China’s NEW Futures and Derivatives Law Provides Much-Needed Legal Certainty†
Digest | 文摘
The highly anticipated Futures and Derivatives Law of the People’s Republic of China (the “FDL”) took effect on August 1, 2022, bringing China’s financial market more in line with international practices. With 155 articles in total, the FDL covers various areas, including settlement and clearing, supervision and administration, as well as cross-border trading and regulatory collaboration.
Importantly, the FDL recognizes close-out netting, offering much-needed legal certainty to foreign parties who trade with counterparties in China. Close-out netting is a mechanism that allows two parties facing a termination event (e.g., default) to consolidate all transactions between them to determine a net amount for one party to pay the other. The FDL states clearly that close-out netting will not be “suspended, invalidated, or revoked” if either party to the transaction enters into bankruptcy proceedings in accordance with law. Prior to the enactment of the FDL, close-out netting could be at risk when a counterparty in China entered into bankruptcy proceedings because the bankruptcy administrator might, for the purpose of performing its legal duties, choose to suspend certain contracts binding the Chinese counterparty, including contracts with close-out netting provisions.
Given the current price volatility around the world, to what extent can the FDL provide foreign investors with an effective tool to help them manage risks? What additional changes, if any, should be considered to strengthen the regulation of futures and derivatives in China so as to further promote investors’ confidence?
† This piece was contributed by Jennifer Baccanello and edited by SINOTALKS.COM.
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