Cohesion And Application Of The Close-out Netting And The Bankruptcy Law

For the flexibility,derivatives have become the main risk hedging tool for commercial transactions.However,due to the lack of standardized management and supervision of over-the-counter transactions,coupled with the existence of intertemporal,leverage and fictitious nature of derivatives,the OTC derivatives market implies greater credit risk.In recent years,under the impetus of ISDA,both parties in OTC derivatives transactions have reduced transaction risks by Close-out Netting Clause,thereby reducing systemic risks in the entire derivatives market has gradually become an industry practice.However,the reduction of financial market system risk and the improvement of financial market operation efficiency pursued by the termination of the net settlement system conflict with the principles of protecting the integrity of bankrupt debtors’ property and treating creditors fairly in the Corporate Bankruptcy Law.Therefore,in the case of a bankruptcy breach by a party,once the applicable time of the Close-out Netting coincides with the bankruptcy-related procedures,it may not be effectively applicable due to the contradiction with the bankruptcy offset and bankruptcy cancellation right.In order to ensure the effective operation of the Close-out Netting,many countries or regions have clearly recognized its effectiveness.For example,the United States has explicitly exempted the termination of the netting system through legislation such as the Bankruptcy Code,while the United Kingdom has with its unique Bankruptcy Compulsory Offset System and Defective Asset Theory,it produces the same effect as the termination of netting.Although we introduced the Chinese version of the ISDA Master Agreement,the NAFMII Master Agreement(2009),the legislation does not yet have a legal concept that fully corresponds to the termination of net settlement,and the lack of regulation and supervision of OTC derivatives makes the NAFMII Master Agreement itself is not enough to ensure the deterministic application of the termination of the net settlement system,which largely hinders the rapid,stable and international development of my country’s derivatives market.In response to the above problems,this article first explains the rationality of the Close-out Netting through the method of legal interpretation.In fact,the essence of OTC derivatives contracts is "contracts." The Close-out Netting Clause is to prevent special risks in the financial market and to achieve the purpose of hedging by market entities.It has no intention to harm the interests of other bankrupt creditors.For the principle of favor divortii,Close-out Netting should be valid.In addition,in practice,the regulatory authorities clearly support the Close-out Netting.Out of respect for financial transaction practices,the judicial department has not yet issued a ruling that denies the Close-out Netting Clause.Therefore,this system is enforceable in China.Regarding the problem that the Close-out Netting cannot be applied with certainty in our country,this article attempts to find an explanation and application for Close-out Netting under the provisions of the current "Bankruptcy Law".The Close-out Netting system can be divided into two steps: "Early Termination" and "Netting".First,in the context of China’s prudent handling of the bankruptcy of financial institutions,the“Automatic Early Termination” clause in the supplementary agreement can be used to advance the early termination of derivative contracts until the financial institution applies for bankruptcy reorganization or When the regulatory authority’s takeover period expires in case the "netting" falls into "within six months before the bankruptcy application is accepted".So as to avoid the conflicts between "early termination" and the bankruptcy set-off rights and cherry-picking.Second,according to the definition of termination of netting,this system itself does not include the “actual payment” of the final net payment,so it has no conflicts with the right to cancel bankruptcy.Furthermore,in order to ensure that the non-defaulting party obtains all the benefits under the contract,both parties to the transaction can learn from the experience of the “Daily Debt-free Settlement” of the derivatives transaction,and agree on a shorter term through supplementary clauses in the “performance guarantee document” The settlement time interval ensures that both parties have sufficient collateral for repayment,and reduces the amount of bankruptcy claims that the non-defaulting party needs to declare to the bankruptcy administrator after the Close-out Netting.