LEGAL PLURALISM AND ISOMORPHISM IN GLOBAL FINANCIAL REGULATION: THE CASE OF OTC DERIVATIVE COUNTERPARTY RISK REGULATION IN CHINA

As economic globalization grows and legal conflicts between statemade domestic law and private-made transactional law become unavoidable, the core concepts instated by the International Swaps and Derivatives Association (ISDA) master agreement such as the close-out setoff mechanism become touchstones for different legal systems in different countries. The close-out setoff which aims to reduce counterparty risk in the event of counterparty default, may come into conflict with existing bankruptcy law, as is the case for China. China has used a unique deference method to reconcile conflicting state laws and international norms in derivatives trade by localizing the ISDA master agreement and devising the master agreement of the National Association of Financial Market Institutional Investors (NAFMII). The NAFMII master agreement adopted all essential concepts of the ISDA master agreement including the close-out setoff that conflicts with Chinese Enterprise Bankruptcy Law. This Article studies some of the rulings on the legal standing of close-out setoff adjudicated by Chinese provincial courts and the relevant judicial interpretations of the Chinese Supreme Court. This Article also explores how China keeps abreast with the international trend by using mandatory central clearing as an alternative means of reducing counterparty risk. Furthermore, the Theory of Isomorphism is used to explain the driving force behind reconciling legal conflicts in the Chinese derivatives market. The analysis advanced here sheds light on the longstanding debate over conflict resolution in public-private ordering at the transnational and national levels. The analysis provided in this Article may help international finance regulators, lawyers, scholars, and policy makers understand how international financial norms and rules become integrated into domestic law.