# How Does the 2002 ISDA Master Agreement Change the Standard for Close-Out Calculations? ▴ 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) represents a fundamental architectural upgrade to the operational core of over-the-counter (OTC) derivatives markets. Its primary innovation lies in redesigning the protocol for calculating termination payments, moving from a bifurcated and often problematic system to a unified, more robust standard. This change was not a minor patch; it was a necessary system overhaul engineered in response to critical failures observed during the market stresses of the late 1990s. The core of this evolution is the replacement of the elective measures of ‘[Market Quotation](https://prime.greeks.live/area/market-quotation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)’ and ‘Loss’ from the 1992 Agreement with a single, mandatory standard known as the ‘Close-out Amount’.

Understanding this shift requires viewing the [ISDA Master Agreement](https://prime.greeks.live/area/isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) as the foundational operating system for bilateral financial contracts. In this context, the close-out calculation is a critical subroutine that executes when a contract is terminated prematurely due to a default or other termination event. The 1992 version of this subroutine offered two distinct methods. The first, Market Quotation, was an attempt at an objective, market-based valuation.

It required the determining party to seek quotes from reference market-makers for a replacement transaction. The second method, Loss, was a more subjective measure, allowing the determining party to calculate its total losses and costs resulting from the termination. The 2002 Agreement decommissioned this dual-track system. It implemented the Close-out Amount, a single, integrated calculation designed to produce a ‘[commercially reasonable](https://prime.greeks.live/area/commercially-reasonable/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)’ result through ‘[commercially reasonable procedures](https://prime.greeks.live/area/commercially-reasonable-procedures/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)’. This represented a philosophical shift from either rigid, often impractical market polling or wide, subjective discretion toward a standard of reasoned, objective commercial practice.

> The 2002 ISDA Master Agreement replaces the dualistic and flawed ‘Market Quotation’ and ‘Loss’ methods with a single ‘Close-out Amount’ standard, embedding the principle of commercial reasonableness into the core of derivatives termination.

This architectural enhancement was driven by the manifest weaknesses of the preceding framework. The Market Quotation method proved unreliable, particularly in illiquid markets or during times of systemic stress ▴ precisely when it was most needed. Market-makers were often unwilling or unable to provide firm quotes for [replacement transactions](https://prime.greeks.live/area/replacement-transactions/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), rendering the process impractical. The Loss method, while flexible, was criticized for its inherent subjectivity, which could lead to disputes between counterparties.

The [determining party](https://prime.greeks.live/area/determining-party/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)’s calculation was difficult for the other party to verify, creating potential for disagreement over the final termination payment. The 2002 ISDA’s Close-out Amount was engineered to remedy these deficiencies by creating a more resilient and equitable mechanism. It provides the determining party with the flexibility to use various information sources ▴ including quotes, market data, and internal models ▴ while holding them to an objective standard of [commercial reasonableness](https://prime.greeks.live/area/commercial-reasonableness/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) that can be scrutinized and upheld in court.

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## Strategy

The strategic impetus behind the 2002 ISDA [Master Agreement](https://prime.greeks.live/area/master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)’s revised close-out mechanism was to engineer a more stable and predictable system for managing [counterparty credit risk](https://prime.greeks.live/area/counterparty-credit-risk/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). The shift from the 1992 framework’s dual-method election to the single ‘Close-out Amount’ standard reflects a strategic decision to prioritize objective, commercially sound outcomes over the flawed dichotomy of rigid external polling and broad internal discretion. This section analyzes the strategic deficiencies of the legacy systems and details the superior architecture of the 2002 standard.

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## The Deficiencies of the 1992 Framework

The 1992 ISDA Master Agreement presented counterparties with a choice between two distinct methodologies for calculating the termination payment ▴ Market Quotation and Loss. This choice itself introduced an element of inconsistency into the market, but the primary strategic flaws lay within the methods themselves.

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## Market Quotation a Flawed Attempt at Objectivity

On its face, the Market Quotation method appeared to be a sound, objective approach. The protocol required the [non-defaulting party](https://prime.greeks.live/area/non-defaulting-party/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) to obtain quotes from at least three major dealers in the relevant market ([Reference Market-makers](https://prime.greeks.live/area/reference-market-makers/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)) for a transaction that would replace the terminated one. The idea was to establish a fair market value through a polling process. However, its operational and strategic weaknesses became apparent during periods of market instability.

- 
**Practical Unavailability** In volatile or illiquid markets, Reference Market-makers were often reluctant to provide firm quotes. Providing a quote carried risk, and without any obligation to do so, many dealers simply refused, leaving the non-defaulting party unable to fulfill the procedural requirements.

- 
**Lack Of “Skin In The Game”** Even when quotes were provided, the quoting banks had no actual stake in the outcome. They were not obligated to stand by their quotes and execute a trade at that price. This could lead to indicative, unreliable, or even careless quotations that did not reflect true, executable market levels.

- 
**Systemic Failure Under Stress** The methodology was most likely to fail when it was needed most. During a systemic credit event, the very act of seeking multiple quotes for a large, defaulted portfolio could signal distress and further exacerbate market volatility, making it nearly impossible to obtain reasonable valuations.

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## Loss a Subjective and Contentious Alternative

The Loss method provided an alternative that was more flexible but strategically problematic due to its subjectivity. Under this method, the non-defaulting party was entitled to determine in good faith the total losses and costs it incurred as a result of the [early termination](https://prime.greeks.live/area/early-termination/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). This could include the cost of replacement transactions and the cost of unwinding hedges.

While this approach avoided the practical issues of Market Quotation, it created a new set of problems. The calculation was performed internally by the non-defaulting party, making it opaque to the defaulting party. The “good faith” standard was a relatively low bar, and disputes frequently arose over whether the calculated Loss was a true and fair representation of the economic damage suffered. This subjectivity made the outcome of a close-out less predictable and more likely to result in protracted legal challenges.

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## The 2002 Close-Out Amount a Superior System Design

The [2002 ISDA](https://prime.greeks.live/area/2002-isda/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)’s [Close-out Amount](https://prime.greeks.live/area/close-out-amount/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) was engineered as a direct response to these failings. It is a hybrid methodology that synthesizes the goal of objectivity from Market Quotation with the flexibility of Loss, all governed by a higher, more rigorous standard. The User’s Guide to the 2002 ISDA Master Agreement explicitly states that the change was designed to introduce greater objectivity.

The core directive is that the determining party must use “commercially reasonable procedures 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 single directive fundamentally realigns the strategic incentives.

> The shift to the Close-out Amount standard in the 2002 ISDA was a strategic re-engineering of risk protocols, moving from a flawed choice between impractical rigidity and contentious subjectivity to a unified, objectively verifiable standard of commercial reasonableness.

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## What Does Commercially Reasonable Mean in This Context?

This standard is both procedural and substantive. The process used to arrive at the valuation must be sound, and the final number itself must be fair. The determining party has the flexibility to use a variety of information sources, including:

- 
**Quotations from third parties** Unlike Market Quotation, there is no rigid requirement for a specific number of quotes. A single quote from a reputable dealer could be sufficient if it is commercially reasonable to rely on it.

- 
**Relevant [market data](https://prime.greeks.live/area/market-data/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)** This can include prices, rates, and volatilities from electronic platforms, broker screens, and other reliable market sources.

- 
**[Internal models](https://prime.greeks.live/area/internal-models/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)** The determining party can use its own internal pricing models, provided they are consistent with models used in its normal course of business and are based on sound, verifiable inputs.

- 
**Information about replacement transactions** If the party actually enters into a replacement trade, the cost of that trade can be used as a key component of the calculation.

This flexibility allows the valuation method to be adapted to the specific transaction and the prevailing market conditions. The governing principle is that the chosen method must be objectively defensible. The standard is what a court would apply if it were tasked with making the determination itself.

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## Comparative Analysis of Close-Out Methodologies

The strategic superiority of the 2002 Agreement’s approach becomes clear when the three methods are compared directly.

### Comparison of ISDA Close-Out Calculation Standards

| Feature | 1992 Market Quotation | 1992 Loss | 2002 Close-out Amount |
| --- | --- | --- | --- |
| Governing Standard | Procedurally rigid (e.g. must seek 3+ quotes) | “Good faith” belief of the determining party | “Commercially reasonable procedures” and “commercially reasonable result” |
| Objectivity Level | High (in theory); Low (in practice) | Low (inherently subjective) | High (objective standard of commercial reasonableness) |
| Flexibility | Low (prescriptive process) | High (broad discretion) | High (flexible use of data sources and methods) |
| Data Sources | Primarily quotes from Reference Market-makers | Any information the party deems relevant | Quotations, market data, internal models, replacement transaction costs |
| Reliability in Stressed Markets | Very low; prone to failure | High (always calculable) | High (flexible methods adapt to market conditions) |
| Potential for Disputes | High (due to procedural failures) | High (due to subjectivity) | Lower (due to objective, defensible standard) |

The 2002 ISDA also introduced a critical change regarding payment direction. The 1992 Agreement controversially allowed for a “First Method” or one-way payment system, where a non-defaulting party would not have to make a payment to a defaulting party, even if the net value of the terminated trades was in the defaulting party’s favor. The 2002 ISDA eliminated this option, mandating the “Second Method” or two-way payments in all circumstances. This ensures that the close-out process is a true reflection of the market value of the terminated positions, regardless of which party is in default.

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## Execution

The execution of a close-out under the 2002 ISDA Master Agreement is a structured, evidence-based process designed to produce a defensible and commercially reasonable valuation. This section provides a detailed operational guide to the execution of the [Close-out Amount calculation](https://prime.greeks.live/question/how-does-market-illiquidity-affect-the-validity-of-a-close-out-amount-calculation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), walking through the procedural steps and data requirements from the perspective of a non-defaulting party.

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## Initiating the Close-Out Process

The process begins with the designation of an [Early Termination Date](https://prime.greeks.live/area/early-termination-date/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). This occurs following an Event of Default (e.g. bankruptcy, failure to pay) or a Termination Event (e.g. illegality, force majeure). The non-defaulting party (or determining party) must then calculate the Close-out Amount “as of” the Early Termination Date. If doing so is not commercially reasonable, the calculation can be performed as of a date or dates shortly thereafter.

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## What Are the Steps in a Commercially Reasonable Procedure?

The core of the execution process is the adherence to “commercially reasonable procedures.” This is not a vague guideline; it implies a series of deliberate, documented actions aimed at achieving a fair valuation. The following steps outline a robust operational playbook.

- 
**Portfolio Reconciliation** The first step is to ensure an exact record of all outstanding transactions to be terminated. This involves a complete reconciliation of trade details, valuations, and any collateral posted under a Credit Support Annex (CSA).

- 
**Assessment of Market Conditions** The determining party must assess the state of the market for the types of transactions being terminated. Is the market liquid or illiquid? Is it under stress? This assessment will inform the choice of valuation methods.

- 
**Selection of Valuation Inputs** Based on the market assessment, the determining party selects one or more sources of information to calculate the replacement cost or economic value of the terminated portfolio. This is the most critical phase of the execution.

- 
**Calculation and Documentation** The party performs the calculation, meticulously documenting every input, assumption, and step in the process. This documentation is vital for demonstrating that the procedure was commercially reasonable.

- 
**Inclusion of Ancillary Costs** The calculation must also include any reasonable costs incurred in the process, such as brokerage fees, legal expenses, and costs associated with unwinding or re-establishing hedges.

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## Valuation Inputs and Data Sources

The 2002 Agreement provides significant flexibility in the choice of [data sources](https://prime.greeks.live/area/data-sources/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). The determining party should select the most reliable and appropriate sources given the specific circumstances. A key element of a commercially reasonable procedure is the ability to justify this selection.

### Data Sources for Close-out Amount Calculation

| Data Source | Description | When to Use | Considerations |
| --- | --- | --- | --- |
| Third-Party Quotations | Firm or indicative quotes from dealers for replacement transactions. | Liquid markets where reliable quotes are available. | The number of quotes is flexible; even one may suffice if reasonable. The creditworthiness of the quoting dealer should be considered. |
| Market Data Feeds | Real-time or end-of-day data from sources like Bloomberg, Reuters, or exchange feeds. | For standardized, liquid products like interest rate swaps or FX forwards. | Ensure data is from a reputable source and relevant to the specific transaction terms (e.g. currency, tenor). |
| Internal Pricing Models | Proprietary models used by the determining party to value derivatives. | For complex or illiquid products where external data is sparse. Can also be used to corroborate external data. | The model must be the same as used in the normal course of business and should be based on observable inputs where possible. Full documentation of model methodology and inputs is critical. |
| Replacement Transaction Costs | The actual price at which a replacement trade is executed with another counterparty. | When a replacement trade is actually executed close to the Early Termination Date. | This is often the most compelling evidence of loss, as seen in the Lehman/NPC case. The replacement must be on reasonably similar terms. |
| Hedge Unwinding/Re-establishing Costs | The actual costs or gains realized from liquidating or creating hedges related to the terminated transactions. | In all cases where the terminated portfolio was hedged. | A clear and documented link must be established between the hedges and the terminated transactions. |

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## Hypothetical Execution a Walkthrough

Imagine a scenario where ‘Bank A’ is the non-defaulting party terminating a portfolio of interest rate swaps with ‘Hedge Fund B’ (the defaulting party) on an Early Termination Date of August 1, 2025.

**Step 1 Portfolio Identification**

Bank A identifies two outstanding swaps with Hedge Fund B:

- 
**Swap 1** 5-year USD Interest Rate Swap, Notional $100m, Bank A pays fixed 2.50%, receives SOFR.

- 
**Swap 2** 10-year EUR Interest Rate Swap, Notional €50m, Bank A receives fixed 1.75%, pays EURIBOR.

**Step 2 Market Assessment & Procedure Selection**

Bank A’s trading desk assesses the market. The USD swap market is liquid. The EUR swap market is reasonably liquid but less so at the 10-year tenor. Bank A decides on a procedure ▴ it will seek firm quotes from three dealers for replacement swaps and will also calculate the portfolio’s mark-to-market value using its internal, industry-standard pricing models fed with observable market data as a cross-check.

> A robust execution of the Close-out Amount calculation involves a documented, multi-source valuation process that can withstand objective scrutiny, blending market data, quotations, and internal models to arrive at a commercially reasonable result.

**Step 3 Data Gathering & Calculation**

Bank A’s actions:

- 
**Obtains Quotes** It requests and receives quotes for the cost of entering into replacement swaps from three other banks.

- 
**Internal Valuation** It runs its internal models using the current SOFR and EURIBOR curves.

- 
**Cost Analysis** It documents $15,000 in legal fees associated with the default and termination process.

The results are compiled:

**Swap 1 (USD IRS) Replacement Cost (Bank A’s Loss)**

- 
**Quote from Dealer X** $1,250,000

- 
**Quote from Dealer Y** $1,280,000

- 
**Quote from Dealer Z** $1,265,000

- 
**Bank A Internal MTM** $1,270,000

**Swap 2 (EUR IRS) Replacement Value (Bank A’s Gain)**

- 
**Quote from Dealer X** €850,000

- 
**Quote from Dealer Y** €840,000

- 
**Quote from Dealer Z** €845,000

- 
**Bank A Internal MTM** €848,000

**Step 4 Final Close-out Amount Calculation**

Bank A determines that using the average of the dealer quotes is the most commercially reasonable approach as the market is liquid and the quotes are tight. It documents this decision.

- 
**Average Loss on Swap 1** ($1,250,000 + $1,280,000 + $1,265,000) / 3 = $1,265,000

- 
**Average Gain on Swap 2** (€850,000 + €840,000 + €845,000) / 3 = €845,000

Assuming a EUR/USD exchange rate of 1.0800, the gain on Swap 2 is $912,600.

The net replacement value is a loss for Bank A of ▴ $1,265,000 – $912,600 = $352,400.

The final Close-out Amount payable by Hedge Fund B to Bank A is the sum of the net replacement loss and the documented expenses:

**Close-out Amount = $352,400 (Net Loss) + $15,000 (Expenses) = $367,400**

This entire procedure, from the market assessment to the final calculation, is documented in a detailed report, creating a clear audit trail that demonstrates the commercial reasonableness of both the process and the result.

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## References

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

- International Comparative Legal Guides. “Derivatives Laws and Regulations Close-out Under the 1992 and 2002 ISDA Master Agreements 2025.” 17 June 2025.

- Charles Law PLLC. “The ISDA Master Agreement ▴ Part II ▴ Negotiated Provisions.” Practical Compliance & Risk Management for the Securities Industry, May-June 2012.

- International Swaps and Derivatives Association. “ISDA Close-out Amount Protocol.” ISDA, 2009.

- The Jolly Contrarian. “ISDA Comparison.” 24 September 2020.

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## Reflection

The evolution from the 1992 ISDA framework to the 2002 standard for close-out calculations provides a critical lesson in system architecture. It demonstrates a market-wide recognition that robust financial networks require protocols built on objective, defensible, and resilient principles. The Close-out Amount is more than a calculation; it is an operational philosophy. As you assess your own counterparty risk frameworks, consider the systems you rely on.

Are they designed with the flexibility to adapt to stress while being grounded in an objective logic that ensures fairness and predictability? The intelligence of any financial system is ultimately measured by its performance during moments of maximum duress. The 2002 ISDA provides a blueprint for building that intelligence directly into the legal and operational DNA of financial agreements.

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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 is the foundational legal document published by the International Swaps and Derivatives Association, designed to standardize the contractual terms for privately negotiated (Over-the-Counter) derivatives transactions between two counterparties globally. </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, or simply a quote, represents the most recent price at which an asset has traded or, more commonly in active markets, the current best bid and ask prices at which it can be immediately bought or sold. </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, while originating in traditional finance, serves as a crucial foundational legal framework for institutional participants engaging in over-the-counter (OTC) crypto derivatives trading and complex RFQ crypto transactions. </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">
![Precision-engineered multi-vane system with opaque, reflective, and translucent teal blades. This visualizes Institutional Grade Digital Asset Derivatives Market Microstructure, driving High-Fidelity Execution via RFQ protocols, optimizing Liquidity Pool aggregation, and Multi-Leg Spread management on a Prime RFQ](https://options.greeks.live/wp-content/uploads/2025/07/precision-engineered-multi-vane-system-illustrating-institutional-digital-asset-derivatives-rfq-protocols-market-microstructure-optimized-liquidity-aggregation-prime-os-high-fidelity-execution.jpg)

## Commercially Reasonable Procedures

Meaning ▴ Commercially Reasonable Procedures denote a standard of conduct or a set of actions that a prudent and competent entity would undertake in a specific business context, balancing cost, effectiveness, and prevailing industry practices. </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">
![Sleek, domed institutional-grade interface with glowing green and blue indicators highlights active RFQ protocols and price discovery. This signifies high-fidelity execution within a Prime RFQ for digital asset derivatives, ensuring real-time liquidity and capital efficiency](https://options.greeks.live/wp-content/uploads/2025/08/institutional-digital-asset-derivatives-rfq-prime-os-execution-interface.jpg)

## Commercially Reasonable

Meaning ▴ "Commercially Reasonable" is a legal and business standard requiring parties to a contract to act in a practical, prudent, and sensible manner, consistent with prevailing industry practices and good faith. </a><a href="https://prime.greeks.live/area/replacement-transactions/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sleek, light-colored, egg-shaped component precisely connects to a darker, ergonomic base, signifying high-fidelity integration. This modular design embodies an institutional-grade Crypto Derivatives OS, optimizing RFQ protocols for atomic settlement and best execution within a robust Principal's operational framework, enhancing market microstructure](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-engine-core-principal-system.jpg)

## Replacement Transactions

Meaning ▴ Replacement transactions, within crypto systems and blockchain technology, refer to instances where a previously broadcasted but unconfirmed transaction is superseded by a new transaction originating from the same address, typically with an increased transaction fee. </a><a href="https://prime.greeks.live/area/commercial-reasonableness/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sleek, precision-engineered device with a split-screen interface displaying implied volatility and price discovery data for digital asset derivatives. This institutional grade module optimizes RFQ protocols, ensuring high-fidelity execution and capital efficiency within market microstructure for multi-leg spreads](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-execution-module.jpg)

## Commercial Reasonableness

Meaning ▴ Commercial Reasonableness, in the context of crypto institutional options trading and RFQ systems, signifies the objective standard by which the terms, conditions, and pricing of a transaction are evaluated for their alignment with prevailing market practices, economic rationality, and prudent business judgment among sophisticated participants. </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">
![A refined object featuring a translucent teal element, symbolizing a dynamic RFQ for Institutional Grade Digital Asset Derivatives. Its precision embodies High-Fidelity Execution and seamless Price Discovery within complex Market Microstructure](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-precision-for-optimal-execution-and-deep-liquidity-aggregation.jpg)

## Determining Party

Meaning ▴ In the precise terminology of complex crypto financial instruments, particularly institutional options or structured products, the Determining Party is the pre-designated entity, whether an on-chain oracle or an agreed-upon off-chain agent, explicitly responsible for definitively calculating and announcing specific parameters, values, or conditions that critically influence the payoff, settlement, or lifecycle events of a contractual agreement. </a><a href="https://prime.greeks.live/area/counterparty-credit-risk/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A diagonal metallic framework supports two dark circular elements with blue rims, connected by a central oval interface. This represents an institutional-grade RFQ protocol for digital asset derivatives, facilitating block trade execution, high-fidelity execution, dark liquidity, and atomic settlement on a Prime RFQ](https://options.greeks.live/wp-content/uploads/2025/07/optimized-institutional-digital-asset-derivatives-trading-system-rfq-protocols-and-atomic-settlement.jpg)

## Counterparty Credit Risk

Meaning ▴ Counterparty Credit Risk, in the context of crypto investing and derivatives trading, denotes the potential for financial loss arising from a counterparty's failure to fulfill its contractual obligations in a transaction. </a><a href="https://prime.greeks.live/area/master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Precision cross-section of an institutional digital asset derivatives system, revealing intricate market microstructure. Toroidal halves represent interconnected liquidity pools, centrally driven by an RFQ protocol](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-prime-os-architecture-revealing-precision-rfq-protocol-engine-for-optimal-high-fidelity-execution-and-latent-liquidity-aggregation.jpg)

## Master Agreement

Meaning ▴ A Master Agreement is a standardized, foundational legal contract that establishes the overarching terms and conditions governing all future transactions between two parties for specific financial instruments, such as derivatives or foreign exchange. </a><a href="https://prime.greeks.live/area/reference-market-makers/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A robust, dark metallic platform, indicative of an institutional-grade execution management system. Its precise, machined components suggest high-fidelity execution for digital asset derivatives via RFQ protocols](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-platform-high-fidelity-price-discovery-and-atomic-settlement-infrastructure.jpg)

## Reference Market-Makers

Meaning ▴ Reference Market-Makers are designated or recognized liquidity providers within a trading system whose quoted prices or executed trades serve as benchmarks or inputs for pricing models, especially in opaque or fragmented markets like those for certain crypto assets or institutional options. </a><a href="https://prime.greeks.live/area/non-defaulting-party/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Angular dark planes frame luminous turquoise pathways converging centrally. This visualizes institutional digital asset derivatives market microstructure, highlighting RFQ protocols for private quotation and high-fidelity execution](https://options.greeks.live/wp-content/uploads/2025/07/high-fidelity-rfq-protocols-for-institutional-digital-assets.jpg)

## Non-Defaulting Party

Meaning ▴ A Non-Defaulting Party refers to the participant in a financial contract, such as a derivatives agreement or lending facility within the crypto ecosystem, that has fully adhered to its obligations while the other party has failed to do so. </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">
![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)

## Early Termination

Meaning ▴ Early Termination, within the framework of crypto financial instruments, denotes the contractual right or obligation to conclude a derivative or lending agreement prior to its originally stipulated maturity date. </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">
![An Institutional Grade RFQ Engine core for Digital Asset Derivatives. This Prime RFQ Intelligence Layer ensures High-Fidelity Execution, driving Optimal Price Discovery and Atomic Settlement for Aggregated Inquiries](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-engine-core-high-fidelity.jpg)

## Close-Out Amount

Meaning ▴ The Close-Out Amount represents the aggregated net sum due between two parties upon the early termination or default of a master agreement, encompassing all outstanding obligations across multiple 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">
![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)

## 2002 Isda

Meaning ▴ The 2002 ISDA, or the 2002 ISDA Master Agreement, represents the prevailing global standard contractual framework developed by the International Swaps and Derivatives Association for documenting over-the-counter (OTC) derivatives transactions between two parties. </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">
![Abstract geometric forms, symbolizing bilateral quotation and multi-leg spread components, precisely interact with robust institutional-grade infrastructure. This represents a Crypto Derivatives OS facilitating high-fidelity execution via an RFQ workflow, optimizing capital efficiency and price discovery](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-engine-infrastructure.jpg)

## 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/market-data/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A bifurcated sphere, symbolizing institutional digital asset derivatives, reveals a luminous turquoise core. This signifies a secure RFQ protocol for high-fidelity execution and private quotation](https://options.greeks.live/wp-content/uploads/2025/08/institutional-digital-asset-derivatives-rfq-protocol-orchestration.jpg)

## Market Data

Meaning ▴ Market data in crypto investing refers to the real-time or historical information regarding prices, volumes, order book depth, and other relevant metrics across various digital asset trading venues. </a><a href="https://prime.greeks.live/area/internal-models/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Precisely engineered metallic components, including a central pivot, symbolize the market microstructure of an institutional digital asset derivatives platform. This mechanism embodies RFQ protocols facilitating high-fidelity execution, atomic settlement, and optimal price discovery for crypto options](https://options.greeks.live/wp-content/uploads/2025/07/high-fidelity-digital-asset-derivatives-rfq-market-microstructure-1.jpg)

## Internal Models

Meaning ▴ Within the sophisticated systems architecture of institutional crypto trading and comprehensive risk management, Internal Models are proprietary computational frameworks developed and rigorously maintained by financial firms. </a><a href="https://prime.greeks.live/question/how-does-market-illiquidity-affect-the-validity-of-a-close-out-amount-calculation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A transparent blue sphere, symbolizing precise Price Discovery and Implied Volatility, is central to a layered Principal's Operational Framework. This structure facilitates High-Fidelity Execution and RFQ Protocol processing across diverse Aggregated Liquidity Pools, revealing the intricate Market Microstructure of Institutional Digital Asset Derivatives](https://options.greeks.live/wp-content/uploads/2025/07/digital-asset-derivatives-rfq-execution-system-microstructure-principal-framework.jpg)

## Close-Out Amount Calculation

Market illiquidity degrades a close-out amount's validity by replacing executable prices with ambiguous, model-dependent valuations. </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">
![Stacked, glossy modular components depict an institutional-grade Digital Asset Derivatives platform. Layers signify RFQ protocol orchestration, high-fidelity execution, and liquidity aggregation](https://options.greeks.live/wp-content/uploads/2025/07/layered-digital-asset-derivatives-rfq-protocol-stack-for-prime-brokerage.jpg)

## Early Termination Date

Meaning ▴ An Early Termination Date refers to a specific, contractually defined point in time, prior to a financial instrument's scheduled maturity, at which the agreement can be concluded. </a><a href="https://prime.greeks.live/area/data-sources/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sleek cream-colored device with a dark blue optical sensor embodies Price Discovery for Digital Asset Derivatives. It signifies High-Fidelity Execution via RFQ Protocols, driven by an Intelligence Layer optimizing Market Microstructure for Algorithmic Trading on a Prime RFQ](https://options.greeks.live/wp-content/uploads/2025/08/institutional-digital-asset-derivatives-high-fidelity-execution-engine-optimized-rfq-protocols-prime-os-intelligence-layer.jpg)

## Data Sources

Meaning ▴ Data Sources refer to the diverse origins or repositories from which information is collected, processed, and utilized within a system or organization. </a>

**Tags:** [Hedge Unwinding Costs](https://options.greeks.live/area/hedge-unwinding-costs/), [Commercial Reasonableness](https://options.greeks.live/area/commercial-reasonableness/), [2002 ISDA Master Agreement](https://options.greeks.live/area/2002-isda-master-agreement/), [Commercially Reasonable](https://options.greeks.live/area/commercially-reasonable/), [Early Termination](https://options.greeks.live/area/early-termination/), [Non-Defaulting Party](https://options.greeks.live/area/non-defaulting-party/)	

## Discover More

- 
### [Why Has the Market Almost Universally Adopted the 2002 Isda Master Agreement over the 1992 Version?](https://options.greeks.live/question/why-has-the-market-almost-universally-adopted-the-2002-isda-master-agreement-over-the-1992-version/)
![An Institutional Grade RFQ Engine core for Digital Asset Derivatives. This Prime RFQ Intelligence Layer ensures High-Fidelity Execution, driving Optimal Price Discovery and Atomic Settlement for Aggregated Inquiries.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-engine-core-high-fidelity.jpg)

The 2002 ISDA Agreement replaced the 1992 version by introducing a more precise and flexible close-out process to reduce legal risk.

- 
### [How Do Courts Interpret “Commercially Reasonable Procedures” in Close-Out Amount Calculations?](https://options.greeks.live/question/how-do-courts-interpret-commercially-reasonable-procedures-in-close-out-amount-calculations/)
![Angular dark planes frame luminous turquoise pathways converging centrally. This visualizes institutional digital asset derivatives market microstructure, highlighting RFQ protocols for private quotation and high-fidelity execution. The central convergence point represents price discovery and atomic settlement within a prime brokerage framework, optimizing capital efficiency.](https://options.greeks.live/wp-content/uploads/2025/07/high-fidelity-rfq-protocols-for-institutional-digital-assets.jpg)

Courts interpret "commercially reasonable procedures" as an objective, evidence-based standard for valuing derivative close-outs.

- 
### [How Does the Close-Out Amount Calculation Differ from the 1992 Loss Method?](https://options.greeks.live/question/how-does-the-close-out-amount-calculation-differ-from-the-1992-loss-method/)
![A precise mechanical instrument with intersecting transparent and opaque hands, representing the intricate market microstructure of institutional digital asset derivatives. This visual metaphor highlights dynamic price discovery and bid-ask spread dynamics within RFQ protocols, emphasizing high-fidelity execution and latent liquidity through a robust Prime RFQ for atomic settlement.](https://options.greeks.live/wp-content/uploads/2025/07/precision-engineering-driving-institutional-digital-asset-derivatives-execution-across-advanced-rfq-protocols-and-prime-brokerage-frameworks.jpg)

The Close-out Amount mandates an objective, market-verifiable process, while the 1992 Loss method permits a subjective, internal one.

- 
### [How Does the 2002 ISDA Master Agreement Change the Standard for Calculating Close-Out Amounts?](https://options.greeks.live/question/how-does-the-2002-isda-master-agreement-change-the-standard-for-calculating-close-out-amounts/)
![Detailed metallic disc, a Prime RFQ core, displays etched market microstructure. Its central teal dome, an intelligence layer, facilitates price discovery. Protruding rods signify low-latency RFQ protocol data transmission, ensuring high-fidelity execution for digital asset derivatives.](https://options.greeks.live/wp-content/uploads/2025/07/principal-operating-system-intelligence-layer-powering-digital-asset-derivatives-rfq-protocols-for-optimal-execution.jpg)

The 2002 ISDA Agreement mandates an objectively reasonable process for calculating close-out amounts, enhancing valuation certainty.

- 
### [How Does Market Volatility Affect the Determination of a Commercially Reasonable Close out Amount?](https://options.greeks.live/question/how-does-market-volatility-affect-the-determination-of-a-commercially-reasonable-close-out-amount-2/)
![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)

Volatility transforms a close-out from a calculation into a rigorous test of your firm's entire operational architecture.

- 
### [What Are the Primary Legal Risks in a 1992 ISDA Closeout?](https://options.greeks.live/question/what-are-the-primary-legal-risks-in-a-1992-isda-closeout/)
![A precision-engineered metallic cross-structure, embodying an RFQ engine's market microstructure, showcases diverse elements. One granular arm signifies aggregated liquidity pools and latent liquidity. The opposing perforated arm represents high-fidelity execution and algorithmic trading parameters. Its central pivot symbolizes atomic settlement within institutional digital asset derivatives.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-rfq-engine-microstructure-for-atomic-settlement.jpg)

The primary legal risks in a 1992 ISDA closeout center on the enforceability of netting and the calculation of the final settlement amount.

- 
### [In What Ways Did the 2002 ISDA Master Agreement Tighten the Definitions of Events of Default?](https://options.greeks.live/question/in-what-ways-did-the-2002-isda-master-agreement-tighten-the-definitions-of-events-of-default/)
![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)

The 2002 ISDA Master Agreement tightened default definitions to reduce ambiguity and accelerate termination rights for non-defaulting parties.

- 
### [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 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.

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---

**Original URL:** https://options.greeks.live/question/how-does-the-2002-isda-master-agreement-change-the-standard-for-close-out-calculations/
