Study On Close-out Netting Rules Of OTC Derivatives In Bankruptcy Proceedings

In 26 April 2021,the "The Futures Law of the People’s Republic of China("PRC")"(Draft Version)was published,and the second review draft was issued in November 2021,which was renamed to "The Futures and Derivatives Law of PRC(Draft)".The establishment of the protection of"Close-out Netting" has attracted widespread attention.In recent years,with the development of over-the-counter derivatives("OTC derivatives")transactions in China,there has been a growing call for the protection of the relevant rules through legislation.Due to the special characteristics of OTC derivatives trading,it reduces the financial risk while expanding the systemic risk in the financial field due to its volatility and virtual nature.In particular,when a party of an OTC derivatives contract enters bankruptcy,the "cherrypicking" right and offsetting defense of the bankruptcy administrator stipulated in the "PRC Enterprise Bankruptcy Law" will counter the application of the close-out netting and its prerequisite "single agreement",making the role of it in reducing risk exposure and systemic risk in the financial sector unable to play.To solve this contradiction,this paper analyzes the conflict between the rule and the theory of bankruptcy law,deeply analyze the jurisprudence behind this conflict,and try to make corresponding suggestions on the relevant legislation of protecting the closeout netting rules and coordinate with the rules of bankruptcy law mainly in the PRC Futures and Derivatives Law,taking into account the latest legislative practices at home and abroad.Chapter 1 analyzes the reasons and significance of the close-out netting rules in OTC derivatives transactions from a practical perspective,and attempts to "restate the legal discourse" of financial concepts.It is clarified that the relationship of creditor’s rights and debts of OTC derivatives trading has the characteristics of "constant changes in content,and changes of situation cannot be a justified reason for breach of contract",which surpasses the characteristics of general civil and commercial law contracts;it is clarified that the essence of the "single agreement" is to combine multiple creditor’s rights and debts relationships to one relationship,and the essence of close-out netting is the intentional termination of the contract and the negotiated offset;at the same time,the "China problem" is raised in this chapter to pave the way for subsequent theoretical study.Chapter 2 is the core theoretical analysis.The core conflict between this rule and the existing rules of bankruptcy law is sorted out in detail,and it is proposed that the bankruptcy administrator’s "picking right" in the bankruptcy law may lead to the invalidation of the close-out netting clause,and the "netting" and the "offset" in the existing bankruptcy law system" is not a conflict,but rather the view that the latter cannot achieve the goals of the rules.Chapter 3 is mainly about the theoretical justification that the system should be given special treatment by bankruptcy law.The systemic risks in the financial sector prevented by this rule represent higher legal interests,and the value order of bankruptcy law still has the legitimacy to protect the application of this system-due to the particularity of OTC financial derivatives contracts,early termination of contracts is more Conducive to"asset maximization".Chapter 4 is to investigate the current international practice and learn legislative techniques.As the first country to develop the derivatives market,the United States has undergone many revisions and careful discussions in its normative formulation.It sets exception rules in the bankruptcy code,and clears the application rules through separate legislation for our country to learn from;the United Kingdom,due to its special theory of contract law and bankruptcy law,the legislative changes that need to be made are relatively small,and they mainly play a role of comparison and supplement.Chapter 5 returns to the final purpose of this paper—to resolve the conflict between the application of close-out netting rules and the current bankruptcy rules in China.The legislative design of the three-tier structure is proposed:firstly,the exception clauses and causative rules are set up in the"Enterprise Bankruptcy Law",which not only solves the conflict but does not cause structural damage to the bankruptcy law;secondly,to further improve the expression and content of current draft of the "Futures and Derivatives Law" to ensure that the rules can be effectively applied in bankruptcy proceedings,and to further clarify the applicable subject and exception rules through administrative regulations in the future;finally,the financial stability law will be strengthened in the future to achieve multifaceted control of systemic risks in the financial field.