Legal Research On Mandatory Margin Rules

The global financial crisis in 2008 exposed the great risks of non-centralized trading and liquidation of OTC financial derivatives markets.In the 2009 G20 Pittsburgh summit declaration,the participating countries and regions reached a consensus on strict supervision of the OTC financial derivatives market and implementation of a strict margin system for non-centrally cleared OTC financial derivatives.At present,many participating countries or regions have formulated and implemented mandatory deposits.Although China has fulfilled a number of financial regulatory commitments,it has not yet issue the mandatory deposits for non-centrally cleared OTC financial derivatives.China's OTC financial derivatives market is still in its infancy,However,we must learn from the hardships of developed countries on OTC financial derivatives,adhere to the principles of prudential supervision and moderate supervision,consistent with international regulatory standards based on our country's actual conditions.Firstly,this article begins with the conception of OTC financial derivatives,compared with the financial derivatives trading on exchanges and OTC financial derivatives,non-centrally cleared models and Central Counterparty models,introduces the framework requirements of the mandatory margin rules of non-centrally cleared OTC financial derivatives.Seconly,this article demonstrates the necessity of introducing this margin system in China from the perspective of preventing systemic risks of OTC financial derivatives and promoting the central counterparty's centralized clearing process,analyzes that the mandatory margin rules complies with our country's prudential regulatory objectives for the financialderivatives market and does not conflict with the CSA issued by ISDA.Thirdly,this article introduces the margin rules in other countries or regions,such as the United States,the European Union and Hong Kong and have a evaluation and summary.Finally,this article puts forward some suggestions for our country to introduce this system,defines mandatory margin system from legal attribute,builds a legal system from multiple aspects(such as the subject element,the object element,the scope of application,the method of transfer,the minimum transfer amount,the time of mandatory deposit,the asset separation requirements),the article suggests that the Futures Law should extend the supervision of OTC financial derivatives,including the margin rules into the scope of Futures Law,and clarifies the possible legal obstacles in the field of guarantee law and bankruptcy law for the margin rules and proposes legal suggestions.This article is divided into four chapters.The main contents of each chapter are as follows:Chapter ?: Overview of the mandatory margin rules of non-centrally cleared OTC financial derivatives.After the 2008 financial crisis,from G20 Pittsburgh Summit released the declaration to the Financial Stability Council released five major reform measures including the mandatory margin rules,G20 indicate the regulatory objectives for OTC financial derivatives by increasing the cost of transactions to implement the mandatory margin rules,in order to promote the establishment of the centralized clearing mechanism for global central counterparties and prevent systemic financial risks.At present,most countries or regions have already formulated and implemented the margin rules in stages.China has yet to begin.Section ?: This Section introduced OTC derivatives,compared the OTC transactions with on-floor trading,it can be seen that there are inherently high risks and high leverage in OTC financial derivatives.Although China has taken the lead in establishing a central counterparty clearing mechanism,there are still many OTC derivatives that are not included or cannot be included in centralized liquidation in China.Section ?: This section introduced the background of the mandatory margin rules,G20 summit begins to raise higher capital requirements for non-cetrally cleared OTC financial derivatives in 2009.Basel Committee on Banking Supervision and International Securities Regulatory Commission jointly study and formulate global standards and formed a Working Group on Margin Requirements to draft theinternational standards for margin rules in 2011.The Basel Committee on Banking Supervision and the International Securities Regulatory Commission jointly issued“Margin Requirements for Non-centrally Cleared Derivatives” includes a total of eight key principles in 2013.The Basel Committee on Banking Supervision and the International Securities Regulatory Commission jointly issued “Margin requirements for non-centrally cleared derivatives”(including scope of application,type of margin,time of implementation,requirements for qualified collateral,etc.)in 2015.However,the international standards of the mandatory margin rules issued by BCBS and IOSCO are soft law,whether it is implemented depends on country or region itself.Chapter ?: Necessity and feasibility analysis of China's introduction of the mandatory margin rules of non-centrally cleared OTC financial derivatives.This chapter believes that judging from the necessity,the introduction of the margin rule in China will help prevent systemic risks,advance the CCP process,and fulfill China's commitment at the G20 Pittsburgh summit,avoiding the margin rule in other countries or regions that will adversely affect our institutions;From the perspective of feasibility,the introduction of this system is in line with China's regulatory objectives for the financial derivatives market and is in line with the “Twelfth Five-Year Plan”.In addition,it is feasible at the legal level,and is compatible with the existing ISDA and NAFMII.The Credit support documents for ISDA and NAFMII are set by self-regulatory organizations,there is no mandatory,and exist arbitrariness in the formulation of margin contracts.As centralized clearing brings higher liquidation costs and corresponding margin requirements,OTC derivatives market participants are not willing to conduct such centralized liquidation.By increasing margin requirements,It can promote the conversion from non-centrally clearing to CCP mechanism,promote the reform of the OTC financial derivatives market initiated by G20 member countries since 2009,thereby further to reduce systemic risks.Chapter ?: Progress of the mandatory margin rules in other countries or regions.This chapter details the mandatory margin rules in the United States,the European Union and Hong Kong and their implementation schedule,including regulated entities,applicable product range,initial margin,variable margin,qualified collateral,minimum transfer amount,margin delivery time,close-out netting requirements.In order to achieve "Stones from other hills,can learn".Section ?: In October 2015,the relevant prudential supervisory agency of theUnited States passed the final version of the margin rules for swaps and securities swaps.In December 2015,the US Commodity Futures Trading Commission issued the final version of its mandatory margin rules.Section ?: On December 15,2016,According to the requirements of the European Market Infrastructure Regulation(EMIR),The European Regulation Agency(ESAs)has formulated the “Technical Regulations on Risk Mitigation of Non-centrally OTC Derivatives” as a compulsory deposit system at the EU level.Section ?: On January 27,2017,the Hong Kong Monetary Authority(HKMA)issued a new margin rule “Non-centrally OTC Derivatives Trading—Margin and Other Risk Mitigation”.Section ?: On the whole,the United States,the European Union and Hong Kong and other countries or regions have formulated their respective margin rules in accordance with the framework principles issued by BCBS/IOSCO,similarities in these systems effectively reduce compliance and regulatory costs.Since the market generally reflected that it was unable to complete the relevant preparations on time,the various regulatory agencies formulated different transitional period arrangements and actually postponed the implementation schedule of the mandatory margin rules.The delayed implementation of the international mandatory margin rules provides opportunities for China to study and introduce the system,which is conducive to China's catching up with other countries or regions as soon as possible for the supervision of OTC financial derivatives.Chapter ?: The legal construction of mandatory margin rules in China.This section suggested that China refer to other international regulatory entities,based on the framework requirements of the mandatory margin rules developed by the BCBS and IOSCO,combining the actual development of OTC derivatives in China,drafte and implement the mandatory margin rules in stages.The similarity of the rules is conducive to improving the efficiency of supervision,reducing the cost of supervision and compliance in various countries,preventing regulatory arbitrage,and having good operability.Section ?: This section defines the legal attribute of the mandatory margin rules and distinguishes it from the traditional collateral,the futures margin system,and the central counterparty margin system.Mandatory margin is relatively independent,bidirectional,dynamic and mandatory.Section ?: Through refer the BCBS/IOSCO international standard,the content ofthe margin rules that have been implemented in Europe and the United States,and the NAFMII credit support documents,this section attempt to implement the margin rules in China.The subject elements should be basically consistent with the BCBS-IOSCO regulatory standards,the object element(eligible collateral)should be a highly fluid substance,the scope of application should consider all OTC derivatives transactions that have not been cleared through the central counterparty,the transfer method includes security interest financial collateral arrangemant and title transfer financial collateral arrangement,the minimum transfer amount fully refers to Europe and the United States,NAFMII,and consider the actual situation in China,margin delivery time is recommended to before T+1 days,finally proposed the asset separation requirements.Section ?: The mandatory margin system should be adjusted by the Futures Law.In our country's laws,the transferability of cash as a legal collateral security is not sure and transfer of ownership is similar to the transfer guarantee system,the stipulation of the right of revocation in the Enterprise Bankruptcy Law all constitute legal obstacles to the implementation of the mandatory margin system and should be revised and improved.