# How Does the 2002 Isda Agreement Prioritize between a Force Majeure Event and an Illegality? ▴ Question

**Published:** 2025-08-01
**Categories:** Question

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## Concept

The [2002 ISDA Master Agreement](https://prime.greeks.live/area/2002-isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) operates as a precise, hierarchical system for classifying and responding to disruptions in derivatives trading. When an event occurs that could be interpreted as both an Illegality and a [Force Majeure Event](https://prime.greeks.live/area/force-majeure-event/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), the agreement’s protocol stack gives definitive precedence to Illegality. This is a foundational principle of the agreement’s architecture, designed to provide absolute certainty in moments of operational crisis. The system is engineered to prevent ambiguity, ensuring that both counterparties operate from a single, shared understanding of the prevailing condition and the procedural path forward.

An event or circumstance that qualifies as an Illegality is treated as such, even if it also meets the definition of a [Force Majeure](https://prime.greeks.live/area/force-majeure/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) Event. This prioritization is not arbitrary; it reflects a core logic within financial markets that the direct and specific impact of law supersedes more general, external impediments to performance.

An Illegality under the 2002 [ISDA Master Agreement](https://prime.greeks.live/area/isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) arises when a change in law makes it unlawful for a party or its [Credit Support](https://prime.greeks.live/question/how-does-the-2002-isda-framework-influence-the-negotiation-of-credit-support-annexes/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) Provider to make a payment, delivery, or otherwise comply with a material provision of the agreement. This is a direct confrontation with sovereign power. The performance itself becomes a prohibited act. A Force Majeure Event, conversely, is triggered by an external event beyond the control of the parties ▴ such as a natural disaster or civil unrest ▴ that physically prevents performance.

The act of performance remains legal, yet it is rendered impossible by external circumstances. The distinction is between a legal barrier and a physical one. The [2002 ISDA](https://prime.greeks.live/area/2002-isda/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) framework recognizes that a legal prohibition is an absolute and non-negotiable constraint that alters the fundamental basis of the contract, whereas a physical impediment, however severe, may be temporary or subject to workarounds that are not applicable when the performance itself is against the law.

> The 2002 ISDA Master Agreement establishes a clear hierarchy where Illegality takes precedence over a Force Majeure Event, ensuring legal certainty in contract resolution.

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## What Defines the System’s Logic?

The internal logic of the 2002 ISDA Master Agreement’s hierarchy is built upon the principle of specificity and the source of the constraint. Legal prohibitions are considered more fundamental and definitive than operational disruptions. The framework is designed to create a clear decision tree for counterparties, eliminating the potential for disputes arising from a party attempting to claim the more advantageous [termination event](https://prime.greeks.live/area/termination-event/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). This structure provides a robust and predictable mechanism for unwinding transactions under extreme stress, which is the primary function of the master agreement as a [risk management architecture](https://prime.greeks.live/area/risk-management-architecture/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite).

This prioritization has significant implications for the subsequent actions of the counterparties. An Illegality leads to a specific set of termination and valuation procedures. By channeling an event into the Illegality pathway, the agreement ensures that the resolution process is aligned with the legal realities that triggered the disruption.

The introduction of the Force Majeure concept in the 2002 agreement, which was absent in the 1992 version, was itself a strategic evolution designed to handle operational impossibilities. Its subordination to Illegality maintains the primacy of legal and regulatory compliance within the global derivatives market.

Furthermore, the hierarchy extends to other potential disruptive events. An event that could be classified as an Illegality or Force Majeure will not be considered an Event of Default for failure to pay or deliver for as long as the Illegality or Force Majeure condition persists. However, if an event constitutes an Event of Default (such as bankruptcy) and also an Illegality or Force Majeure, it is treated as an Event of Default.

This establishes a clear pecking order ▴ Events of Default are prioritized over other Termination Events like Illegality, and Illegality is prioritized over Force Majeure. This creates a complete, ordered system for event classification, which is essential for the stability of the vast, interconnected web of bilateral derivatives contracts.

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## Strategy

Understanding the prioritization of Illegality over Force Majeure is the first step; leveraging this knowledge within a strategic framework is what provides an operational edge. The primary strategic component introduced by these provisions in the 2002 ISDA Master Agreement is the “Waiting Period.” This mechanism acts as a circuit breaker, a designed pause in the machinery of the contract to allow for the possibility that a disruptive event is temporary. For both an Illegality and a Force Majeure Event affecting a transaction, a Waiting Period of [three Local Business](https://prime.greeks.live/question/what-are-the-main-differences-between-local-and-stochastic-volatility-models/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) Days applies. For a Force Majeure Event, this period can be extended up to a total of [eight Local Business](https://prime.greeks.live/question/what-are-the-main-differences-between-local-and-stochastic-volatility-models/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) Days.

During this time, the parties’ obligations to make payments or deliveries under the [affected transactions](https://prime.greeks.live/area/affected-transactions/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) are deferred. This deferral allows counterparties to assess the situation, communicate, and determine if the disruption will resolve itself without necessitating the termination of the entire portfolio of trades.

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## The Strategic Function of the Waiting Period

The [Waiting Period](https://prime.greeks.live/area/waiting-period/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) is a critical tool for strategic [risk management](https://prime.greeks.live/area/risk-management/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). It prevents a precipitous and potentially unnecessary termination of transactions. A government might issue a temporary decree that is quickly rescinded, or a natural disaster might disrupt payment systems for a few days before they are restored. Terminating a complex derivatives portfolio is a significant, costly, and often irreversible action.

The Waiting Period provides a buffer, allowing firms to avoid this drastic step if the problem is short-lived. It transforms a binary, immediate decision into a measured, time-gated process.

However, this strategic buffer has a critical exception that reveals the system’s core risk priorities. The Waiting Period does not apply to payment or delivery obligations under a [Credit Support Document](https://prime.greeks.live/question/how-does-the-2002-isda-framework-influence-the-negotiation-of-credit-support-annexes/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) (CSD), such as a [Credit Support Annex](https://prime.greeks.live/area/credit-support-annex/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) (CSA). If a party is required to post collateral, that obligation is immediate and is not deferred by an Illegality or Force Majeure Event. This distinction is fundamental.

The system is architected to tolerate a temporary pause in transaction cash flows, but it will not tolerate a pause in the flow of collateral that mitigates counterparty [credit risk](https://prime.greeks.live/area/credit-risk/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). The integrity of the risk mitigation framework is paramount. A failure to post collateral is a direct increase in credit exposure, and the [agreement provides](https://prime.greeks.live/question/how-does-a-market-makers-inventory-position-influence-the-quotes-it-provides-to-clients/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) for immediate remedies in such a scenario, including the right to terminate. This differential treatment underscores a core principle of institutional finance ▴ managing and containing credit risk is the system’s highest operational priority.

> The Waiting Period acts as a strategic buffer against premature contract termination, though it explicitly excludes collateral obligations to preserve credit risk integrity.

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## Comparing Termination Rights and Pathways

The strategic pathways for termination diverge depending on the event and the party’s status. Following the Waiting Period, if the Illegality or Force [Majeure Event](https://prime.greeks.live/question/what-are-the-key-differences-in-calculating-the-termination-amount-for-a-force-majeure-event-versus-an-event-of-default/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) is continuing, termination rights become active. A key strategic consideration is which party holds the right to terminate. In the case of an Illegality, if the event affects both parties, either party may terminate.

If it affects only one party, only the [Affected Party](https://prime.greeks.live/question/how-has-the-distinction-between-liquid-and-illiquid-instruments-under-mifid-ii-affected-bond-market-structure/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) has the initial right to terminate the Affected Transactions. This provides the party facing the legal barrier with control over the decision to unwind the trades.

The table below outlines the strategic differences in how these events are handled under the 2002 ISDA [Master Agreement](https://prime.greeks.live/question/what-are-the-key-differences-between-a-prime-brokerage-agreement-and-an-isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), providing a clear view of the operational pathways.

### Table 1 ▴ Strategic Comparison of Illegality and Force Majeure

| Attribute | Illegality | Force Majeure Event |
| --- | --- | --- |
| Priority | Highest priority among these two Termination Events. Supersedes Force Majeure. | Subordinate to Illegality. An event that is both will be treated as an Illegality. |
| Waiting Period (Transactions) | Three Local Business Days. | Three Local Business Days, extendable up to eight Local Business Days. |
| Waiting Period (Credit Support) | Does not apply. Collateral obligations are immediate. | Does not apply. Collateral obligations are immediate. |
| Termination Right | Generally held by the Affected Party. | Either party may terminate the Affected Transactions after the Waiting Period. |
| Scope | Triggered by a change in law making performance illegal. | Triggered by an external event making performance impossible. |

This structured approach ensures that when a crisis hits, the response is not improvised. It is a pre-agreed, systematic process that balances the need for flexibility with the absolute requirement for contractual certainty and credit risk stability. The strategic decision for a trading desk is not what to do, but when to execute the steps laid out in the agreement’s operational playbook.

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## Execution

The execution phase following an Illegality or Force Majeure Event is a matter of precise, procedural discipline. The first operational step is notification. The 2002 ISDA Master Agreement requires that a party, upon becoming aware of such an event, must promptly use all reasonable efforts to notify its counterparty. This notice should specify the nature of the event and provide any other information the other party might reasonably require.

This is not a formality; it is the initiation of a formal, contractually-defined process. The operational readiness of a trading desk is measured by its ability to execute this notification swiftly and accurately, often through pre-established communication channels specified in the agreement’s Schedule.

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## Procedural Steps for Managing a Termination Event

Once the Waiting Period has expired and the event persists, the execution of a termination proceeds along a clear path. The process involves designating an [Early Termination Date](https://prime.greeks.live/area/early-termination-date/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) and calculating the [Close-Out Amount](https://prime.greeks.live/area/close-out-amount/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). This calculation is one of the most critical execution points, determining the final financial settlement between the parties.

- **Notice of Termination** The party with the right to terminate delivers a notice to the other party, designating an [Early Termination](https://prime.greeks.live/area/early-termination/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) Date for the Affected Transactions. This notice must be delivered in accordance with the notice provisions of the agreement, which themselves have been subject to amendments over time to include modern communication methods like email. 

- **Calculation of Close-Out Amount** The core of the execution process is the determination of the Close-Out Amount. For an Illegality or Force Majeure Event, the agreement specifies that the calculation is performed by the party that is not the Affected Party (or by both parties if both are affected). The calculation is based on obtaining quotations from third-party dealers for replacement transactions. 

- **Exclusion of Credit Support Documents** A critical detail in the execution of the [Close-Out Amount calculation](https://prime.greeks.live/question/what-are-the-primary-differences-in-documenting-a-loss-calculation-versus-a-close-out-amount-calculation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) for an Illegality or Force Majeure Event is that Section 6(e) of the 2002 Agreement stipulates that the quotations obtained from third parties should not take into account the existence of any Credit [Support Document](https://prime.greeks.live/question/how-does-an-rfq-audit-trail-support-best-execution-requirements-under-mifid-ii/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). This is a profound point. The valuation is meant to reflect the market value of the derivatives transactions themselves, stripped of the credit mitigation provided by the CSA. The settlement of collateral is handled separately. This ensures a clean, objective valuation of the trading portfolio itself. 

- **Final Settlement** Once the Close-Out Amount is determined, it results in a single net payment obligation from one party to the other, representing the net value of all terminated transactions. This payment, along with the return of any collateral held, finalizes the unwinding of the relationship with respect to the terminated trades. 

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## How Is the Close out Amount Determined?

The determination of the Close-Out Amount is a granular process designed to produce a fair market value. The table below details the inputs and considerations for this calculation in the context of an Illegality or Force Majeure event, which typically falls under the “Mid-Market” valuation methodology.

### Table 2 ▴ Execution of Close-Out Amount Calculation

| Component | Description | Execution Detail |
| --- | --- | --- |
| Calculating Party | The party responsible for managing the valuation process. | For Illegality or Force Majeure, this is the Non-Affected Party, or both parties if both are affected. |
| Valuation Method | The method used to determine the value of the terminated transactions. | Typically involves obtaining mid-market quotations from four leading dealers in the relevant market. |
| Replacement Transaction | A hypothetical transaction that would have the same material terms as the terminated transaction. | The quotations are for the cost of entering into this replacement transaction. |
| Credit Support Annex | The impact of collateral on the valuation. | Quotations are obtained without regard to any Credit Support Document in place. The value is “clean” of credit mitigation. |
| Unpaid Amounts | Any payments that were due but not paid prior to the Early Termination Date. | These are added to the calculation to ensure all outstanding obligations are settled. |

Mastering the execution of these procedures requires more than just legal understanding. It demands operational infrastructure, pre-defined communication protocols, and a clear understanding of the valuation mechanics within the firm’s treasury and risk functions. The hierarchy that places Illegality above Force Majeure is the strategic directive; the precise and disciplined execution of the subsequent steps is what preserves capital and ensures stability during market turmoil.

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## References

- International Swaps and Derivatives Association. “2002 ISDA Master Agreement.” ISDA Publications, 2002.

- Smith, John A. “Derivatives Documentation and Risk Management ▴ A Systemic Analysis.” Journal of Financial Regulation, vol. 12, no. 2, 2021, pp. 115-142.

- Chen, Wei. “Contractual Hierarchies in Financial Law ▴ A Study of the ISDA Framework.” The Journal of International Financial Markets, vol. 35, 2019, pp. 45-63.

- Katten Muchin Rosenman LLP. “Force Majeure Clauses and Financially Settled Transactions Under the ISDA Master Agreement.” Katten Publications, April 2020.

- Norton Rose Fulbright. “Amendments to the Notices provision under the ISDA 2002 Master Agreement.” Legal Briefing, October 2011.

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## Reflection

The architecture of the 2002 ISDA Master Agreement provides a clear protocol for managing market disruptions. Its hierarchical treatment of Illegality and Force Majeure is a testament to a system designed for certainty. The real question for any institution is how this external logic is integrated into its own internal operational framework. Is your notification procedure automated or manual?

Are your valuation models calibrated to execute a “clean” close-out calculation under stress? The agreement provides the blueprint for stability; achieving it depends on the robustness of the machinery you build to execute its directives.

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## Glossary

<a href="https://prime.greeks.live/area/2002-isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## 2002 Isda Master Agreement

Meaning ▴ The 2002 ISDA Master Agreement represents a standardized bilateral contractual framework for over-the-counter (OTC) derivatives transactions. </a><a href="https://prime.greeks.live/area/force-majeure-event/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Force Majeure Event

Meaning ▴ A Force Majeure Event denotes an unforeseeable and unavoidable circumstance that prevents a party from fulfilling its contractual obligations, thereby absolving them from liability for non-performance. </a><a href="https://prime.greeks.live/area/force-majeure/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Force Majeure

Meaning ▴ Force Majeure designates a contractual clause excusing parties from fulfilling their obligations due to extraordinary events beyond their reasonable control, such as natural disasters, acts of war, or government prohibitions, which render performance impossible or commercially impracticable. </a><a href="https://prime.greeks.live/area/isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Isda Master Agreement

Meaning ▴ The ISDA Master Agreement is a standardized contractual framework for privately negotiated over-the-counter (OTC) derivatives transactions, establishing common terms for a wide array of financial instruments. </a><a href="https://prime.greeks.live/question/how-does-the-2002-isda-framework-influence-the-negotiation-of-credit-support-annexes/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Credit Support

The 2002 ISDA framework imposes a disciplined risk architecture that elevates CSA negotiations from a task to a core strategic function. </a><a href="https://prime.greeks.live/area/2002-isda/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## 2002 Isda

Meaning ▴ The 2002 ISDA Master Agreement constitutes a standardized contractual framework, widely adopted within the over-the-counter (OTC) derivatives market, establishing foundational terms for bilateral derivatives transactions. </a><a href="https://prime.greeks.live/area/risk-management-architecture/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Risk Management Architecture

Meaning ▴ A Risk Management Architecture constitutes a structured framework comprising policies, processes, systems, and controls designed to identify, measure, monitor, and mitigate financial and operational risks across an institution's trading and asset management activities. </a><a href="https://prime.greeks.live/area/termination-event/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Termination Event

Meaning ▴ A Termination Event denotes a pre-specified condition or set of criteria, contractually defined or algorithmically encoded, whose verified occurrence mandates the immediate cessation or unwinding of a financial agreement, especially prevalent within institutional digital asset derivatives. </a><a href="https://prime.greeks.live/question/what-are-the-main-differences-between-local-and-stochastic-volatility-models/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Three Local Business

Local volatility models define volatility as a deterministic function of price and time, while stochastic models treat it as a random process. </a><a href="https://prime.greeks.live/question/what-are-the-main-differences-between-local-and-stochastic-volatility-models/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![An institutional-grade platform's RFQ protocol interface, with a price discovery engine and precision guides, enables high-fidelity execution for digital asset derivatives. Integrated controls optimize market microstructure and liquidity aggregation within a Principal's operational framework](https://options.greeks.live/wp-content/uploads/2025/07/proprietary-institutional-digital-asset-derivatives-rfq-protocol-engine-facilitating-high-fidelity-execution-and-granular-market-microstructure-analysis-for-prime-os.jpg)

## Eight Local Business

Local volatility models define volatility as a deterministic function of price and time, while stochastic models treat it as a random process. </a><a href="https://prime.greeks.live/area/affected-transactions/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![An intricate, transparent cylindrical system depicts a sophisticated RFQ protocol for digital asset derivatives. Internal glowing elements signify high-fidelity execution and algorithmic trading](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-protocol-architecture.jpg)

## Affected Transactions

Meaning ▴ Affected Transactions refers to a distinct subset of financial operations within a trading system that are subject to specific, pre-defined conditions, rules, or regulatory mandates which alter their standard processing flow. </a><a href="https://prime.greeks.live/area/risk-management/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A precisely engineered system features layered grey and beige plates, representing distinct liquidity pools or market segments, connected by a central dark blue RFQ protocol hub. Transparent teal bars, symbolizing multi-leg options spreads or algorithmic trading pathways, intersect through this core, facilitating price discovery and high-fidelity execution of digital asset derivatives via an institutional-grade Prime RFQ](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-engine-facilitating-high-fidelity-multi-leg-options-spread-execution-best-price-discovery-and-latent-liquidity-access-for-prime-brokerage.jpg)

## Risk Management

Meaning ▴ Risk Management is the systematic process of identifying, assessing, and mitigating potential financial exposures and operational vulnerabilities within an institutional trading framework. </a><a href="https://prime.greeks.live/area/waiting-period/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Abstract structure combines opaque curved components with translucent blue blades, a Prime RFQ for institutional digital asset derivatives. It represents market microstructure optimization, high-fidelity execution of multi-leg spreads via RFQ protocols, ensuring best execution and capital efficiency across liquidity pools](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-optimizing-market-microstructure-for-high-fidelity-execution-best-execution-price-discovery-across-liquidity-pools-and-prime-os.jpg)

## Waiting Period

Meaning ▴ A waiting period represents a mandated temporal delay imposed before a specific system action, such as order execution or data release, can proceed. </a><a href="https://prime.greeks.live/question/how-does-the-2002-isda-framework-influence-the-negotiation-of-credit-support-annexes/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A dark, reflective surface displays a luminous green line, symbolizing a high-fidelity RFQ protocol channel within a Crypto Derivatives OS. This signifies precise price discovery for digital asset derivatives, ensuring atomic settlement and optimizing portfolio margin](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-execution-pathway-optimizing-principal-liquidity-and-capital-efficiency.jpg)

## Credit Support Document

The 2002 ISDA framework imposes a disciplined risk architecture that elevates CSA negotiations from a task to a core strategic function. </a><a href="https://prime.greeks.live/area/credit-support-annex/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Interconnected, precisely engineered modules, resembling Prime RFQ components, illustrate an RFQ protocol for digital asset derivatives. The diagonal conduit signifies atomic settlement within a dark pool environment, ensuring high-fidelity execution and capital efficiency](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-protocol-engine.jpg)

## Credit Support Annex

Meaning ▴ The Credit Support Annex, or CSA, is a legal document forming part of the ISDA Master Agreement, specifically designed to govern the exchange of collateral between two counterparties in over-the-counter derivative transactions. </a><a href="https://prime.greeks.live/question/how-does-a-market-makers-inventory-position-influence-the-quotes-it-provides-to-clients/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A central dark aperture, like a precision matching engine, anchors four intersecting algorithmic pathways. Light-toned planes represent transparent liquidity pools, contrasting with dark teal sections signifying dark pool or latent liquidity](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-execution-engine-9.jpg)

## Agreement Provides

A market maker's inventory dictates its quotes by systematically skewing prices to offload risk and steer its position back to neutral. </a><a href="https://prime.greeks.live/area/credit-risk/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![An institutional grade RFQ protocol nexus, where two principal trading system components converge. A central atomic settlement sphere glows with high-fidelity execution, symbolizing market microstructure optimization for digital asset derivatives via Prime RFQ](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-execution-microstructure-2.jpg)

## Credit Risk

Meaning ▴ Credit risk quantifies the potential financial loss arising from a counterparty's failure to fulfill its contractual obligations within a transaction. </a><a href="https://prime.greeks.live/question/what-are-the-key-differences-in-calculating-the-termination-amount-for-a-force-majeure-event-versus-an-event-of-default/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![An arc of interlocking, alternating pale green and dark grey segments, with black dots on light segments. This symbolizes a modular RFQ protocol for institutional digital asset derivatives, representing discrete private quotation phases or aggregated inquiry nodes](https://options.greeks.live/wp-content/uploads/2025/07/modular-rfq-protocol-segments-for-institutional-digital-asset-derivatives.jpg)

## Majeure Event

The calculation for an Event of Default is a unilateral risk mitigation tool; for Force Majeure, it is a bilateral, fair-value process. </a><a href="https://prime.greeks.live/question/how-has-the-distinction-between-liquid-and-illiquid-instruments-under-mifid-ii-affected-bond-market-structure/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Two distinct components, beige and green, are securely joined by a polished blue metallic element. This embodies a high-fidelity RFQ protocol for institutional digital asset derivatives, ensuring atomic settlement and optimal liquidity](https://options.greeks.live/wp-content/uploads/2025/07/institutional-rfq-protocol-for-digital-asset-derivatives-high-fidelity-link.jpg)

## Affected Party

MiFID II codified bond liquidity into a binary state, forcing market structure to evolve around formal transparency thresholds. </a><a href="https://prime.greeks.live/question/what-are-the-key-differences-between-a-prime-brokerage-agreement-and-an-isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Sleek teal and beige forms converge, embodying institutional digital asset derivatives platforms. A central RFQ protocol hub with metallic blades signifies high-fidelity execution and price discovery](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-engine-microstructure.jpg)

## Master Agreement

A Prime Brokerage Agreement is a centralized service contract; an ISDA Master Agreement is a standardized bilateral derivatives protocol. </a><a href="https://prime.greeks.live/area/early-termination-date/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A polished, light surface interfaces with a darker, contoured form on black. This signifies the RFQ protocol for institutional digital asset derivatives, embodying price discovery and high-fidelity execution](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-interface.jpg)

## Early Termination Date

Meaning ▴ The Early Termination Date specifies a pre-agreed date or a date triggered by specific events, upon which a derivative contract or financial agreement concludes prior to its originally scheduled maturity. </a><a href="https://prime.greeks.live/area/close-out-amount/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Complex metallic and translucent components represent a sophisticated Prime RFQ for institutional digital asset derivatives. This market microstructure visualization depicts high-fidelity execution and price discovery within an RFQ protocol](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-institutional-digital-asset-derivatives-rfq-protocol-dynamics.jpg)

## Close-Out Amount

Meaning ▴ The Close-Out Amount represents the definitive financial value required to terminate a derivatives contract or position, typically calculated upon a default event or a pre-defined termination trigger. </a><a href="https://prime.greeks.live/area/early-termination/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Modular institutional-grade execution system components reveal luminous green data pathways, symbolizing high-fidelity cross-asset connectivity. This depicts intricate market microstructure facilitating RFQ protocol integration for atomic settlement of digital asset derivatives within a Principal's operational framework, underpinned by a Prime RFQ intelligence layer](https://options.greeks.live/wp-content/uploads/2025/07/modular-high-fidelity-execution-architecture-for-institutional-digital-asset-derivatives-rfq-protocol-integration-and-principals-operational-framework-optimization.jpg)

## Early Termination

Meaning ▴ A contractual provision or systemic mechanism enabling pre-scheduled cessation of a derivative instrument or financial agreement prior to its original maturity. </a><a href="https://prime.greeks.live/question/what-are-the-primary-differences-in-documenting-a-loss-calculation-versus-a-close-out-amount-calculation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sophisticated system's core component, representing an Execution Management System, drives a precise, luminous RFQ protocol beam. This beam navigates between balanced spheres symbolizing counterparties and intricate market microstructure, facilitating institutional digital asset derivatives trading, optimizing price discovery, and ensuring high-fidelity execution within a prime brokerage framework](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-execution-engine-10.jpg)

## Close-Out Amount Calculation

Documenting Loss substantiates a party's good-faith damages; documenting a Close-out Amount validates a market-based replacement cost. </a><a href="https://prime.greeks.live/question/how-does-an-rfq-audit-trail-support-best-execution-requirements-under-mifid-ii/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A futuristic circular lens or sensor, centrally focused, mounted on a robust, multi-layered metallic base. This visual metaphor represents a precise RFQ protocol interface for institutional digital asset derivatives, symbolizing the focal point of price discovery, facilitating high-fidelity execution and managing liquidity pool access for Bitcoin options](https://options.greeks.live/wp-content/uploads/2025/07/institutional-rfq-protocol-for-digital-asset-derivatives-execution.jpg)

## Support Document

An RFQ audit trail provides the immutable, data-driven evidence required to prove a systematic process for achieving best execution under MiFID II. </a>

**Tags:** [Termination Event](https://options.greeks.live/area/termination-event/), [Financial Regulation](https://options.greeks.live/area/financial-regulation/), [Force Majeure](https://options.greeks.live/area/force-majeure/), [Contractual Hierarchy](https://options.greeks.live/area/contractual-hierarchy/), [Waiting Period](https://options.greeks.live/area/waiting-period/), [Close-Out Amount](https://options.greeks.live/area/close-out-amount/)	

## Discover More

- 
### [Can Isda Protocols Be Used as a Complete Substitute for a Full Migration to the 2002 Master Agreement?](https://options.greeks.live/question/can-isda-protocols-be-used-as-a-complete-substitute-for-a-full-migration-to-the-2002-master-agreement/)
![Abstract layers visualize institutional digital asset derivatives market microstructure. Teal dome signifies optimal price discovery, high-fidelity execution. Dark rings represent dynamic RFQ protocols and multi-leg spread execution. Robust cream layer underscores prime brokerage liquidity and capital efficiency.](https://options.greeks.live/wp-content/uploads/2025/08/high-fidelity-digital-asset-derivatives-rfq-execution-protocol-layers-and-market-microstructure-optimization.jpg)

ISDA Protocols are surgical patches; they cannot substitute for the foundational system upgrade of a full 2002 Master Agreement migration.

- 
### [What Constitutes a Commercially Reasonable Procedure under the 2002 ISDA Master Agreement?](https://options.greeks.live/question/what-constitutes-a-commercially-reasonable-procedure-under-the-2002-isda-master-agreement-2/)
![A multi-faceted crystalline structure, featuring sharp angles and translucent blue and clear elements, rests on a metallic base. This embodies Institutional Digital Asset Derivatives and precise RFQ protocols, enabling High-Fidelity Execution. Light interaction depicts Price Discovery within complex Market Microstructure, leveraging a Prime RFQ Intelligence Layer for Multi-Leg Spread optimization and Capital Efficiency.](https://options.greeks.live/wp-content/uploads/2025/07/high-fidelity-digital-asset-derivatives-rfq-market-microstructure.jpg)

A commercially reasonable procedure is an objectively verifiable valuation protocol, central to the 2002 ISDA's risk-mitigation architecture.

- 
### [What Are the Practical Implications of the Close-Out Amount for a Derivatives Trading Desk?](https://options.greeks.live/question/what-are-the-practical-implications-of-the-close-out-amount-for-a-derivatives-trading-desk/)
![Sharp, intersecting elements, two light, two teal, on a reflective disc, centered by a precise mechanism. This visualizes institutional liquidity convergence for multi-leg options strategies in digital asset derivatives. It embodies high-fidelity execution via RFQ protocol within a Principal's operational framework, leveraging algorithmic trading engines for capital efficiency.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-block-trade-execution.jpg)

The close-out amount is a defensible, calculated value that crystallizes a portfolio's worth upon contract termination.

- 
### [How Does the 2002 ISDA’s Set off Provision Change Counterparty Risk Management?](https://options.greeks.live/question/how-does-the-2002-isdas-set-off-provision-change-counterparty-risk-management/)
![Close-up of intricate mechanical components symbolizing a robust Prime RFQ for institutional digital asset derivatives. These precision parts reflect market microstructure and high-fidelity execution within an RFQ protocol framework, ensuring capital efficiency and optimal price discovery for Bitcoin options.](https://options.greeks.live/wp-content/uploads/2025/07/engineered-core-systems-driving-institutional-digital-asset-derivatives-rfq-protocol-execution.jpg)

The 2002 ISDA's set-off provision enables a non-defaulting party to reduce its net payment by offsetting it with unrelated debts.

- 
### [How Does the 2002 ISDA Agreement Affect the Calculation of Default Interest?](https://options.greeks.live/question/how-does-the-2002-isda-agreement-affect-the-calculation-of-default-interest/)
![A precision-engineered metallic and glass system depicts the core of an Institutional Grade Prime RFQ, facilitating high-fidelity execution for Digital Asset Derivatives. Transparent layers represent visible liquidity pools and the intricate market microstructure supporting RFQ protocol processing, ensuring atomic settlement capabilities.](https://options.greeks.live/wp-content/uploads/2025/08/robust-institutional-digital-asset-derivatives-trading-platform-for-optimized-rfq-protocol-execution-and-deep-liquidity-access.jpg)

The 2002 ISDA Agreement codifies a clear, commercially grounded methodology for calculating default interest, enhancing risk management.

- 
### [How Does the Close-Out Amount Calculation Differ between the 1992 and 2002 ISDA Agreements?](https://options.greeks.live/question/how-does-the-close-out-amount-calculation-differ-between-the-1992-and-2002-isda-agreements/)
![Central reflective hub with radiating metallic rods and layered translucent blades. This visualizes an RFQ protocol engine, symbolizing the Prime RFQ orchestrating multi-dealer liquidity for institutional digital asset derivatives. It ensures high-fidelity execution, transparent price discovery, and atomic settlement within complex market microstructure.](https://options.greeks.live/wp-content/uploads/2025/07/high-fidelity-digital-asset-rfq-execution-and-liquidity-management.jpg)

The 2002 ISDA Agreement replaced the 1992 version's subjective "Loss" calculation with an objective "Close-Out Amount" standard.

- 
### [How Does the 2002 ISDA Framework Mitigate Systemic Risk during a Counterparty Default?](https://options.greeks.live/question/how-does-the-2002-isda-framework-mitigate-systemic-risk-during-a-counterparty-default/)
![Abstract spheres and a sharp disc depict an Institutional Digital Asset Derivatives ecosystem. A central Principal's Operational Framework interacts with a Liquidity Pool via RFQ Protocol for High-Fidelity Execution. A distinct Crypto Derivatives OS component signifies Aggregated Liquidity and Price Discovery in Market Microstructure.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-framework.jpg)

The 2002 ISDA Framework mitigates systemic risk by contractually netting all trades into a single, terminable agreement.

- 
### [What Are the Best Practices for Documenting a Derivatives Close-Out?](https://options.greeks.live/question/what-are-the-best-practices-for-documenting-a-derivatives-close-out/)
![Sleek, modular infrastructure for institutional digital asset derivatives trading. Its intersecting elements symbolize integrated RFQ protocols, facilitating high-fidelity execution and precise price discovery across complex multi-leg spreads. This represents a Prime RFQ intelligence layer for optimal capital efficiency and reduced slippage in volatile markets.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-system-optimizing-high-fidelity-block-trade-liquidity-and-multi-leg-spread-precision.jpg)

A robust derivatives close-out requires a pre-emptive documentation architecture to ensure legally-defensible, systematic termination.

- 
### [Can a Force Majeure Clause Be Added to a 1992 ISDA Agreement Bilaterally?](https://options.greeks.live/question/can-a-force-majeure-clause-be-added-to-a-1992-isda-agreement-bilaterally/)
![Two intersecting technical arms, one opaque metallic and one transparent blue with internal glowing patterns, pivot around a central hub. This symbolizes a Principal's RFQ protocol engine, enabling high-fidelity execution and price discovery for institutional digital asset derivatives. It depicts dynamic market microstructure interactions, ensuring atomic settlement and optimizing multi-leg spread options.](https://options.greeks.live/wp-content/uploads/2025/07/principal-grade-digital-asset-derivatives-rfq-execution-engine.jpg)

A force majeure clause can be bilaterally added to a 1992 ISDA to create a bespoke protocol for managing non-financial performance impossibility.

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                "text": "The internal logic of the 2002 ISDA Master Agreement\u2019s hierarchy is built upon the principle of specificity and the source of the constraint. Legal prohibitions are considered more fundamental and definitive than operational disruptions. The framework is designed to create a clear decision tree for counterparties, eliminating the potential for disputes arising from a party attempting to claim the more advantageous termination event. This structure provides a robust and predictable mechanism for unwinding transactions under extreme stress, which is the primary function of the master agreement as a risk management architecture."
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                "text": "The determination of the Close-Out Amount is a granular process designed to produce a fair market value. The table below details the inputs and considerations for this calculation in the context of an Illegality or Force Majeure event, which typically falls under the \"Mid-Market\" valuation methodology."
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```


---

**Original URL:** https://options.greeks.live/question/how-does-the-2002-isda-agreement-prioritize-between-a-force-majeure-event-and-an-illegality/
