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SEBI amends SEBI regulations to allow AIF

Published on January 16, 2023
Current Context: Alternative Investment Funds (AIFs) can now participate in the Credit Default Swaps (CDS) market as protection buyers and sellers thanks to an amendment to the SEBI (Alternative Investment Funds-AIF) Regulations, 2012 by the Securities and Exchange Board of India (SEBI).
SEBI amends SEBI regulations to allow AIF
  • AIFs may take part in CDS under AIF Regulations 16(1)(aa), 17(da), 18(ab), and 20(11).
  • By granting this permit, the domestic corporate bond market will be developed further, and business entities will be able to manage bond market risk.
  • Only for the purpose of hedging may Category-I and Category-II AIFs purchase CDS on an underlying investment in debt securities. AIFs in Category III are allowed to buy CDS for hedging or any other legal reason.
  • When it comes to selling, Category-II and Category-III AIFs may designate uninsured government bonds or Treasury bills in an amount equal to the CDS exposure in order to sell CDS.
  • Within the specified parameters, Category III AIFs may sell CDS.
  • All unit holders of the scheme should be notified before taking any unhedged position that would result in gross unhedged positions across all CDS transactions exceeding 25% of the scheme's investable funds.
  • CDS
    • It is a specific type of counter-party arrangement where the risk associated with third-party credit can be transferred from one party to another.
  • AIF
    • Alternative investment funds are a type of investment vehicle that allows investors to invest in assets that are not traditional stocks, bonds, or cash. These types of funds typically invest in assets such as real estate, private equity, hedge funds, commodities, and derivatives.

Question:

Q.1 Which organization has amended its rules so that, Alternative Investment Funds (AIFs) can now participate in the Credit Default Swaps (CDS) market as protection buyers and sellers?
a. SBI
b. SEBI
c. NABARD
d. RBI

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