Dissertation > Political, legal > Legal > International law > International Economic Law > International financial and monetary law

Research on Legal System of Close-out Netting in ISDA Master Agreement

Author ShiZhiJie
Tutor PengZuo
School East China University of Political Science
Course International Law
Keywords ISDA Master Agreement Close-out NettingSet-off The Safe Harbor Provisions OTCDerivatives Transaction Single Agreement
CLC D996.2
Type Master's thesis
Year 2012
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Close-out Netting is one of the three pillars of ISDA Master Agreement, andunderstanding the close-out netting is the key to understand the ISDA MasterAgreement and the whole financial market. As we all know, the OTC derivativestransactions exists in order to circumvent the government’s control, the mostimportant role of the close-out netting is to avoid "bankruptcy in picking its behavior", which not only has a positive meaning for the contract subject, as well as reducesystemic risk of the derivative goods market. For the contract subject, the close-outnetting on the one hand controls and reduces the credit risk of derivatives markets:under the close-out netting arrangements, counterparty exposure will be greatlyreduced, and the counterparty credit risk will be lower. On the other hand to it ishelpful to reduce the cost of engaging in financial derivative products, improve theutilization efficiency of capital for financial institutions: the New Basel CapitalAccord conditional recognized the close-out netting, the close-out netting will betaken into account in calculating the capital adequacy ratio, making the same capitalfunds can support a larger scale of financial derivative transactions. Under theexisting legal system in China, however, the close-out netting of the ISDA MasterAgreement is of these uncertainties, a serious impediment to the development ofChina’s financial derivatives transactions. In the thesis, an overview of ISDA MasterAgreement, the interpretation of the close-out netting of the ISDA Master Agreement, Analysis of the close-out netting and set-off system, the focus of the thesis iseffectiveness of the close-out netting in China and to learn from the experience of twoBritish and American legislation, provide own proposals on how to resolve this legalissue.In addition to the introduction and conclusion, the thesis is divided into fourchapters.Chapter I: An overview of the ISDA Master Agreement to adjust the object offinancial derivative products. This chapter is theoretical points of the full text. Thethesis firstly observe and study the concept, essence, three main functions of financialderivatives, and reflect on the nature of financial derivatives after the2008financialcrisis. An overview of the development of financial derivatives, the final classificationof financial derivatives trading field outside the derivative transactions is object of thespecific adjustment of the ISDA Master Agreement, the signing of the ISDA MasterAgreement has been a prerequisite for OTC derivatives transactions. The backgroundof the ISDA Master Agreement, an overview of the evolution process and file groupstructure will be introduced. The ISDA Master Agreement is the carrier of theclose-out netting; the ISDA Master Agreement is understood to contribute to a betterunderstanding of the close-out netting. This chapter firstly describes the backgroundof the ISDA Master Agreement to more clearly understand the ISDA MasterAgreement is the core of close-out netting. Followed by an overview of the ISDA1987Edition,1992and current2002Master agreement. Again to investigate a uniqueumbrella structure of ISDA Master Agreement, all attachments, confirmation letterand other documents formatted Master Agreement connection as a whole. Finally anoverview of the three pillars of the ISDA Master Agreement, stating the central pillarof the three pillars in the termination of the netting.Chapter II: A detailed description of the close-out netting of the ISDA MasterAgreement. First, an overview of the close-out netting of financial markets, thought tolay the foundation for inspection in the close-out netting of the ISDA MasterAgreement; Second, analysis the payment netting and the close-out netting in theISDA Master Agreement to clarify the specific meaning of the two nettings. Emphasis on the close-out netting, and described by the examples of the specific operation ofthe close-out netting; finally, from the program, application objects, the legislativeintent of the close-out netting and set-off in order to better understand the exactmeaning of the close-out netting of the ISDA Master Agreement.Chapter III: From four aspects to clarify the value of the close-out netting of theISDA Master Agreement. First, the close-out netting is the primary method to reducethe OTC derivatives market risk. The close-out netting is an essential tool forfinancial institutions and other derivatives users engage in derivative trading activities.Again, the national policy makers agreed to continuously promote the validity of theclose-out netting is enough to prove the importance of the close-out netting for thecontrol of financial derivatives trading risk. Finally, the validity of the close-outnetting is directly related to our financial institutions in derivative transactions.Chapter IV: Departure from our current legal system, analysis the validity of theclose-out netting of the ISDA Master Agreement. The first section, the NAFMIIMaster Agreement with the described title of "Chinese version of the ISDA MasterAgreement", the NAFMII Master Agreement also introduces the close-out netting ofthe ISDA Master Agreement. the "netting" in China’s laws and regulations and theclose-out netting of the ISDA Master Agreement cannot be equated. Again, validity ofthe close-out netting of the ISDA Master Agreement on the points involved in thebankruptcy and does not involve bankruptcy in our country. Second II examines thelegal status and the validity of the close-out netting of the ISDA Master Agreement inBritain and the United States. First, the market share of OTC derivatives transactions,netting legislation and national overview. Second, a brief inspection by the Britishmandatory offset system in the close-out netting of the ISDA Master Agreement in theUK. Finally, detailed examination of the validity of the close-out netting of the ISDAMaster Agreement under the safe harbor provisions of the U.S. Bankruptcy Code andthe Federal Deposit Insurance Act. The third section mainly expounds the legislativepaths on the close-out netting of the ISDA Master Agreement. First of all, three mainpaths on the close-out netting is described: the State Council formulated the "theBankruptcy Ordinance of banking financial institutions", specially formulated Netting Act and recognized by the Supreme Court of Justice explained the validity of theclose-out netting. Second, respectively describes the advantages and disadvantages ofthese three legislative path, and make my own tendentious recommendations.

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