The termination of the netting system is not only of positive significance to the contract subjects, but also plays a certain role in reducing the systemic risks in the derivatives market. On the one hand, the termination netting system can reduce the credit risk of the contract subject: under the termination netting arrangement, the risk exposure of the counterparty will be greatly reduced, which will help control the credit risk of the counterparty; On the other hand, it is beneficial for financial institutions to improve the efficiency of capital utilization: due to the great role of terminating net settlement in reducing credit risk, the new Basel Capital Accord conditionally recognizes the termination net settlement clause, that is, if the termination net settlement is effective, it can be considered when calculating the capital adequacy ratio. In this way, the same capital can support larger-scale financial derivatives transactions, thus greatly improving the efficiency of capital utilization. For financial markets, by reducing the credit risk among market participants, the termination of the netting system greatly reduces the overall risk of financial derivatives, thus effectively reducing the systemic risk of financial markets and financial institutions.
The relationship between the three institutional foundations of ISDA general agreement
Single agreement, defective assets and termination net settlement constitute an organic whole, which makes the framework structure of ISDA master agreement obviously different from other types of contracts.
(1) A single agreement is the institutional basis and premise of the three, which makes it possible to terminate the net settlement system for defective assets. Because only on the premise of a single agreement, all the components of the master agreement constitute a single and complete agreement between the two parties to the transaction, and one party's failure to perform any documents or obligations under the transaction constitutes a violation of the whole agreement, then the other party to the transaction has the right to start the default event handling procedure under the master agreement to safeguard its own rights and interests. In addition, only under the premise of a single agreement, once the default event or termination event agreed in the master agreement occurs, it is possible for both parties to terminate all unexpired transactions in advance and calculate the termination amount, thus promoting the realization of the termination net settlement system.
(2) A single agreement is not an end, and it will eventually be embodied in the principle of defective assets and the system of terminating net settlement, which are the key systems to protect the vital interests of the observant party. When the default event or potential default event of the defaulting party appears and continues, the observant party can use the principle of defective assets to protect its own interests to the maximum extent, and finally can protect its own interests by terminating the net settlement.
(3) Single agreement, defective assets and termination net settlement system all have the purpose of reducing and controlling credit risk, and the three have internal consistency in reducing and controlling counterparty credit risk.
Application and applicability analysis of the three institutional foundations of ISDA master agreement in China
China's Reference to the Three Institutional Foundations of ISDA Master Agreement
The Reference of Financial Derivatives Master Agreement to the Three Institutional Foundations of ISDA Master Agreement
In March 2009, the People's Bank of China authorized the China Association of Interbank Market Dealers to issue the Master Agreement on Financial Derivatives Trading in China Interbank Market (2009 Edition) (hereinafter referred to as NAFMII Master Agreement), which is the first real master agreement on financial derivatives trading in China. Before the release of NAFMII master agreement, China's financial derivatives trading adopted the text mode of "one product, one master agreement" (such as the master agreement for bond forward trading in the national inter-bank bond market) and "one product, one master agreement" (such as the master agreement for RMB foreign exchange derivatives in the national inter-bank foreign exchange market). NAFMII master agreement covers all over-the-counter financial derivatives transactions in China, and adopts the text mode of "all products, one master agreement" similar to ISDA master agreement, which will have a far-reaching impact on the development of financial derivatives in China.
China's NAFMII master agreement fully draws lessons from these three institutional foundations, and establishes three institutional arrangements: single agreement, fulfillment of preconditions (i.e. defective assets principle) and termination of net settlement. Among them, the single agreement system arrangement is embodied in the first article of the main agreement: "The above three documents constitute a single and complete agreement between the two parties to the transaction." The institutional arrangement for fulfilling the preconditions is embodied in Article 4 (3) of the master agreement. The arrangement for terminating the netting system is embodied in all clauses of Article 9 "Handling of Default Events" and Article 10 "Handling of Termination Events" and other relevant clauses of this Agreement.
Refer to the commitment performance guarantee documents of ISDA three institutional foundations.
The text of NAFMII master agreement includes not only the master agreement, supplementary agreement and effective agreement of the transaction, but also the performance guarantee documents. At present, there are two kinds of performance guarantee documents, among which the transferable performance guarantee document is a part of the master agreement, and the pledged performance guarantee document constitutes the credit support slave contract of the master agreement.
The promised performance guarantee document also reflects the reference to the three institutional foundations of ISDA. In the document, a number of transactions are dynamically valued and netted to calculate the risk exposure, so as to deliver or return the performance collateral to the counterparty. Its essence is to classify multiple creditor-debtor relationships into one creditor-debtor relationship, which is the embodiment of a single agreement system arrangement. Article 4 of the document stipulates that "no obligation is required", which is the concrete application of the principle of defective assets. Article 1 1 of this document, "Relief Rights of Pledger and Pledgee", stipulates that in case of early termination, the rights and obligations of both parties under the NAFMII master agreement shall be offset with the performance bond, which basically conforms to the principle of net settlement of termination.
Applicability Analysis of Three Institutional Foundations in China
The three basic institutional arrangements in the main agreement between ISDA and NAFMII are obviously inconsistent with the relevant laws and regulations of China, and their application in China is uncertain.
Uncertainty of the application of single agreement system in China
The clauses in the master agreement, which embody the single agreement system, stipulate that both parties shall establish "contact" between the transactions under the agreement. Connectivity is a relatively vivid term, which comes from offset method and refers to the contractual interdependence between transactions that look independent from other angles. In some civil law jurisdictions, if there is a lack of connectivity or a single agreement framework is not established, it will lead to doubts about whether the bankrupt party registered in this jurisdiction can implement the termination of net settlement, so the establishment of such connectivity is very important.
According to Article 25 of China's Contract Law, the contract is established when the acceptance takes effect, so every derivative transaction made by both parties constitutes an independent contract. Even if the two parties make a statement that all transactions constitute a single agreement when signing the master agreement on derivatives, it is still uncertain whether this statement itself is enough to establish connectivity among all transactions within the jurisdiction of China. The most fundamental solution is to promote China's legislation to recognize the connectivity of such transactions and a single agreement framework.
Uncertainty of the application of the principle of non-performing assets in China
As mentioned above, the application of the principle of defective assets in bankruptcy cases is different in different countries, which depends on the balance and choice between various value orientations such as protecting the interests of creditors and ensuring the safety and efficiency of transactions. In China, it is necessary to understand the principle of defective assets in combination with the relevant provisions of contract law and enterprise bankruptcy law.
China's "Contract Law" also has provisions similar to the principle of defective assets. For example, Article 108 stipulates: "If one party explicitly expresses or indicates by its own behavior that it will not perform its contractual obligations, the other party may require it to bear the liability for breach of contract before the expiration of the performance period." However, this clause only stipulates that one party can ask the other party to bear the liability for breach of contract, but does not give the party the right to suspend the performance of the contract obligations.
Article 18 of China's Enterprise Bankruptcy Law stipulates the bankruptcy administrator's right to choose. After the people's court accepts the bankruptcy application, the administrator has the right to decide to terminate or continue to perform the contract that was established before the bankruptcy application was accepted, but the debtor and the other party have not yet performed it, and notify the other party that "if the administrator decides to continue to perform the contract, the other party shall perform it, but the other party has the right to ask the administrator to provide a guarantee; If the manager does not provide a guarantee, it shall be deemed as the termination of the contract. " From this point of view, under the bankruptcy administrator system stipulated in China's Enterprise Bankruptcy Law, after the bankruptcy of one party to the master agreement, the non-bankrupt party cannot effectively exercise its rights under paragraph 2(a)(iii) of the ISDA master agreement or paragraph 4 (iii) of the NAFMII master agreement, because the right to decide whether to continue to perform or terminate the transactions under the master agreement belongs to the bankruptcy administrator. No matter whether the bankruptcy administrator decides to continue to perform or terminate the transaction under the master agreement, the non-bankrupt counterparty cannot suspend the performance of the contractual obligations without terminating the transaction under the master agreement.
Uncertainty of Termination of Netting System under China Bankruptcy Law
First, as mentioned above, Article 18 of the Enterprise Bankruptcy Law stipulates the bankruptcy administrator's right to choose. Therefore, if the bankruptcy administrator regards each unexpired transaction under the master agreement as a separate contract that has not been fully performed by both parties, and only chooses to perform the contract that is beneficial to the bankrupt party, the non-bankrupt party may have to perform the agreed obligations under one transaction with expected losses and another transaction with expected profits.
Second, even if the two parties to the transaction calculate the early termination payment according to the net termination system of the master agreement, the calculation of the amount may occur after or before the start of the bankruptcy procedure (for example, one party to the transaction is seriously insolvent, although it has not entered the bankruptcy procedure, it has also triggered the default clause in the master agreement), which conflicts with the relevant provisions of China's bankruptcy law and may be invalid.
(1) If the early termination payment is generated after the bankruptcy application is accepted, which does not meet the bankruptcy offset clause in Article 40 of the Enterprise Bankruptcy Law of China, it may be recognized as the creditor's rights and debts generated after the bankruptcy case is accepted, thus affecting the application for bankruptcy offset.
(2) The early termination payment is generated before the start of bankruptcy proceedings, which conflicts with the provisions of Articles 3 1 to 33 of China's Enterprise Bankruptcy Law on revocable acts and invalid acts before the bankruptcy case is accepted. It can be considered that the net payment of creditor's rights and debts generated within six months before the court accepts the bankruptcy case is not supported.