The Securities and Exchange Board of India (SEBI) has issued guidelines for mutual fund schemes to participate in interest rate swap. Mutual funds can now enter into plain vanilla Interest Rate Swaps (IRS) for hedging purposes, provided that the value of the notional principal does not exceed the value of respective existing assets being hedged by the scheme. In the event that such participation in IRS is through over the counter transactions, the counterparty has to be an entity recognized as a market maker by the RBI. Additionally, exposure to a single counterparty in such transactions should not exceed 10 per cent of the net assets of the scheme. This 10 per cent limit will not be applicable if mutual funds are transacting in IRS through an electronic trading platform offered by the Clearing Corporation of India Ltd (CCIL).
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