On Legal Control Of Financial Futures Risk

This article focuses on controlling the financial futures risk by law. The financial futures, such as stock index futures, interest rate futures, foreign exchange futures or currency futures, security futures, and hybrid securities, characterize as being traded in exchange, margin, offset, high depending on legislation and regulation. Marking to market, margin system, clearing house guaranteeing the performance of the contract, and other systems ensure financial futures market's integrity and efficiency. Were the law good, the futures market will be safe. If not, great risk exists.The law does not concentrate on individual risk, which results from price fluctuation, but on negative uncertainty of market system, which results from inperfect futures market distemperedness, namely futures risk is negative uncertainty resulting from inperfect futures market. Market failure or inperfect law show as both imperfection of market system and unlawfullness of market subjects and their behaviour.The essence of market failure is lack of laws or regulations system and supervision frame; and the result is lack of good system and structure which can control effectively risk. Due to inperfect risk controlling system, market manipulation can not be prevented effectively, speculation can not be inducted to the way of enhancing market liquidity and steadying market. In the conditions of imperfect system, manipulation becomes easy, speculators are apt to take oppotunism more,so futures market cann't develop its fuction and take uncertainty of harms and damages to futures market and its participants, other markets and the whole financial system or national economy. Why the law focuses on the foresaid risk? Firstly, market failure is the focus of public policy, law shall be responsible for eliminating systemic risk and financial crisis spread. The aim of legislation policy shall not be to prevent breakdown of a specific agency, but prevent financial system suffering risk contagion, Secondly, inperfect law easily results to extreme risk, which is concered seriously by all financial fields and to be restrained firstly. Legislating and perfecting the laws and regulations system of futures, and controlling effectively futures risk, are basic public goods which government shall bear and provide for financial market.The law provides the following key arms to control futures risk: taming excessive speculation, preventing manipulation and protecting market integrity.Contract listing regulation is a very central measure to risk control before 2000, when the CFMA was promulgated. Be sure that the terms and conditions of the futures contract are well designed so that both the long and the short could not manipulate the prices. It's very important. But it does not mean that regulators should examine and approve the terms and conditions. Listing by examining and approving will impose heavy cost on the market, so the examining and approving program is not a good measure to control risk of listing. In fact, there are some other means to control risk, such as suspending or disapproving the listed contract, amending exchange rules or altering the terms and conditions, emergency authority, and so on. So the CFMA abolishes the approving program before listing. The law should balance the financial innovation and necessary regulation of contract listing for public policy. Deregulation in this field is a prominent trend.The core of market surveillance of financial futures is to supervise the transaction, in order to tame excessive speculation and prevent manipulation. Speculation provides liquidity, but excessive speculation has negative effect, such as speculation bubble. Excessive speculation easily results in the risk of manipulation.The most important measure of taming excessive speculation is to restrict the Volume and open interest of speculator on the basis of differentiating the speculation and hedge. Manipulation is the illegality of making intently the artifical price, easily results in the systematic risk, so effectively stricking on manipulation is very important to prevent and control risk. To define manipulation, four elements are absolutely necessaries: (1) manipulate ability; (2) manipulate intention; (3) artificial price; and (4) causality. The legal measures of preventing manipulation include but not limited to volume and open interest limits, take preventing manipulation as core condition of marketing, give the regulatory authority strong anti market manipulation rights, claim against the civil liability of regulator. The rights of anti market manipulation thereinto shall include ceasing and withdrawing relavent qualification, emergency disposal rights, trading ban on market offenders, and modifying the exchange rules, other disruption preventive measures.The financial risk of futures market fasten on clearance.If it can effectively protect the financial integrity of the market, the systematic risk of futures market can be invoided effectively. The law shall construct tiering clearance system to detract and prevent risk. The developing trend of modern derivatives Clearance and Settlement Systems is tiering clearance, the risk of non-clearing participants and their clients is bore by clearing participants.On this base, execute rigid and effective margin system, prices limits, risk-reserve system and margin safely depositing and monitoring system etc.