The Research Of Legal Risk And Civil Liability Of International Financial Derivatives Transactions

Financial derivatives contracts are bilateral, consensual and paidcontracts with specific delivery of financial benefits as theirobject.Usually, financial derivatives are divided into four fundamentaltypes such as forwards, futures, options and swaps.The varieties tradingin the OTC market are forwards, options and swaps, the internationalderivatives trading generally refers to the OTC.In the financial derivativestrading market，there are not only market risk, liquidity risk, credit risk,operational risk, but also the legal risks which caused by many factorsamong which there is not a special law on financial derivativestransactions in some countries as well as laws and regulations areinconsistent between different countries，The risk in the OTC markets isgreater than that in the Exchange-Traded ones.Financial derivatives contracts and gambling, insurance contracts allhave aleatory nature. Hedging transactions in financial derivatives tradingis like the insurance, but the speculative arbitrage is similar togambling,so financial derivatives trading has the legal risk of beingrecharacterized. The difference between the aleatory contracts and thecontracts attached with time and condition is that，the effect of the timeand condition attached in the contracts either make the contracts takeeffect or lose effect，while the aleatory contract has been established andcome into effect，only the legal effect is uncertainty.Because the OTC trading is of high risks,a country usually exertsaccess restrictions to the traders from the aspects of subjectcategories,expertise, market experience, financial strength and others by legislation.Therefore,in the international OTC derivatives trading, thereexists legal risk of qualification flaws from the counter party. In addition,traders’violation of the enterprise internal authorization may also lead totrading qualification flaws.International OTC derivatives transactions commonly adopt thestandard ISDA Master Agreement, single agreement,netting and creditsupport are known as the three pillars of ISDA agreement. However,when a counter party encounters bankruptcy, the transaction will face therisk the liquidator to exercise priority right to choose，which makes themultiple transactions under the single contract be disintegrated intomultiple contracts，and this will make it impossible to reduce the risk bynetting.Also, under the bankruptcy system, the credit support under theISDA Master Agreement may be identified as "preferential disposition"which occurs in the "critical period", and this will make the credit supportinvalid.And under the reforming system,the law may limit creditors toexercise real right for security under the credit support terms except forthe consent by the reorganization executor. In addition, the legal effect ofthe security pledged credit support may be uncertainty because of thelegal principle of statutory jus in rem,and the ownership-transfer creditsupport may be regarded as "liquid contract" which is prohibited in civillaw countries.Thus, to the OTC derivatives trading legal system, we shouldconform to the requirements of healthy economic development, renew therelevant legal system, to avoid the legal risks.we should widen and clearthe market access system to avoid the risk of subject disqualification.Thebankruptcy law, property law should be modified to avoid the legal riskfrom the conflicts between these laws and the terms of single agreement，netting，credit support under the international standard agreements suchas the ISDA Master Agreement.To the legal liability，not only the liabilitywho causes the contract invalid and revocable，but also the legal liabilityof torts such as misrepresentation, fraud, manipulation should be foundout.According to the case fact，proceeding from the dealer’s fiduciary duty,the dealers should undertake different levels of duties such as duty ofsuitability and care to advise including risk tips and suggestions varying with the different knowledge，experience and economic strength of theend users，and not to use the principle of changed circumstances.Thispaper argues that the duty of care, suitability and fiduciary duties happensto be the hinges by which the tort behaviors and damages are connected.In addition to the introduction, the paper is divided into six chapters.Chapter1, on the basis of a detailed study of the legal relationship ofeach financial derivatives contracts，the common law nature of the fourbasic financial contracts is summarized.Finally,it discusses the legal risksof financial derivatives trading.Chapter2continues with the first chapter on the study of the lawnature of financial derivatives, it discusses its aleatory nature, thedifference between the aleatory contracts and the contracts attached withtime and condition of the financial derivatives.It also discusses the legalrisks that the financial derivatives contracts may be recharacterized.Chapter3, after introducing the OTC financial derivatives marketrestrictions of some countries,it focuses on the research of legal risk andliability when the national institutions, companies and individuals are notqualified by law.Chapter4，discusses the conflicts and legal risks between the socalled three pillars of the ISDA agreement and the bankruptcy law,contract law of the countries.Based on absorbing the experience offoreign legislation, it puts forward suggestions for improvement ofChina’s related legislation, in order to avoid trading risks.Chapter5， discusses the constitutive elements of tort of dealers andits theoretical basis, which includes the duty of care, suitability duty,information disclosure and relatively limited fiduciary duty of the dealerowned to the end user.Chapter6，through some cases，discusses the legal recognition andthe civil liability of misrepresentation and manipulation.