# How Does the 2002 ISDA Close-Out Amount Differ from the 1992 Loss Calculation? ▴ Question

**Published:** 2025-07-30
**Categories:** Question

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## Concept

The transition from the 1992 International Swaps and Derivatives Association (ISDA) Master Agreement’s “Loss” calculation to the 2002 Agreement’s “[Close-Out Amount](https://prime.greeks.live/area/close-out-amount/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)” represents a fundamental architectural upgrade in derivatives risk management. Your focus on this distinction signals a sophisticated understanding of [counterparty risk](https://prime.greeks.live/area/counterparty-risk/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) and the mechanics of default. You are looking beyond the surface-level legal language to the core operational and philosophical shift in how the market quantifies and resolves distress. The 1992 framework operated on a principle of delegated authority, granting significant discretion to the non-defaulting party.

In contrast, the 2002 framework implements a system of verifiable objectivity, demanding a transparent and commercially justifiable process. This evolution was a direct response to the market’s need for a more robust, predictable, and equitable mechanism for terminating derivative contracts in volatile conditions.

At its core, the 1992 ISDA’s “Loss” provision was a subjective measure. It empowered the non-defaulting party to determine its total losses and costs, with the primary constraint being that the determination be made in [good faith](https://prime.greeks.live/area/good-faith/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) and be [commercially reasonable](https://prime.greeks.live/area/commercially-reasonable/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). Courts interpreted this standard as a test of rationality, meaning a calculation could only be overturned if it was so illogical that no reasonable party could have arrived at it.

This created a high barrier to challenging a calculation, effectively creating a system that prioritized finality and discretion over granular accuracy. The system architecture was designed for speed and deference in a less complex market environment.

> The core architectural change between the 1992 and 2002 ISDA agreements is the deliberate pivot from a subjective, deference-based calculation standard to an objective, evidence-based one.

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## What Was the Original Design Philosophy?

The 1992 [ISDA Master Agreement](https://prime.greeks.live/area/isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) provided two pathways for calculating the termination payment ▴ [Market Quotation](https://prime.greeks.live/area/market-quotation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) and Loss. Market Quotation was a more prescriptive method, requiring the soliciting party to obtain quotes from at least three major dealers in the relevant market. It was a structured procedure designed to produce an objective valuation based on external data points. The “Loss” method served as a flexible alternative, a catch-all designed for situations where obtaining multiple market quotes was impractical or would fail to capture the full economic impact of the termination.

It accounted for all costs, including the unwinding of hedges and other ancillary financial consequences. The [determining party](https://prime.greeks.live/area/determining-party/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)’s good faith assessment was the central pillar of this approach, reflecting a market structure built on established dealer relationships and a degree of implicit trust.

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## The Systemic Upgrade to Close-Out Amount

The 2002 ISDA Master Agreement discarded the dualistic Market Quotation/Loss structure in favor of a single, unified methodology termed “Close-Out Amount”. This was a deliberate redesign aimed at synthesizing the objectivity of Market Quotation with the flexibility of Loss. The governing language of the 2002 Agreement mandates that the determining party must “act in good faith and use [commercially reasonable procedures](https://prime.greeks.live/area/commercially-reasonable-procedures/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) in order to produce a [commercially reasonable result](https://prime.greeks.live/question/how-do-courts-interpret-commercially-reasonable-procedures-in-close-out-amount-calculations/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)”. This phrasing represents a critical evolution.

The standard is no longer mere rationality; it is one of objective commercial reasonableness. This shift means that both the process (the procedures used) and the outcome (the final amount) are subject to scrutiny against an objective market standard. The determining party must be prepared to demonstrate, with evidence, that its actions were consistent with those of a reasonable market participant under the prevailing circumstances. This change reflects the maturation of the derivatives market, demanding higher standards of transparency and procedural fairness in the face of increasing complexity and transaction volumes.

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## Strategy

Strategically navigating a derivative portfolio through a counterparty default requires a precise understanding of the governing contractual architecture. The choice between operating under a 1992 or a [2002 ISDA Master Agreement](https://prime.greeks.live/area/2002-isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) fundamentally alters the strategic calculus for both the determining party and the defaulting party during a close-out. The shift from “Loss” to “Close-Out Amount” was a direct consequence of systemic pressures for a more transparent and less contentious valuation process, aiming to reduce the uncertainty and potential for disputes that characterized the earlier framework. The strategic imperative moved from defending a subjective position to evidencing an objective process.

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## Rationale for the Systemic Evolution

The primary driver for the change was the market’s demand for greater objectivity in termination calculations. The 1992 “Loss” standard, with its deference to the determining party’s rational judgment, was perceived as opaque and potentially inequitable. In a crisis, this subjectivity could lead to wildly divergent valuation outcomes, fueling protracted legal battles that added further instability to the financial system. The architects of the [2002 ISDA](https://prime.greeks.live/area/2002-isda/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) sought to engineer a more resilient protocol.

By introducing the explicit requirement for “commercially [reasonable procedures](https://prime.greeks.live/question/how-do-courts-interpret-commercially-reasonable-procedures-in-close-out-amount-calculations/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)” and a “commercially reasonable result,” the 2002 agreement aimed to codify a best-practice standard that could be independently verified. This was a strategic move to bolster market confidence by ensuring that close-out amounts would more closely reflect a true economic reality, regardless of which party was making the calculation.

> The strategic shift from the 1992 to the 2002 ISDA framework is one of moving from a position of protected discretion to one of demonstrable diligence.

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## Comparative Analysis of Calculation Standards

Understanding the strategic differences requires a granular comparison of the two regimes. The following table breaks down the core components of each calculation standard, providing a clear view of the operational and legal distinctions that drive strategic decision-making.

### Table 1 ▴ Strategic Comparison of ISDA Close-Out Standards

| Attribute | 1992 ISDA “Loss” Calculation | 2002 ISDA “Close-Out Amount” Calculation |
| --- | --- | --- |
| Governing Standard | A “reasonable determination in good faith.” Interpreted by courts as a standard of rationality (i.e. not so unreasonable that no reasonable person could have made it). | “Act in good faith and use commercially reasonable procedures in order to produce a commercially reasonable result.” Interpreted as a higher standard of objective reasonableness. |
| Procedural Flexibility | Highly flexible. The determining party has broad discretion in how it calculates its total losses and costs. The focus is on the final number, with less emphasis on the underlying process. | Flexible but constrained by objective standards. The procedures themselves must be commercially reasonable, opening the methodology to external scrutiny. A single quote may suffice if commercially reasonable. |
| Evidentiary Burden | The burden is on the challenging party to prove the determination was irrational or made in bad faith ▴ a very high threshold to meet. | The determining party has an implicit burden to maintain records demonstrating its procedures were commercially reasonable. The challenger’s task is to show a failure in process or an unreasonable outcome. |
| Permitted Information Sources | Broadly defined as any information the party considers relevant to its “total losses and costs.” Can include costs of unwinding internal hedges. | A non-exhaustive list is provided, including third-party quotes and market data, but all information must be used in a commercially reasonable manner. It is future-looking, focusing on the cost of a replacement transaction. |
| Potential for Dispute | Lower likelihood of a successful challenge due to the deferential “rationality” standard, but disputes could be highly adversarial due to the perceived subjectivity. | Arguably greater scope for disputes to arise, as the standard of “objective reasonableness” provides more concrete grounds for a challenge. |

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## What Are the Strategic Implications for the Determining Party?

For the party calculating the termination payment, the 2002 ISDA imposes a more rigorous operational discipline. Under the 1992 framework, a determining party could act with a degree of confidence that its calculation would be upheld, provided it avoided outright irrationality. The strategy was one of internal assessment and assertion. Under the 2002 framework, the strategy must shift to one of procedural diligence and documentation.

The determining party is no longer just a calculator; it is the architect of a defensible valuation process. This requires a proactive approach to gathering market data, soliciting quotes where appropriate, and meticulously documenting every step of the calculation process. While this increases the administrative burden, a well-documented, reasonable process significantly strengthens the party’s position and can lead to a more final and less contestable resolution.

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## Execution

Executing a close-out under an ISDA [Master Agreement](https://prime.greeks.live/question/how-does-the-isda-master-agreement-facilitate-both-netting-types/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) is a critical operational process that demands precision and a deep understanding of the governing contractual mechanics. The procedural differences between the 1992 “Loss” and 2002 “Close-Out Amount” calculations are substantial, requiring distinct operational playbooks. A failure to execute according to the prescribed standard can result in a successful legal challenge, leading to a re-determination of the amount owed and significant financial and reputational cost. The focus in execution moves from a simple calculation to the construction of a legally defensible valuation narrative.

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## Operational Playbook for the 1992 ISDA Loss Calculation

The execution of a “Loss” calculation under the [1992 ISDA](https://prime.greeks.live/area/1992-isda/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) is guided by its subjective, deferential standard. The operational focus is on capturing all relevant costs and losses in a manner that can be justified as rational.

- **Internal Assessment** ▴ The primary step is an internal collation of all costs and losses directly attributable to the early termination. This includes, but is not limited to, the cost of replacing or unwinding the terminated transactions, the cost of liquidating any related hedges, and any funding costs incurred.

- **Good Faith Determination** ▴ The team responsible for the calculation must act with an honest belief in the fairness of their assessment. This is the “good faith” component of the standard. Any appearance of vindictiveness or intent to penalize the defaulting party beyond actual losses can undermine the determination.

- **Rationality Check** ▴ Before finalizing the number, the determining party should perform an internal “sanity check.” The key question is ▴ Is this determination so far outside the bounds of commercial reality that a court would find it irrational? This is a low bar, but it is the critical threshold that must be met.

- **Documentation** ▴ While less procedurally intensive than the 2002 standard, maintaining a record of the components of the [loss calculation](https://prime.greeks.live/area/loss-calculation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) is a prudent measure. This documentation should articulate the basis for each cost included in the final figure.

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## How Is the 2002 Close-Out Amount Execution More Rigorous?

Executing a “Close-Out Amount” calculation requires a shift in mindset towards creating a transparent, auditable trail of commercially reasonable actions. The process must withstand external scrutiny.

- **Establish Procedures** ▴ The determining party must use “commercially reasonable procedures”. This means the first step is to establish and follow a clear, logical process for the valuation. This may involve consulting with internal risk and legal teams to define the approach before any calculations are made. The process itself becomes a key part of the execution.

- **Gather Market Intelligence** ▴ The determining party must actively seek out relevant market information. This is a more proactive step than in the 1992 regime. It can include seeking quotes for replacement transactions from third parties (one quote can be sufficient if obtaining it was a reasonable procedure), referencing pricing services, using data from electronic trading platforms, or employing internal, model-based valuations where they are consistent with market practice.

- **Act in a Timely Manner** ▴ The calculation must be performed as of the [Early Termination Date](https://prime.greeks.live/area/early-termination-date/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), or as soon as commercially reasonable thereafter. Unexplained delays in performing the calculation can be viewed as a procedurally unreasonable step.

- **Comprehensive Documentation** ▴ This is the most critical execution component. The determining party must create and preserve a detailed record of the entire process. This record becomes the primary evidence that the procedures were commercially reasonable.

> A successful execution under the 2002 ISDA is not merely about arriving at a number; it is about building a robust, evidence-based case for why that number is commercially reasonable.

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## Documentary Evidence for Defensible Execution

The quality and completeness of documentation are central to defending a close-out calculation, particularly under the 2002 agreement. The following table outlines the types of evidence that should be compiled and maintained.

### Table 2 ▴ Documentation Requirements for ISDA Close-Out Calculations

| Evidence Type | 1992 ISDA “Loss” | 2002 ISDA “Close-Out Amount” |
| --- | --- | --- |
| Internal Calculations | Summary spreadsheets detailing the components of the total loss. Memos explaining the rationale for including specific costs. | Detailed models showing all inputs, assumptions, and valuation methodologies. Records should be sufficient for a third party to replicate the calculation. |
| Third-Party Quotes | Helpful as a data point but not required. If used, records of requests and responses should be kept. | Crucial evidence. Records of all parties contacted for quotes (even those who declined to quote), the quotes received, and the rationale for selecting or discarding a quote. |
| Market Data | General market data supporting the overall reasonableness of the loss figure. | Time-stamped data from pricing services, trading screens, or other market sources used as inputs for the calculation. This demonstrates the determination was based on prevailing market conditions. |
| Procedural Records | Minimal requirement. A memo outlining the final decision-making process may be sufficient. | Essential. A complete log of actions taken, including dates, times, personnel involved, and the reasons for key decisions made during the valuation process. This forms the narrative of commercial reasonableness. |

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## References

- “ISDA Comparison – The Jolly Contrarian.” The Jolly Contrarian, 24 Sept. 2020.

- “High Court clarifies calculation of Close-out amount under 2002 ISDA Master Agreement.” Lexology, 22 Mar. 2018.

- “ISDA Master Agreements and the calculation of close-out payments.” Walker Morris, 19 Apr. 2018.

- “Derivatives Laws and Regulations Close-out Under the 1992 and 2002 ISDA Master Agreements 2025.” ICLG.com, 17 June 2025.

- “Close-Out Amount Calculations Under 2002 ISDA.” The National Law Review, 29 Mar. 2018.

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## Reflection

The evolution from the 1992 “Loss” to the 2002 “Close-Out Amount” is more than a legalistic rewording. It is a mirror held up to the maturation of the global financial markets. It reflects a systemic demand for greater accountability, transparency, and process integrity. The knowledge of this distinction provides more than just a tool for calculating a termination payment; it offers a diagnostic lens through which you can examine your own firm’s operational readiness.

Does your internal risk management architecture merely react to defaults, or is it engineered to produce a defensible, objective valuation under pressure? Is your documentation protocol an afterthought, or is it an integrated system designed to build a fortress of evidence around your actions? The ultimate strategic advantage lies in embedding the principles of objective reasonableness and procedural diligence deep within your operational DNA, ensuring that your firm can execute with precision and confidence when it matters most.

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## Glossary

<a href="https://prime.greeks.live/area/counterparty-risk/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Counterparty Risk

Meaning ▴ Counterparty risk denotes the potential for financial loss stemming from a counterparty's failure to fulfill its contractual obligations in a transaction. </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">
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## 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/commercially-reasonable/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Commercially Reasonable

Meaning ▴ Commercially Reasonable refers to actions, terms, or conditions that a prudent party would undertake or accept in a similar business context, aiming to achieve a desired outcome efficiently and effectively while considering prevailing market conditions, industry practices, and available alternatives. </a><a href="https://prime.greeks.live/area/good-faith/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Good Faith

Meaning ▴ Good Faith, in a financial and operational context, denotes the adherence to honest intent and absence of fraudulent or deceptive conduct during contractual agreements and transactional processes. </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/area/market-quotation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Market Quotation

Meaning ▴ A market quotation represents the current executable bid and ask prices for a specific financial instrument, typically accompanied by the corresponding tradable sizes or market depth at various price levels. </a><a href="https://prime.greeks.live/area/determining-party/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Determining Party

Meaning ▴ The Determining Party is the designated entity, system component, or algorithmic agent possessing the final and binding authority to initiate, validate, or conclude a specific event, transaction, or state transition within a defined operational framework. </a><a href="https://prime.greeks.live/area/commercially-reasonable-procedures/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Commercially Reasonable Procedures

Meaning ▴ Commercially Reasonable Procedures defines the standard of conduct for actions taken within a financial context, mandating diligence and adherence to prevailing market practices and conditions. </a><a href="https://prime.greeks.live/question/how-do-courts-interpret-commercially-reasonable-procedures-in-close-out-amount-calculations/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Commercially Reasonable Result

Courts interpret "commercially reasonable procedures" as an objective, evidence-based standard for valuing derivative close-outs. </a><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/2002-isda/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A transparent glass sphere rests precisely on a metallic rod, connecting a grey structural element and a dark teal engineered module with a clear lens. This symbolizes atomic settlement of digital asset derivatives via private quotation within a Prime RFQ, showcasing high-fidelity execution and capital efficiency for RFQ protocols and liquidity aggregation](https://options.greeks.live/wp-content/uploads/2025/07/architecting-high-fidelity-execution-for-institutional-digital-asset-derivatives-rfq-protocols-and-systemic-liquidity-aggregation.jpg)

## 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/question/how-do-courts-interpret-commercially-reasonable-procedures-in-close-out-amount-calculations/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sleek, circular, metallic-toned device features a central, highly reflective spherical element, symbolizing dynamic price discovery and implied volatility for Bitcoin options. This private quotation interface within a Prime RFQ platform enables high-fidelity execution of multi-leg spreads via RFQ protocols, minimizing information leakage and slippage](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-institutional-digital-asset-derivatives-rfq-execution-hub.jpg)

## Reasonable Procedures

Courts interpret "commercially reasonable procedures" as an objective, evidence-based standard for valuing derivative close-outs. </a><a href="https://prime.greeks.live/area/objective-reasonableness/?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)

## Objective Reasonableness

Meaning ▴ Objective Reasonableness denotes a quantifiable standard for evaluating the appropriateness of an action or decision within a financial system, particularly in automated trading environments. </a><a href="https://prime.greeks.live/area/market-data/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Abstract image showing interlocking metallic and translucent blue components, suggestive of a sophisticated RFQ engine. This depicts the precision of an institutional-grade Crypto Derivatives OS, facilitating high-fidelity execution and optimal price discovery within complex market microstructure for multi-leg spreads and atomic settlement](https://options.greeks.live/wp-content/uploads/2025/07/precision-engineered-market-microstructure-for-institutional-digital-asset-derivatives-rfq.jpg)

## Market Data

Meaning ▴ Market Data comprises the real-time or historical pricing and trading information for financial instruments, encompassing bid and ask quotes, last trade prices, cumulative volume, and order book depth. </a><a href="https://prime.greeks.live/question/how-does-the-isda-master-agreement-facilitate-both-netting-types/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A central core represents a Prime RFQ engine, facilitating high-fidelity execution. Transparent, layered structures denote aggregated liquidity pools and multi-leg spread strategies](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-rfq-engine-for-institutional-digital-asset-derivatives-execution.jpg)

## Master Agreement

The ISDA Master Agreement provides a dual-protocol framework for netting, optimizing cash flow efficiency while preserving capital upon counterparty default. </a><a href="https://prime.greeks.live/area/1992-isda/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![The image depicts two intersecting structural beams, symbolizing a robust Prime RFQ framework for institutional digital asset derivatives. These elements represent interconnected liquidity pools and execution pathways, crucial for high-fidelity execution and atomic settlement within market microstructure](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-cross-market-execution-architecture-for-digital-assets.jpg)

## 1992 Isda

Meaning ▴ The 1992 ISDA Master Agreement represents a standardized contractual framework for privately negotiated over-the-counter (OTC) derivative transactions between two counterparties. </a><a href="https://prime.greeks.live/area/loss-calculation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Intersecting sleek components of a Crypto Derivatives OS symbolize RFQ Protocol for Institutional Grade Digital Asset Derivatives. Luminous internal segments represent dynamic Liquidity Pool management and Market Microstructure insights, facilitating High-Fidelity Execution for Block Trade strategies within a Prime Brokerage framework](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-high-fidelity-engine.jpg)

## Loss Calculation

Meaning ▴ Loss Calculation quantifies the financial depreciation of an asset or position against its cost basis or a specified liquidation threshold. </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 macro view reveals the intricate mechanical core of an institutional-grade system, symbolizing the market microstructure of digital asset derivatives trading. Interlocking components and a precision gear suggest high-fidelity execution and algorithmic trading within an RFQ protocol framework, enabling price discovery and liquidity aggregation for multi-leg spreads on a Prime RFQ](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-system-precision-engine.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>

**Tags:** [Market Quotation](https://options.greeks.live/area/market-quotation/), [2002 ISDA Master Agreement](https://options.greeks.live/area/2002-isda-master-agreement/), [Financial Regulation](https://options.greeks.live/area/financial-regulation/), [Good Faith](https://options.greeks.live/area/good-faith/), [Derivatives Law](https://options.greeks.live/area/derivatives-law/), [Close-Out Amount](https://options.greeks.live/area/close-out-amount/)	

## Discover More

- 
### [Can a Party Still Use Its Own Internal Models for Valuation under the More Objective 2002 ISDA Standard?](https://options.greeks.live/question/can-a-party-still-use-its-own-internal-models-for-valuation-under-the-more-objective-2002-isda-standard/)
![An exposed high-fidelity execution engine reveals the complex market microstructure of an institutional-grade crypto derivatives OS. Precision components facilitate smart order routing and multi-leg spread strategies. A central intelligence layer supports RFQ protocols, ensuring optimal price discovery and robust counterparty risk management for prime brokerage operations.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-engine-microstructure-2.jpg)

The 2002 ISDA framework permits internal model valuation, provided the methodology constitutes a defensible, commercially reasonable system.

- 
### [What Role Do Third-Party Quotations Play in Validating a Close-Out Amount Calculation?](https://options.greeks.live/question/what-role-do-third-party-quotations-play-in-validating-a-close-out-amount-calculation/)
![A central, metallic, complex mechanism with glowing teal data streams represents an advanced Crypto Derivatives OS. It visually depicts a Principal's robust RFQ protocol engine, driving high-fidelity execution and price discovery for institutional-grade digital asset derivatives. The intricate structure suggests a sophisticated market microstructure for atomic settlement.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-execution-engine-8.jpg)

Third-party quotations provide an objective, market-based anchor for validating a close-out amount as commercially reasonable.

- 
### [Can Internal Valuation Models Satisfy the Commercially Reasonable Procedures Requirement under the 2002 ISDA?](https://options.greeks.live/question/can-internal-valuation-models-satisfy-the-commercially-reasonable-procedures-requirement-under-the-2002-isda/)
![Angular metallic structures precisely intersect translucent teal planes against a dark backdrop. This embodies an institutional-grade Digital Asset Derivatives platform's market microstructure, signifying high-fidelity execution via RFQ protocols. It demonstrates liquidity aggregation, algorithmic price discovery, portfolio margin capabilities, and systemic risk mitigation within a Prime Brokerage OS.](https://options.greeks.live/wp-content/uploads/2025/07/digital-asset-derivatives-rfq-high-fidelity-execution-system-architecture.jpg)

Internal models can satisfy ISDA's reasonability test if executed within a robust, transparent, and auditable system architecture.

- 
### [What Is the Main Difference in the Close out Calculation between the 1992 and 2002 ISDA?](https://options.greeks.live/question/what-is-the-main-difference-in-the-close-out-calculation-between-the-1992-and-2002-isda/)
![A sophisticated metallic mechanism with integrated translucent teal pathways on a dark background. This abstract visualizes the intricate market microstructure of an institutional digital asset derivatives platform, specifically the RFQ engine facilitating private quotation and block trade execution. It underscores high-fidelity execution and atomic settlement within a secure Prime RFQ, revealing latent liquidity and capital efficiency.](https://options.greeks.live/wp-content/uploads/2025/07/systemic-framework-for-institutional-digital-asset-derivatives-rfq-price-discovery-and-atomic-settlement.jpg)

The 2002 ISDA replaces the 1992's rigid 'Market Quotation/Loss' with a flexible, 'commercially reasonable' Close-out Amount.

- 
### [How Does the 2002 ISDA Standard Impact Litigation Risk Compared to the 1992 Version?](https://options.greeks.live/question/how-does-the-2002-isda-standard-impact-litigation-risk-compared-to-the-1992-version/)
![Translucent circular elements represent distinct institutional liquidity pools and digital asset derivatives. A central arm signifies the Prime RFQ facilitating RFQ-driven price discovery, enabling high-fidelity execution via algorithmic trading, optimizing capital efficiency within complex market microstructure.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-best-execution-framework.jpg)

The 2002 ISDA standard mitigates litigation risk by replacing subjective valuation with an objective, commercially reasonable process.

- 
### [What Are the Primary Differences in Close out Procedures between the 1992 and 2002 Isda Master Agreements?](https://options.greeks.live/question/what-are-the-primary-differences-in-close-out-procedures-between-the-1992-and-2002-isda-master-agreements/)
![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 enhances close-out by replacing subjective loss calculations with an objective, commercially reasonable standard.

- 
### [In What Scenarios Might a Firm Prefer a 1992 ISDA over the More Protective 2002 Version?](https://options.greeks.live/question/in-what-scenarios-might-a-firm-prefer-a-1992-isda-over-the-more-protective-2002-version/)
![Precisely bisected, layered spheres symbolize a Principal's RFQ operational framework. They reveal institutional market microstructure, deep liquidity pools, and multi-leg spread complexity, enabling high-fidelity execution and atomic settlement for digital asset derivatives via an advanced Prime RFQ.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-microstructure-core.jpg)

A firm may prefer the 1992 ISDA to leverage its subjective close-out mechanics as a tool for strategic advantage in specific counterparty relationships.

- 
### [How Does the Close out Calculation Differ between the 1992 and 2002 Isda Agreements?](https://options.greeks.live/question/how-does-the-close-out-calculation-differ-between-the-1992-and-2002-isda-agreements/)
![A central, dynamic, multi-bladed mechanism visualizes Algorithmic Trading engines and Price Discovery for Digital Asset Derivatives. Flanked by sleek forms signifying Latent Liquidity and Capital Efficiency, it illustrates High-Fidelity Execution via RFQ Protocols within an Institutional Grade framework, minimizing Slippage.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-market-microstructure-rfq-protocol-optimization.jpg)

The 2002 ISDA Agreement replaces the rigid 1992 'Market Quotation/Loss' with a flexible 'Close-out Amount' based on commercial reasonableness.

- 
### [Can a Determining Party Choose the Most Favorable Outcome within a Reasonable Range?](https://options.greeks.live/question/can-a-determining-party-choose-the-most-favorable-outcome-within-a-reasonable-range/)
![A polished blue sphere representing a digital asset derivative rests on a metallic ring, symbolizing market microstructure and RFQ protocols, supported by a foundational beige sphere, an institutional liquidity pool. A smaller blue sphere floats above, denoting atomic settlement or a private quotation within a Principal's Prime RFQ for high-fidelity execution.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-market-microstructure-and-rfq-protocols.jpg)

A Determining Party must act within an objectively reasonable range and cannot simply choose the most favorable outcome.

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            "acceptedAnswer": {
                "@type": "Answer",
                "text": "For the party calculating the termination payment, the 2002 ISDA imposes a more rigorous operational discipline. Under the 1992 framework, a determining party could act with a degree of confidence that its calculation would be upheld, provided it avoided outright irrationality. The strategy was one of internal assessment and assertion. Under the 2002 framework, the strategy must shift to one of procedural diligence and documentation. The determining party is no longer just a calculator; it is the architect of a defensible valuation process. This requires a proactive approach to gathering market data, soliciting quotes where appropriate, and meticulously documenting every step of the calculation process. While this increases the administrative burden, a well-documented, reasonable process significantly strengthens the party's position and can lead to a more final and less contestable resolution."
            }
        },
        {
            "@type": "Question",
            "name": "How Is The 2002 Close-Out Amount Execution More Rigorous?",
            "acceptedAnswer": {
                "@type": "Answer",
                "text": "Executing a \"Close-Out Amount\" calculation requires a shift in mindset towards creating a transparent, auditable trail of commercially reasonable actions. The process must withstand external scrutiny."
            }
        }
    ]
}
```


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