The Legal Regulation On Close-out Netting Of Financial Transactions

While the financial derivatives of high risk and high lever makes it play a role of riskmanagement, it also is considered one of important reasons for systematic risk. Close-out ofthe netting system as a design to solve the problem when the derivatives trading abnormallyperformed and presenting bankruptcy risk. Because of uncertainty o its legal effect in Chinaby means of regarding close-out netting as a kind of market performance. This thesis analysesthe feature comparison between the relations of close-out netting and bankruptcy offset,including termination rights and cherry-picking, netting and bankruptcy offset, singleagreement and cherry-picking. These analysis and studies undoubtedly have demonstrated thegreat value of the thesis.The content of this article contains following five parts, which mainly analyzes the legalregulation on the close-out netting of financial derivative transactions.The first part is the analysis of the conception of financial derivative securities itsfeatures and its risk as well. Because of its subjunctive character, the two parties of financialderivative trade at the variation in prices of the future. However, financial derivative also hasthe feature of the coexistence of high proceeds of high risks.In part two of this article, it attempts to analyze the legal basis of the close-out netting offinancial derivative trading. However, because of the close-out netting itself is the product ofmarket innovation, and it has great influence on traditional theory. The development of thecivil law is based on the Roman law, which has the characteristic of simple commodityeconomy. Because of its virtuality, valuableness and circulation, so it is necessary tounderstand the close-out netting on the basis of the law of civil and business and the economy.The third section mainly focuses on the application situation of the close-out nettingwhen the party of the deal is declared bankrupt. Close-out netting serves a similar function tothe bankruptcy offset which as yet has no unique definition. However, the close-out netting isintrinsically not right of bankruptcy offset, the bankruptcy offset is used after the terminationof this agreement while counting the settlement of net. Thus, close-out netting is not subject tolegal regulation become urgent problem in the present time.The fourth section intends to claim the close-out netting of the extraterritorial legislativepractice. Just like most enterprises operate in finance as a sideline in China, many enterprises lack of the basic knowledge of the features of financial derivatives. Once they are involved in,investment bank familiar with the rules of the game have got a head start. These countries’experience in establishing the close-out netting system can be taken by us for reference.Therefore, it is of great significance to the perfection of the close-out netting system in China.These countries’ experiences and lessons have important implications for the establishment ofclose-out netting in China.In the last part, this thesis proposes scheme for building the close-out netting of financialderivative transactions. On the one hand, as the current law on the close-out netting offinancial derivative of the scope hasn’t clearly defined. On the other hand, it has violated anymandatory provisions of laws and regulations, thus it may prevent the development of theclose-out netting. Furthermore, it should be defined clearly in the legislation and thus maypromote the development of China’s financial market.