The Application Problem Of NAFMⅡ Master Agreement In China Bankruptcy Procedure

Financial derivatives have been an important part of modern financial market.Its unique functions on risk management and price discovery have profoundly affected the development of modern market economy.They have effectively promoted the flow of information among market participants and strengthened Market participants’ risk prevention capabilities.In order to reduce transaction costs,improve transaction efficiency and reduce transaction risks,the ISDA Master Agreement formulated by ISDA,an international self-regulatory organization,is generally applied by participants in the international financial derivatives market.The core term of the agreement is the termination and net settlement system.The financial crisis broke out in 2008 with the bankruptcy of Lehman Brothers,and ISDA subsequently locked down and drastically reduced the risk exposure of various financial institutions in accordance with the termination and net settlement measures for derivatives transactions terminated in an orderly manner under the derivative master agreement.As a result,market participants avoided suffering a wider range of losses and the spread of risks within the financial system.With the continuous development and improvement of China’s financial market,in the basis of full reference to the ISDA master agreement,the NAFMⅡ master agreement applicable to the transactions of OTC financial derivatives was introduced in China.The NAFMⅡ Master Agreement contains three core systems: net termination,single agreement,and early termination.The single agreement system is the prerequisite for the implementation of the termination and net settlement system.All the transactions under the master agreement are treated as a whole agreement;the early termination system is the starting condition for the commencement of the net settlement system,leading to the early termination of all transactions under the master agreement due to the bankruptcy of one party;the ultimate purpose of these arrangement is to timely realize the termination and net settlement of all transactions between the parties in the event of bankruptcy or other default of the transaction party.However,regarding the bankruptcy administrator’s right to choose fulfill,the bankruptcy revocation right and the right to review the bankruptcy set-off,these arrangements have certain problems in China’s existing bankruptcy procedures.This article intends to conduct research on the following issues: 1.The existence of applicable issues between the single agreement system,early termination system and termination net system in the NAFMⅡ master agreement,and the right to choose to perform and bankruptcy set-off in the existing bankruptcy legal system;2.the Necessity of legislation recognizes for the NAFMⅡ master agreement’s relevant systems and the specific legislation path;3.In the condition that complying with the basic concept of the bankruptcy legal system,how to recognize the NAFMⅡ master agreement’s related systems in the Regulations for the Bankruptcy Risks of Commercial Banks that the Banking Regulatory Commission is drafting(hereinafter referred as the " Regulations").The following arguments are mainly proposed in this article and argued accordingly:(1)The application of the single agreement system and the provisions of the bankruptcy agreement should be restricted;(2)When the commencement of bankruptcy proceedings is regarded as a breach to the contract,at the time of the incident,the compulsory early termination system shall be applied in the Regulations to exclude the right of non-violated parties to appoint an early termination date;(3)It shall be determined in the Regulations that all transactions between the parties under the master agreement are terminated and rolled out in advance.The amount of early termination payable after the difference calculation shall be treated as a normal claim which shall be in accordance with the provisions of the bankruptcy procedure,and it shall also be subject to the provisions of bankruptcy revocation rights and invalid individual repayment;(4)The bankruptcy administrator shall identify the hedging transactions and speculative transactions under the master agreement.The automatic termination and net settlement system applies to speculative transactions.The bankruptcy administrator still has the right to choose to perform for the hedging transaction.