On The Legal Regulation Of Over-the-counter Derivative Products

Over-the-counter ("OTC") derivatives are often the complex products of variedfinancial instruments. To reduce trading costs and control relative risks, InternationalSwaps and Derivatives Association ("ISDA") continues to develop and maintainstandard documentation for OTC derivatives ("ISDA Documents"). ISDA Documentsare used by most OTC derivatives market participants and gradually becomes thetrading conventions of the OTC derivatives.OTC derivatives market began to develop in China recent years ago. There is nolaw directly relative to OTC derivatives. The trading conventions conflict with someprovisions of bankruptcy laws, collateral laws and supervisory codes in China. Theenforcement of the trading conventions is uncertain, which will impair thedevelopment of the OTC derivatives market in China.Through the research of legislation and regulation relative to OTC derivatives inUK, US and China, the conclusion is drawn as following:To promote the development of the OTC derivatives market in China and controlrelative risks, the enforcement of the trading conventions developed by ISDADocuments should be confirmed by legislation and the OTC derivatives market inChina should be regulated after making full use of the trading conventions developedby ISDA Documents.The legislation regarding netting of OTC derivatives should be passed so as toenforce the trading conventions developed by ISDA Documents as law. Thus, theprovisions regarding automatic stay, cherry-picking and suspect period in Chinesebankruptcy law will not be applied to the trading conventions developed by ISDADocuments. The enforcement of title-transferred collateral should be confirmed byChinese collateral law. The legislation regarding regulation of OTC derivatives shouldbe passed so as to divide the jurisdictions of different regulators in China. The OTCderivatives market participants should be classified. The OTC derivatives transactionsbetween sophisticated participants should be regulated by the trading conventionsdeveloped by ISDA Documents. The aim of the regulation is to protect theunsophisticated participants by improving information disclosure.