Research Of Legal Protection For The OTC End-users’ Rights

Over-the-counter(OTC) derivatives have been described as the combination of angel and devil. OTC derivatives are important financial tools used by financial markets participants for the purpose of risk management and wealth increasement. Since the rise of the OTC derivatives market in 1970 s it has experienced a explosive growth, which made its global market size nearly ten times that of Exchange-traded(ETD) derivatives, due to the characteristics such as flexibility, personalization, high-leverage and light regulation of such transactions. However, those characteristics bring both superiorities and defects, decided that OTC derivatives are born with high profits and high risks, and the possible destructive effects brought by the high risks were clearly showed in a number of disputes involving huge losses and the US subprime mortgage crisis, which caused more international concern regarding the strengthen of supervision and investor protection. China’s OTC derivatives market is still in its early stage of development, to improve the legal system of End-users’ rights protection is the prerequisite of further development of it. As shown in numerous cases, the institutional deficiencies of legal system which regulates Dealers’ acts of promotion and sale of OTC derivatives products are the key reasons for the disputesbetween Dealers and End-users. Thus, regulations concerning Dealers’ duties of suitability and disclosure shall be improved to regulate Dealers’ promotion and transaction acts, safeguard the fair market order, and protect End-users’ legal rights. This paper is divided into six chapters as follows:Chapter I introduces the question to be researched and defined the scope of this research. By reviewing and analyzing the KODA event and other relative cases, this chapter examines the structure and characteristics of the OTC derivatives products, highlights the Dealers’ irregularities in the process of promotion or sale in the cases, and points out that the Dealers’ failure in performing or under-performing their duties of suitability and/or disclosure is the key causation of such disputes on the basis of cases summarization. Thus, this paper will mainly analyze the legitimacy and the due contents of Dealers’ duties of suitability and disclosure in OTC derivatives transactions, analyze the weaknesses and inadequacies of the current regulations and discuss the ways to perfect them.Chapter II illuminates the necessity of inclined protection for End-users in the OTC derivatives transactions and the starting point of such regulation. This chapter firstly analyzes the definition and characteristics of OTC derivatives, points out that the OTC derivatives is essentially a kind of contract, which will be performed in the future, with double-virtual, zero-sum, high leveraged, personalized, lacking of transferablility, specifically complex and professional, clustered and high risky features. These features decide that the relationship between Dealers and End-users of the OTC transactions have two basic characteristics, which can be described as confliction of interest, and asymmetry of professional competencies and information. The last part of this chapter concludes the need to give the End-users whose rights are prone to be infringed inclined legal protection based on the foregoing analysis, and points out that such legal protection shall be based on the principle of autonomy and the idea of substantial fairness and justice of civil law, and focus on the elimination of the asymmetry in the relationship. The idea of suitability and duty of disclosure is consist with such regulation starting point, thus the duties have solid legitimate basis and shall have their seat in the OTC market regulations. Besides, when discussing theways to perfect relevant regulations the due contents of such duties shall be kept in line with such basis point.Chapter III and Chapter IV respectively present the definition of suitability and duty of disclosure, clarify the contents of such duties more clearly by introducing and comparing their contents in other countries’ relevant regulations, specifically conclude relevant changes the Anglo-American countries made in their financial regulatory reforms and the developing trend, so as to provide some beneficial reference and basis for the regulatory promotions of our country’s regulations of suitability and duty of disclosure in the later chapters.Chapter V analyzes the current status and deficiencies of China’ s regulations concerning suitability and duty of disclosure that can be applied in the OTC market. The first part of this chapter generally introduces the current develop situation of China’s OTC market and the supervision pattern, classifies the exact provisions relating to suitability and duty of disclosure, and gives a big picture of the background of the regulation promotion from a overall perspective. The second part illuminates the deficiencies respectively from the dimensions of overall regulations and specific provisions.Chapter VI proposes some recommendations to improve the current regulations and make up the above mentioned deficiencies on the basis of the previous studies. Firstly the supervision pattern should be perfected to avoid either overlap or vacuum by developing functional supervision and coordinating the institutional supervisions of different authorities. Secondly the legal system shall be improved to solve the current questions such as non-systematic, ambiguous and lacking of enforceability by conducting special legislation of high legal hierarchy on OTC transactions and financial investors protections. Finally some ideas are given to perfect the detailed contents and civil liability of suitability and duty of disclosure in specific regulations.