The Legal Conflicts And Effects Of Derivative Transaction's Credit Support Arrangement Under Chinese Law

The counterparty credit risk is the main transaction risk in OTC derivative transactions, which played as the blasting fuse in the latest global financial crisis. China has adopted the widely used international financial derivatives model transaction agreement enacted by International Swap and Derivatives Association (ISDA) and its credit support annex (CSA) and has made it mandatory applied in China's domestic derivative transactions. However, the provisions provided in the credit support annex regarding the collateral and net settlement mechanism conflicts with China's current security law and insolvency law, which arises ambiguity in legal effects.Chapter ? of this article analyzes the legal characteristics of the widely used Credit Support Annex of ISDA master agreement, which originated from mature derivative transaction rules of developed countries under Anglo-American law system. Chapter ? focuses on NAFMII master agreement and its two CSA attachments, which have adopted the fundamental transaction principles and collateral regimes from ISDA documents. Chapter ? then argues that some credit support provisions conflict with the current Chinese law, which prohibits fluidity agreement under its Collateral Law and does not recognize the application of netting settlement under its Bankruptcy Law. Chapter ? further indicates the attitude from regulatory authorizes and judicial system towards the aforesaid legal conflicts and proposes some applicable transactional agreement designs to prevent legal risks under the existing legal conflicts and ambiguities.