The Legal Research Of Subordinated Debt

Subordination means some creditors can be paid after the other creditors under certain circumstances by their terms or by law. And it is subordinated debt. As a new financial derivative, it has great function but giving rise to market risk at the same time. Constructing the legal system is needed to avoid the risk and maximize its function.First, subordinated debt's legal effect is questioned for it contradicts the mandatory principle of equal set-off. The foreign countries resolve this problem by setting contracts or modifying the statutes.In our country, as subordinated debt is always applied in finance and security area, judicial experience about it is lack. So it is better that the Supreme Court issues some judicial interpretations to regulate the general problems of subordinated debt's appliance.Judicial interpretations issued can raise the legal rank of subordinated debt, and then break the constraint of bankruptcy law. Secondly, subordinated debt gets a long term and is difficult to flow; hence its liquidity risk is high.Those multi-institutional investors should be encouraged to do rational investments in subordinated debt. But since subordinated debt is at the initial stage in China, natural persons should be excluded from the direct investors of subordinated debt.When broadening the scope of institutional investors,we must prohibit the banks from having each other's subordinated debts. Building currency platform of subordination securities relies on the constructions of market transactions, bonds settlement agencies and securities trading counters.Among them, market transactions are of great importance.What's more,securitization of subordinated debts can enhance its market vitality. Third,protect the subordinated creditors'rights to the maximum extent.Subordinated creditors play a major part in regulating the financial market and reducing the credit risk of subordinated debt to the least.To protect creditors'right of knowing, it is needed to consummate the legal procedures of choosing rating agencies, establish rating tracking system and clear the strict responsibilities when rating report or information disclosed is untrue.On the other hand, establish the legal system of subordinated creditors meeting.The procedures of convening meetings, exercise of voting rights and so on should be more concentrated.