Section 6(e) of the International Swaps and Derivatives Association (ISDA) Master Agreement outlines the close-out netting provisions. It specifies the methodology for calculating the termination amount payable upon an early termination event, such as a default or insolvency. This clause is critical for managing counterparty credit risk in derivatives transactions.
Mechanism
When a termination event occurs, Section 6(e) dictates that all outstanding transactions under the Master Agreement are terminated. A single net amount is calculated by valuing all positive and negative mark-to-market positions. This netted sum becomes the sole obligation between the parties, superseding individual transaction obligations.
Methodology
The methodology relies on a standardized calculation of losses and gains across all derivatives, converting them into a single, enforceable payment obligation. This reduces legal and operational complexities, providing certainty in distressed situations. For institutional crypto options and derivatives trading, where ISDA Master Agreements are increasingly adopted, Section 6(e) provides a crucial framework for risk mitigation and orderly resolution, even with the unique settlement characteristics of digital assets.
The 2002 ISDA Agreement defines a commercially reasonable procedure as an objective, good-faith valuation to find a terminated deal's economic equivalent.
Close-out netting is an internal ISDA process consolidating trades into one sum; contractual set-off is an external right to offset that sum against other debts.
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