The Legal Study On The Anti Credit Risk Measures In International Financial Swap Transactions

Financial swap has been a novel financial derivatives transaction in the international capital market ever since 1980s.The legal essence of financial swap is a kind of payment contract. The participants agree to exchange periodic cash flows during the contract time in order to shift financial risk and even profit out of it in compliance with laws and regulations. Chapter One starts with its nature of contract to introduce cross currency swap as the source transaction as well as credit default swap the latest development of international financial swaps. With financial derivatives out-of-counter transaction, financial swap bears superior credit risk and it leads to a debate on the current subprime mortgage crisis in USA.. The first chapter exhibits the single agreement approach for structured financial swap contracts. The single agreement establishes a solid foundation for series swap transactions to employ close-out netting and credit support arrangements to protect participants against credit risk. Chapter Two stresses the key mechanism of close-out netting whose points are early termination, triggered by the stipulated default or termination events under the master agreement, of all the relevant swap transactions and, after netting, resulting in a single net payment rather than gross payment. It truly reduces credit risk confronted by the non-defaulting participants. However, the close-out netting is a comprehensive process with mutual consents admitted and recognized by the authorities, especially, with one participant under bankruptcy. Because close-out netting relates to preferential recovery and its enforcement is usually to be challenged by bankruptcy law. Those legal regimes with developed financial industries have passed lawmaking to sustain the risk-reduced function of close-out netting. Chapter Three describes that credit support arrangement which is an atypical security defends credit crisis in the real payment of international financial swaps. Though it is also subject to particular local laws with perfection requirement, the credit support should satisfy the efficiency in the financial market. Major legal regimes have been dedicated to the simpler use of credit support for the purpose of safety. Through this dissertation, it refers to ISDA documentation, the model and also customary practice for international financial swaps. ISDA documentation contains a master agreement to form a single agreement with close-out netting and credit support arrangement. The three contractual mechanisms combine with one anther to protect the participants against credit risk. Following the comparison among those local contract laws, security laws and bankruptcy laws, it becomes clear what is more suitable for the application of ISDA documentation. The applicability of ISDA master agreement to credit default swap is covered. Terms and conditions are of most importance for credit default swaps to keep credit risk confirmed by some outstanding cases. Credit default swap is an exotic swap which possesses a mixture of swap and other financial derivatives. Special consideration is given to it. Chapter Four researches on the feasibility and practicability to introduce ISDA documentation with its contractual mechanisms to mainland China.And based on the theory and empirical evidence, it affirms the documentation between risk and welfare. The new laws and regulations are to be under construction to safeguard the financial swap in mainland China.