The Analysis On Special Protection On Financial Derivatives

Derivatives have functions on managing and avoiding risk by concentrating risk, but they can cause risk if inappropriately used. In circumstances where a bankruptcy occurs, the other party of the derivatives needs special protection in order to protect the security of the financial market. ISDA drafts lots of model contracts which specifies the general terms of the agreement between counterparties with respect to the questions as collateral, single agreement, close-out netting, set-off and so on. We can learn how to protect the non-bankruptcy party from ISDA Master Agreement. ISDA needs to obtain legal opinions supporting their Master Agreement in relevant jurisdictions. Most countries distinguish the derivatives from common contracts in bankruptcy law. The non-bankruptcy party can enjoy special rights so that the financial market can be run well.We must develop financial market along with the process of economic globalization and financial liberalization. While China is currently moving toward the full development of its own financial derivatives markets, to date, China's experience with these has been a negative one. The current state of the Chinese financial markets on the one hand hander the development of Chinese law on derivatives, on the other hand need good legal environment. NAFMII Master Agreement (2009 Version) released by NAFMII protect the non-bankruptcy party. Some regulars in NAFMII Master Agreement (2009 Version) such as single agreement, close-out netting, set-off are in contradiction with our bankruptcy law. The protection for non-bankruptcy party of the derivatives must be confirmed in Chinese bankruptcy law in order to make financial market run well and adapt to the international trend.The paper is composed of five chapters.Chapter one analyzes the nature of derivatives. This chapter analyzes the necessity for special protection from the perspective of derivatives and discusses the possibility from the perspective of legislative purpose of bankruptcy law.Chapter two discusses the mechanism on derivatives from the ISDA Master Agreement when one party falls in bankruptcy. ISDA Master Agreement provides the non-bankruptcy party special protection through a system including single contract, close-out netting and set-off and so on.Chapter three analyzes the special protection on derivatives of bankruptcy law in different countries. This chapter specifically introduces special protection to derivatives on bankruptcy law of the United States, Britain, and Japan. We can learn how to protect derivatives from the legal experience of these countries. Chapter four analyzes our current financial derivatives market and current research in special protection. This chapter states the essential of constructing special protection system on derivatives in our bankruptcy law.Chapter five constructs special protection system on derivatives mainly though developing financial derivatives transactions law and amending Chinese bankruptcy law.