Sebi issues new guidelines on investing MFs in interest rate swaps
Market regulator Sebi on Friday put in place new guidelines for mutual fund participation in interest rate swap, a derivative product.
Mutual funds can enter into straightforward interest rate swaps (IRSs) for hedging purposes. The value of the notional capital in such cases should not exceed the value of the respective existing assets covered by the scheme.
In the event that participation in the IRS is through OTC transactions, the counterparty must be an entity recognized as a market maker by RBI and the exposure to a single counterparty in such transactions must not be exceed 10 percent of the system’s net assets, Sebi said in a circular.
However, if mutual funds trade in the IRS through an electronic trading platform offered by the Clearing Corporation of
India Ltd (CCIL), the one-time counterparty limit of 10% will not apply, he added.
In the parlance of the market, an interest swap is a derivative product used to hedge interest rate risk by mutual funds. It is used between companies to exchange their future interest rate payments from fixed to variable or vice versa.