MINUTES OF THE MEETING

Transcription

1 MINUTES OF THE MEETING (6 th May 2011) LEGAL SUBCOMMITTEE FOR CDS FIXED INCOME MONEY MARKET AND DERIVATIVES ASSOCIATION OF INDIA (Minutes prepared by Arwa Tambawala) - 1 -

2 DISCUSSION PANEL No. Name Institution 1. Mr. Hoshedar Wadia Juris Corp 2. Mr. Shan Bottlewala Juris Corp 3. Ms. Jacquiline Low ISDA 4. Mr. Jigar Shah Deutsche Bank 5. Ms. Shibani Deutsche Bank 6. Ms. Garima Nahar ICICI Bank 7. Mr. Sreekanta Chatterjee ICICI Bank 8. Mr. Manish Standard Chartered Bank 9. Mr. Sumant Standard Chartered Bank 10. Ms. Richa Iyer Standard Chartered Bank 11. Ms. Arwa Tambawala FIMMDA BACKGROUND: At the Core Product development committee of CDS meeting a legal Sub-Group of the CPDG has been formed representing legal officers of: State Bank of India ICICI Bank Ltd Standard Chartered Bank Deutsche Bank M/s Juris Corp Ltd Ms Jacqueline Low, ISDA, Singapore The legal Sub-Group has been formed to commence the work relating to the scope of the Determination Committee, the processes involved for Auction, voting for determining credit event etc, along with, 1. Devising a Master Agreement for Indian CDS. (The time-line for completion being May 30, 2011.) 2. Standarisation of CDS contracts, in terms of coupon, coupon payment dates etc, (within the timeline shown above.) - 2 -

3 DISCUSSIONS: The committee went through the draft agenda circulated by ISDA (attached herewith). After deliberation the following emerged: A. Matters to be referred to the Core Product Development Committee of FIMMDA for CDS B. Submissions to be made to the RBI after discussion with Core Product development Committee of FIMMDA for CDS C. Reverts awaited from ISDA A. Matters to be referred to the Core Product Development Committee of FIMMDA for CDS 1. Selection of Market Maker on the Determination Committee Should this be based on CDS transaction volume/market share in subsequent DCs instead of random selection? The concern with random selection is that this may result in the DC being comprised of Market-makers who are not significant market participants. The committee also debated the criteria for selection of DC members in the 1 st year when trading volumes in CDS would not be available. It was proposed that trading volumes in Corporate Bonds may be used as a proxy for selection of active members in this space. 2. Selection of User on the Determination Committee 2.1. The minutes of the Core Product development Committee of FIMMDA for CDS limited the membership on the DC from the user category to Insurance Companies, Mutual Funds and FIs. Could this be extended to include Commercial Bank, standalone Primary Dealer, NBFC, Mutual Fund, Insurance Company, Housing Finance Company, Provident Fund, Listed Corporate, Foreign Institutional Investor ( FII ), or any other institution specifically permitted to be a User by RBI? The argument being that some of the institutions categorized as market makers may not qualify as market makers as per the criteria laid down by RBI Would affiliates of member Institutions already on the DC be permitted to apply for membership to the DC under the user category? 2.3. A protocol would need to be developed as to the selection of members on the DC taking into consideration category of user, volume of trades in the year (initially for Corporate Bonds and subsequently for CDS), Assets under Management, affiliation with current members of DC or market makers. 3. Process of submitting a request to the Determination Committee ISDA has a transparent process of submission of requests to the DC which is subject to audit. Under this method, requests can be submitted through an online - 3 -

4 mechanism which enables tracking of requests and the member would know the status of his request. This would eliminate any questions of manipulation and would be subject to audit. We need to examine the process to be followed in India. 4. Funding of Determination Committee 4.1. Each Market-maker on the list of Market-makers maintained by RBI will be required to make an annual contribution in an amount to be determined by the DC to a DC Fund at the start of each DC year. Additional contributions may be required if the DC Fund balance is expected to be insufficient The DC Fund is to be used solely for the purpose of discharging DC-related expenses, including fees for legal advice to the DC, and payments to External Reviewers Will this work well in practice? Market-makers who are not significant market participants may object to paying the same amount as those who are significant market participants. What if they refuse to pay? If the only penalty is that the defaulter cannot sit on the DC, this may not be sufficient to encourage payment. The converse concern is that this may discourage eligible institutions from becoming a Market-maker and thus, reduce liquidity and development of the CDS market. Can we ask RBI to issue a directive to the market saying members who do not pay their dues for funding the DC, cannot be market makers? 5. Definition of publicly available information in the Indian context. In case of listed bonds, information available on the Stock exchange could be an option. However a protocol needs to be set for the DC to follow while ascertaining the reliability of the source of publicly available information while deciding on whether the submission made by the member can be taken up for discussion by the DC. B. Submissions to be made to the RBI after discussion with Core Product development Committee of FIMMDA for CDS: 1. Default on US$ denominated bonds should also be permitted to trigger a CDS Several Indian reference entities have issued foreign currency denominated bonds. As per the current guidelines, a CDS can be triggered only on INR denominated bonds. In this case, in case an entity defaults on its foreign obligation, the Global DC may consider it a credit event and the CDS may be triggered whereas the Indian CDS for the same entity would not be triggered. 2. Ask RBI to say that members who do not pay up cannot be market makers (refer to point 4.3) 3. Can Global DC discuss with onshore DC on matters pertaining to Indian entities - 4 -

5 As the Indian CDS market is in the development stage, it would be beneficial to have the Global DC perspective on issues pertaining to the Indian entities. C. ISDA to revert on the following: 1. Can Global DC discuss with onshore DC (refer to 3) As the discussions happen behind closed doors, would the global DC be comfortable in sharing the discussion and deliberations at the DC meetings? 2. Process of submitting a request to the Determination Committee Can ISDA provide Infrastructure support to the Indian Determination Committee for submissions to be made to the DC? This could be done in 2 ways. FIMMDA may either use existing Infrastructure of ISDA or the ISDA IT team may assist the FIMMDA IT team to develop the online submission of request page to make the process transparent and free of manipulation. The process could be subject to audit. CONCLUSION: The meeting concluded with a vote of thanks to the Committee members for their participation