The Enforceability Of Close-out Netting Of Derivatives Transactions Under PRC Bankruptcy Law

During the recent years,the Chinese derivatives market is developing rapidly.Meanwhile,the relevant supervision rules and regulations have been improved accordingly.However,close-out netting provisions which are used frequently in derivatives practices worldwide are not expressly recognized under the PRC law,therefore there is uncertainty with regard to its enforceability in China,especially in bankruptcy proceeding.On the one hand,bankruptcy is one of the most important events of default under master agreement and will trigger close-out netting provisions.On the other hand,the whole mechanism might be challenged and held invalid under PRC Bankruptcy Law.This issue directly affects legal risks calculation of transactions engaged by Chinese market participants and therefore attracts high attention domestically and internationally.This article will focus on the close-out netting mechanism.It will give a brief overview about the content and application conditions of close-out netting,practices and derivatives markets in China and then discuss the issue of its enforceability under different situations in PRC bankruptcy proceeding on the basis of empirical and comparative analysis.Besides introduction,this article can be divided into five parts.The first part will describe the relevant practice of close-out netting provisions in China at present,raise the core topic of this article and summarize the innovation points of this study.Next part will discuss in details regarding how PRC Bankruptcy Law may challenge the close-out netting from the perspective of relevant regulations and potential legal conflicts.The third part of this article will focus on how outcome will be different in various situations under current bankruptcy rules.Part four then will describe the landscape of other countries law regimes for close-out netting provisions on the basis of comparative analysis and examine the case for close-out netting and the case against it as well.In the end,based on current policies and opinions from Chinese regulators,this article will provide suggestion upon improvement of our regulation and also the practical advice with regard to the exercise of close-out netting so that to help non-faulting party to better avoid conflicts and achieve the purpose of close-out netting mechanism.