The Futures and Derivatives Law of
The FDL Framework
Before the FDL, derivatives trading was indicated in the
Such provisions align with the
Netting under FDL
Netting refers to the consolidation of multiple payments, transactions, or positions between traders. Traders can offset one position with an opposite position to balance the loss of one position with the gain of another. For example, a service company purchases office supplies from a single supplier at a total cost of
Under Article 35 of the Law, in the event of an agreed situation in derivatives trading based on a single master agreement, the transaction may be terminated as agreed, and all trading profits and losses under the agreement shall be settled on a net basis. The netting settlement conducted by the provisions of the preceding paragraph shall not be suspended, invalidated, or revoked due to the entry of bankruptcy proceedings of any party to the transaction according to law.
Close-out netting under FDL
Close-out netting refers to the system agreed upon by derivatives traders through a master agreement and utilised when any party defaults or termination occurs. In close-out netting, all derivatives contracts of parties will be terminated regardless of whether they are due or not, and the final value of all terminated traders' positions under the master agreement will be calculated, and netting will be conducted to determine a single net payable or net receivable, and a one-way net payment obligation will be generated. The system is the basis of international derivatives trading, which is conducive to avoiding risk infection caused by the default of a single market entity. Equally, it reduces systemic risks, improves the efficiency and stability of the derivatives market, and simultaneously contributes to fair competition in the international market environment.
Under Article 37 of the Law, for derivatives trading settled centrally by the qualified central counterparty, close-out netting can be implemented according to law; Settlement property shall be prioritised for settlement and payment, and shall not be sealed up, frozen, detained or enforced; nor shall it be appropriated by anybody until the completion of settlement and payment. The centralized settlement according to law shall not be suspended, invalidated, or revoked due to the entry of bankruptcy proceedings of any party to the transaction according to law.
FDL in bankruptcy proceedings
The adopted FDL provides clearer provisions for bankruptcy proceedings. Particularly, the word "act of netting" in the previous draft is deleted, instead, the FDL adds the context of "suspension" based on the "(it) shall not be invalidated or revoked due to the entry of bankruptcy proceedings of any party to the transaction according to law". The provision clarifies the position of netting in bankruptcy and further defines the legal effect.
Equally, it indicates that the FDL prevails over any conflicts in Bankruptcy Law of the People's Republic in
With the FDL, close-out netting is legally recognised and clarified. The promulgation also ends any uncertainty to the validation of similar clauses in the ISDA master agreement. In conclusion, the FDL plays a substantial role in the development and stabilisation of
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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