On The Legal Risk Prevention Mechanism Of US Credit Default Swaps

As a credit derivative tool,credit default swap is mainly used to transfer the credit risk of basic assets,ensure the safety of asset holders’ funds,distribute credit risks from concentrated individuals to the market,and optimize the allocation of credit risks.Credit default swap provides liquidity and pricing basis for the credit market and provides market participants with a tool to manage credit risk proactively.Credit default swap has designed an atypical legal structure that allows it to have the efficacy of insurance,the appearance of guarantees,and the liquidity of securities.But unlike the above or any other existing legal forms,credit default swap is a new type of civil and commercial contract that combines modern financial technology with the nature of complex derivatives so that the parties can hedge or manage credit risks.Although credit default swap is essentially a contract executed autonomously according to the parties,it is subject to the rules of financial markets as an over-thecounter derivative.Before the subprime mortgage crisis in the United States,such financial innovations as credit default swaps were generally welcomed by the market and enjoyed "special treatment." After the crisis,regulators shifted their attitude toward financial innovation and adopted a series of tough measures to monitor credit default swaps.The autonomy of contract law and government requirements for financial stability make this product into a deep contradiction.The credit derivatives market in the United States has a well-established system.Financial institutions are good at using credit default swaps to actively manage credit risks to achieve hedging purposes.The United States has adopted a series of measures to reduce the legal risk of credit default swaps,including strictly controlling the trading process nodes,guiding market participants to establish internal control systems,reasonably controlling the scope of information disclosure,and introducing a central clearing system.In comparison,since 2010,China began to carry out pilot work on credit derivatives,but the market feedback was not optimistic.The main problems were concentrated in poor market liquidity and inadequate supporting systems.The legal risk of China’s development of credit default swaps mainly focuses on the legal nature,the qualifications of contracting parties,anonymous agencies,close-out netting settlement and credit support systems,etc.and their inability to adapt to China’s legal system.The author believes that because of the complexity of credit derivatives and the special transaction law system of OTC market,credit default swap is different from traditional financial products.It is necessary to take the typical cases of mature market as the starting point to study the legal risk characteristics of credit default swap,sort out all kinds of risks the complex derivatives may occur in the transaction flow.At the same time,China’s demand for credit risk management does exist.It is believed that with the continuous deepening of the bond market,the continuous improvement of the credit rating market and the continuous integrity of relevant supporting legal systems,China’s CDS will receive a promising development.