participant eligibility, and any changes, while SEBI prescribes execution/settlement operational guidelines. Determinations Committee rulings apply equally to exchange-traded CDS. Retail users on exchanges face the same hedging-only, exposure-linked, and tenor-matching conditions as in the OTC market.
FPIs may act as protection buyers or sellers on exchanges, subject to the same 5% aggregate cap described earlier; exchanges must report gross FPI protection sold to CCIL daily (or intra-day if RBI requires). FPIs cannot sell protection where the reference obligation/index involves money market instruments, sub-one-year residual maturity, near-term call/put options, or equivalent index composition.
Futures on Credit Indices
Exchanges may offer credit index futures with guaranteed settlement, where the underlying index comprises only eligible debt instruments and is composed/administered per SEBI's directions (money-market-linked indices still need RBI-authorised benchmark administration). RBI prior approval is required for product design and participant eligibility; SEBI prescribes execution/settlement procedures.
⚠️ FPI Conditions on Credit Index Futures
- Aggregate FPI long positions count toward corporate debt investment limits under the Non-resident Investment in Debt Instruments Directions, 2025.
- Total gross short position of any FPI cannot exceed its consolidated long position across corporate bonds/debentures and credit index futures at any time.
- FPIs cannot participate where the underlying index includes money market instruments, sub-one-year residual maturity debt, or near-term callable/puttable bonds.
Separately, exchanges must adequately inform participants of associated risks, ensure no transactions breach cash-market exposure restrictions otherwise applicable, and furnish any information RBI or another specified agency requires, in the manner and timeframe prescribed.
Exchange participant risk disclosure (para 6.3(i)): Exchanges must ensure that participants are adequately informed of the risks associated with credit derivative contracts. Exchanges designing product documentation and onboarding materials for exchange-traded CDS and credit index futures should build explicit risk-disclosure steps into their participant admission process.
Valuation, Prudential Norms and Other Obligations
- Valuation: Market-makers must maintain robust, consistently applied, and documented/disclosed mark-to-market methodologies.
- Prudential and accounting treatment: Participants follow prudential/capital norms set by their respective regulators; accounting follows notified accounting standards and regulatory guidance, falling back on ICAI guidance where none exists.
- Information requests: RBI may seek any information, statement, or clarification from persons/agencies dealing in credit derivatives, to be furnished as specified.
- Data dissemination: RBI (or an authorised agency) may publish anonymised market data; CCIL must publish daily outstanding notional value per debt instrument.
- Violations: RBI may, after a hearing, bar a violator from the credit derivatives market for up to one month at a time (in addition to other penal/regulatory action), and will publicise such action.
Transition Provision
The Directions apply to all credit derivative transactions entered into from the date they take effect. Transactions already undertaken under the superseded 2021-22 Directions continue to be governed by those Directions until the relevant contracts expire.
What Changes From the 2022 Framework
Compliance Checklist
☑ Confirm market-maker/user status — check eligibility against Paragraph 4.2.1 (market-makers) and 4.2.2 (retail/non-retail) and update internal classification records.
☑ Update CDS/TRS documentation — ensure contracts reflect the no-unilateral-cancellation, no-recourse, and timely-payment clauses mandated for CDS, and FIMMDA-prescribed conventions once issued.
☑ Build CCIL reporting workflows — ensure systems can report OTC trades, amendments, unwinds, novations, and credit/succession events within the 30-minute window.
☑ Monitor FPI CDS limit utilisation — if dealing with FPIs, track the 5% aggregate cap published by CCIL before facilitating further protection sales.
☑ Verify hedging compliance — for retail (non-individual) hedgers, confirm underlying exposure, notional-vs-face-value alignment, and the one-month exit rule after exposure ceases.
☑ Review reference obligation eligibility — confirm proposed reference obligations/assets are dematerialised, correctly rated/unrated per Paragraph 4.4, and not structured/ABS/MBS instruments.
☑ Re-map internal references — replace citations to the superseded FMRD.DIRD.11/14.03.004/2021-22 and A.P. (DIR Series) Circular No. 23 across policies, training material, and audit checklists.
☑ Check cash-market exposure restrictions — for each proposed credit derivative transaction, confirm the reference entity, reference obligation, and reference asset do not involve exposures your entity is otherwise barred from taking in the cash market under applicable sector-specific regulation (para 4.5.1(ii); para 6.3(ii) for exchange-traded).
☑ Verify TRS floating rate benchmark authorisation — if your TRS documentation references a floating rate index, confirm the benchmark administrator is duly authorised by RBI under the Financial Benchmark Administrators Directions, 2023 before the contract is executed (para 4.5.1(vi)).
Practical Implications: FPI Limits, Determinations Committee and What Comes Next
By adding Total Return Swaps and exchange-traded credit index derivatives to a framework that previously covered only CDS on corporate bonds, RBI has materially widened India's credit risk transfer toolkit in a single step. The credit derivatives segment has operated at much lower volume than the interest rate or currency derivatives markets — a gap the RBI has explicitly sought to address since the 2022 CDS-only regime. A broader product suite, paired with a FIMMDA-led Determinations Committee with binding authority over credit events and settlement outcomes, is a structural upgrade rather than a cosmetic expansion.
The compliance challenge will likely centre on the FPI participation provisions — particularly the 5% aggregate CDS protection-selling cap and its interaction with existing corporate bond investment limits. Market-makers dealing with FPIs will need real-time visibility into CCIL's limit-utilisation disclosures to avoid inadvertently facilitating a breach, and the carve-outs from minimum residual maturity and issue-wise limits for CDS-related deliverable obligations add a layer of bookkeeping complexity that risk and middle-office teams should pressure-test early.
Practitioners should also watch the operationalisation of the Credit Derivatives Determinations Committee closely. Its decisions are explicitly made binding on market participants, yet the Direction leaves considerable discretion to FIMMDA on composition details and procedural rules. Firms entering CDS contracts — especially those likely to reference mid-tier corporate issuers where succession or substitution events are more probable — should track how FIMMDA constitutes and resources this Committee, since its rulings will directly determine settlement outcomes.
Two implementation items remain explicitly open under this Direction: RBI prior approval for specific exchange-traded product designs (required before any exchange launches standardised CDS or credit index futures), and FIMMDA's standard documentation and settlement conventions, which are yet to be issued. Until those are finalised, the practical market launch of exchange-traded products is contingent — participants planning exchange-traded credit derivative activity should track both the RBI product-approval process and FIMMDA's documentation work in parallel.
Source: Master Direction – Reserve Bank of India (Credit Derivatives) Directions, 2026, Notification No. FMRD.DIRD.03/14.03.004/2026-27 dated June 25, 2026, issued by the Financial Markets Regulation Department, Reserve Bank of India, under cover of letter RBI/FMRD/2026-27/407, signed by Dimple Bhandia, Chief General Manager.
This article is for informational and educational purposes only and does not constitute legal or regulatory advice. Verify with primary regulatory sources before acting.
