The Enforceability Of Close-out Netting In The Context Of Bankruptcy In China

Derivatives market in China is relatively new and promising in respect of the future expanding.Since the trading of derivatives is highly leveraged,the transaction itself is very risky although it was originally designed as a risk management tool.Along with the economic benefit,it also brings challenges to market regulation and current practice of dispute resolution.Lacking centralized regulation,over-the counter(OTC)derivatives transactions suffer higher default risk.To solve this problem,the International Swaps and Derivatives Association has developed standard terms for the OTC derivatives transactions,which is called ISDA Agreements.In the Master Agreement,Close-out Netting has been introduced as a main tool to facilitate the future payment in any event of default risk.However,the enforceability of Close-out Netting has been questioned in China given the distinct rules in bankruptcy proceedings.More specifically,it is believed that the Close-out Netting is inconsistent with the bankruptcy administrator's right to selectively assume executory contracts,and the due process of set-off and revoking in bankruptcy proceedings.Nevertheless,the assumption and the reasoning in most existing research is vulnerable.This paper is trying to identify the exact legal issue behind each up-mentioned conflicts,and to examine whether the Close-out Netting is truly unenforceable as most research assumed.To achieve this goal,this paper will first clarify the features of derivative transactions and the Close-out netting,and then re-examine the current arguments and the goals behind the bankruptcy law.After all,this paper provides different opinions and raises new questions regarding the existing arguments,and believes that clos-out netting is enforceable in China.