On the afternoon of December 12, the Shanghai Financial Court conducted the public trial of the test case involving a default disposal in the central counterparty clearing business of Shanghai Clearing House (“SHCH”). This case is the first test case tried in accordance with the Rules of the Shanghai Financial Court on Financial Markets Test Case Scheme (“Rules”).
The judicial panel of the case is composed of three judges from the Court’s test case trial team and two external experts. The judicial panel organized several pretrial conferences between the parties, confirming the undisputed facts of the case and identifying the underlying legal issues. Before the trial, the two parties submitted the application, statement of defense, statement of reply and statement of rejoinder respectively and provided thousands of pages of relevant legal rules and domestic and foreign cases. Experts, scholars and industry representatives from all sides also conducted in-depth research on the case and provided a number of third-party opinions.
During the trial, the judicial panel fully listened to the application and defense opinions of the claimant and the respondent and tried the case with focus on two legal issues: whether the Business Rules and the Detailed Rules on Default Disposal of the SHCH are binding on Institution A and whether the involved default disposal process is reasonable. Based on the facts of the case, the attorneys representing the two parties held several rounds of debates with their opinions fully presented which focused on relevant legal provisions and judicial practices and compared and referred to international rules and foreign cases. Personnel appointed by independent third-party opinion providers appeared in court to present relevant legal opinions on the nature of the Central Counterparty Clearing Agreement, the essential conditions for the Business Rules and the Detailed Rules for Default Disposal to take effect and to accept inquiries from the claimant, the respondent and the judicial panel. Meanwhile, upon the request of the respondent SHCH, the judicial panel allowed an SHCH employee to testify in court. The witness was questioned by the claimant, the respondent and the judicial panel on the details of the disposal process and the reasonability of the hedging strategy.
The trial of this case is of great significance for the financial infrastructure to improve its rules. As a central counterparty clearing institution, the SHCH formulates specific rules for dealing with defaults in financial derivatives and forms disposal plans under specific circumstances, which relate to the stability of the financial markets and the interests of trading counterparties. As the trial of this test case focused on the legal disputes that might arise in default disposal scenarios, the parties to the test case challenged and responded to various details of rule formulation and specific disposal. Their legal opinions were fully expressed which are helpful to further improve the international compatibility of relevant risk disposal rules under the background of institutional opening-up. It is of great significance to prevent systemic risks, and promote the sustainability and healthy development of the financial markets.
After the trial, the judicial panel will follow the principles of independent voting, majority decision and reservation of dissenting opinions to make a decision and issue a judicial opinion on the substantive issues involved in the test case based on the facts of the case.
More than 30 people, including deputies to the Shanghai Municipal People's Congress, members of the CPPCC Shanghai Committee, representatives of financial infrastructure, financial and legal institutions, experts and scholars from universities and journalists from news media, attended the trial.
The transcript of the trial and other materials will be published on the official website of the Shanghai Financial Court (http://www.shjrfy.gov.cn).
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