Bankrupt Risk Protocol Control Mechanism In Financial Derivatives And Its Legislative Protection

As a global innovative financial product,financial derivative transaction emerged and flourished in the 1970 s,and became a main method for financial market participants to invest and hedge risks.However,while optimizing resource allocation and increasing market liquidity,its high risk also aggravated counterparty credit risk,which might lead to the "domino effect" of bankruptcy and brings hidden dangers that is detrimental to stability of financial markets.For the purpose of maintaining the stable development of the international financial derivatives market,ISDA has issued a series of standardized agreements,including master agreement and credit support documents.Among them,single agreement,close-out netting and credit support arrangement can mitigate counterparty credit risk in financial derivative transactions,and provide special protection for non-bankrupt parties in transactions,preventing the risks and losses caused by insolvency parties from spreading to the entire financial market through counterparties.China's National Association of Financial Market Institutional Investors also introduced corresponding bankruptcy risk protocol control mechanism,which effectively controls bankrupt risk and systemic risk,thus is of great benefit to the steady development of financial derivative transactions.Nevertheless,this special risk-control mechanism conflicts with the insolvency administrator's cherry picking right and revoking right in traditional bankruptcy law in most countries,as well as China's guarantee law,thus probably being deemed invalid due to violation of these mandatory provisions.In order to ensure the enforceability of the bankruptcy risk protocol control mechanism in financial derivatives,some jurisdictions have established special protection systems for financial derivative transactions.For example,the United States has established "safe harbor" rule in bankruptcy law;European Union recognized special bankruptcy protection mechanisms,such as credit support arrangement and close-out netting in financial collateral,through Financial Collateral Directive.However,China has not yet established special protection system for financial derivatives at the legislative level.This leads to the fact that China's financial derivative market is at a competitive disadvantage and is in urgent need of reform.This dissertation will be divided into four sections.The first section conducts a basic analysis of bankrupt risk in financial derivatives through the introduction of current status and characteristics of international financial derivative market,and then analyzes the ISDA bankrupt risk protocol control mechanism and its functions,mainly including single agreement,close-out netting and credit support arrangement.The second section analyzes the conflicts between these systems and traditional bankruptcy law rules in most countries and China's guarantee law,and then advocates protecting the financial derivative bankrupt risk agreement control mechanism at the legislative level.The third section compares the special protection system regarding insolvency risk in financial derivatives established by the US,British and European legislation.These special protection mechanism ensures the validity and enforceability of bankrupt risk protocol control mechanism in ISDA agreement,thus being worthy for reference.The fourth section states the status quo of ISDA bankrupt risk protocol control and its legislation protection mechanism in China,and discusses the necessity of establishing a special protection system dealing with bankrupt risk on legislative level.With the legislative experience and practice of developed countries to execute special protection to mitigate bankruptcy risk in financial derivatives,this section put forwards suggestions for building China's special protection system regarding bankruptcy risk in financial derivative transactions.