| Central counterparties(CCPs)are traditionally regarded as an important but inconspicuous part of the financial market infrastructure.The capacity of the CCPs clearing system to reduce systemic risk was highlighted after the 2008 financial crisis,which obviously attracted the regulators.CCPs provide clearing services to their members,reducing risks and improving the efficiency of post-transaction and pre-liquidation.The transaction risks are transferred to CCPs,so that the clearing mechanism,which acts as a firewall,preventing the fast spread of such risks.Specifically,if a major financial market participant fails to fulfill its obligations to its counterparty,i.e.another financial institution,the failure of the market participant may be contagious.The risks could spread out through the significantly interrelated financial system,and make the interconnected financial institutions collapsed one after the other,unless the regulators were able to play a supporting role in the first domino before it fell.A failure of a systemic important financial institution will put the entire financial system at risk,in which way the entire financial market is no longer run in an orderly manner.Therefore,the financial market cannot guide the funding flows through market,which may finally have adverse effect on the real economic activities.However,under CCPs clearing mechanism,even if a major market participant collapses,the CCP can prevent the risk of membercollapse to spread to other financial institutions.This is because,the CCP requires its members to submit margin and collateral for security and management of default event.In addition,the CCP has other benefits of such as improving transaction efficiency,reducing the information gap between traders,simplifying the complex trading to a simpler obligation,accelerating liquidation,generating more accurate market information to regulators and eventually reducing systemic risk.A regulatory consensus after the 2008 financial crisis was to trade and liquidate high-risk financial products through a secure,powerful CCP clearing mechanism.Regulatorsat countries and international level shave,in the post-financial crisis era of regulatory reform,mandated the CCP clearing mechanism to improve the transparency and stability of the financial market.The market has quickly established a system as a response to regulatory reform of OTC derivatives.However,many argumentsquestion CCP's abilityto control systemic risks from practical and academic points.The first point is,CCPs cannot eliminate the actual loss in the economy,but reduce the risk mainly through transferring losses to other places.Some financial institutions are too systematic connected and too big to fail.By mandating CCP as a financial market infrastructure,it could play the role of fortress,i.e.cutting off the risks and losses of channels,and transfer the risks and losses to another channel.However,when the enemy,i.e.systemic risk goes along another channel and slides inside the fortress,it also has a destructive effect on the financial market.The CCP serves as a fortress and transfers the risk to itself,so that it may be affected by systemic risks when it plays a role in rescuing a collapsed member.The second point is,the CCP clearing system cannot control systemic risk when a numbers of systemic important financial institutions collapse.The main purpose of CCPs is to prevent the failure of individual companies from spreading through the interconnected financial system,but the financial crisis is not only caused by the failure of a single market participant.If several major market participants are collapsing at the same time,the whole financial market will become precarious because of its high connectedness.When the financial crisis occurred,the panic came from haircut,deterioration of price andcollateral value,and the interrelated financial institutions ceased to trade with each other.The CCP clearing system cannot control this top-down asset price spiral and panic.As China is constructing and perfecting the legal system of its OTC derivatives market,it is necessary researchers and market participantsto straighten out the difficulties of the mandating of CCP,to discuss the internal contradictions of the CCP,and to refine the technical legislative techniques.The main difficulties should include: what types of financial products should be compulsorily cleared;what are the standards for eligible cleared OTC derivatives contracts;whether liquidation should be mandatory or not;how to regulate cleared(or non-cleared)transactions;where to establish the CCP clearing houses;the CCP's membership requirements,operation rules,default management rules and etc.Every above-mentioned detail plays a core role in designing a sound CCP clearing system,and if the rules cannot be effectively formulated,it is possible to hinder the development of new rules.This dissertation focuses on the legal basis,legal status and internal contradictions of the CCP clearing mechanism,and examines the legal techniques of the regulators to implement the CCP clearing mechanism,and finally gives some suggestions about the construction of the CCP clearing mechanism in China.It is one of the core issues of this paper that in which way could CCP achieves these important effects.This dissertation is written into four parts,so as to sort out the basic legal issues and legal difficultiesof CCP.It takes the practices of the international OTC derivatives transactions as the starting point,examining the CCP practice and putting forward to solve the problem of the absence of the CCP clearing system in the China's OTC derivative market.The first part gives a general introduction to the CCP clearing system and points out the question of the absence of the CCP clearing mechanism in China.Firstly,the dissertation introduces the origin and development of the clearing house,and then summarizes the advantages of CCP based on the discussion on its role in 2008 financial crisis,i.e.,a strong technical and market risk management capability,and briefly introduces a brief introduction the reform trends and regulatory priorities of CCP in OTC market in post-crisis era.Secondly,it clarifies the necessity of constructing the CCP clearing system in OTC derivatives market in China.Based on the practices and conditions of the OTC derivatives market in China,this dissertation introduces the benefits of the CCP clearing mechanism.Theconstructive functions of the CCP are,it partly solves the problem of information asymmetry problem and it introduces other benefits in regulation of the OTC market.The close-out netting can effectively reduce the counterparty credit risk of the market participants.Although CCPs can only transfer rather than eliminate risks,it may has the risk of being a too big to fail and introducing moral hazard.In the context of global financial integration,it may also leads to regulatory arbitrage.However,we should recognize that CCP is not a cure-all method for managing risks in futures market and OTC derivatives market,but rather be an integral part of the global financial market infrastructure,where other infrastructuresshould also play roles in risk control.There are different layers of obstacles in constructing a CCP prescription.The first layer is the logical defect of the legal system and the second one is the technical design of the mechanism and the implementation obstacle,such as the rapid update of international standards,or cross-border supervision,etc.It is suggested that the problem of internal logical defect should be firstly dealt with and then,through international cooperation,to promote the CCP mandate.A country should never refuse to update its legal mechanism and reduce gap between international standards building the CCP clearing mechanism.The second chapter discusses the theoretical issuesin-depth onconstructing CCP clearing mechanism in China's OTC derivative market.Firstly,the theory of CCP should be based on the transfer of agreement,which is different from the two main theories,when considering the contents of two theories and the legal practices of Chinese laws and regulations.Secondly,as for the legal status of CCP,CCP should be a party to the contract regardless of what theory the Chinese mechanism should take.The reason is made on the fact that the main benefits and function of CCP is that it bears and enjoys the obligations and rights of the original contract and acts as a party to the contract,in order to promote close-out netting and to reduce counterpart risk on behalf of all the participants in the financial market.After clarifying the basic theoretical issues,the third part of the dissertation,focuses on the international practices of regulating the OTC derivative market from the perspective of CCP prescription.Through discussing the problems in regulation of the China's OTC derivative market,the dissertation highlights the undergoing CCP prescription by summarizing the European Market Infrastructure Regulation and the U.S.Dodd-Frank Act.With analysis of different regulatory frameworks,this dissertation introduces the international standards and the undergoing reform of the CCP,and draws lessons from it.The last part of this dissertation is about the suggestionon constructing CCP Clearing mechanism in China's OTC derivativemarket.First of all,to build a complete legal framework,it is suggested that the legal basis of the central counterparty system should betransfer of contract,and the legal status of the central counterparty should be the party to contract.Secondly,regarding the legal effect of close-out netting,after summarizing the relevant provisions of the P.R.C Enterprise Bankruptcy Law and other mandatory legal principles,it is suggested that China should establish Safe Harbor to protect the close-out netting of OTC derivative contracts involved CCP from declaring from applying of such mandatory rules.The Safe Harbor system in the U.K should be carefully examined and studied in this regard.Secondly,from the pre-default risk control and default management,it is suggested that a sounded and complete system of risk control should be established,such as membership management,default management,waterfall system and etc.Considering the fact that Shanghai Clearing House is acting as the sole CCP in China's OTC derivative market,this dissertation lastly introduces the rules and regulations of Shanghai Clearing House.It is suggested that self-discipline should take more parts in regulating China's OTC derivative market. |
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