# How Does the 2002 Isda Standard of Commercial Reasonableness Differ from the 1992 Standard? ▴ Question

**Published:** 2025-08-12
**Categories:** Question

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## Concept

The architecture of over-the-counter (OTC) derivatives markets relies on a foundational document ▴ the [ISDA Master Agreement](https://prime.greeks.live/area/isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). Its primary function is to create a single, binding contract that governs all transactions between two parties, providing a standardized framework for mitigating counterparty credit risk. At the heart of this framework lies the critical mechanism for calculating payments upon the early termination of transactions, typically triggered by a default. The evolution from the [1992 ISDA Master Agreement](https://prime.greeks.live/area/1992-isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) to the 2002 version reflects a significant upgrade in the system’s logic for determining these close-out payments, a shift driven by the market’s need for greater certainty and defensibility in times of financial stress.

Understanding this evolution requires a focus on the core challenge ▴ valuing a portfolio of complex, often illiquid, derivatives at a specific moment of market disruption. The 1992 Agreement approached this with a bifurcated system, offering parties a choice between two valuation methodologies, “[Market Quotation](https://prime.greeks.live/area/market-quotation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)” and “Loss.” Each carried a distinct operational logic and a different, often subjective, standard of reasonableness. The 2002 Agreement streamlined this process into a single, unified concept ▴ the “Close-out Amount.” This was a direct response to the ambiguities and potential for disputes inherent in the earlier framework. The change represents a fundamental redesign of the close-out calculation, moving toward a more objective and robust standard of [commercial reasonableness](https://prime.greeks.live/area/commercial-reasonableness/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) that has profound implications for how financial institutions manage risk and enforce their contractual rights.

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## Strategy

The strategic divergence between the 1992 and [2002 ISDA](https://prime.greeks.live/area/2002-isda/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) Master Agreements is most apparent in the architecture of their respective close-out valuation methodologies. The 1992 Agreement presented a choice between two distinct systems, each with its own operational philosophy and standard for conduct. The 2002 Agreement superseded this dual-track system with a single, consolidated approach designed to enhance objectivity and reduce disputes. This redesign reflects a strategic shift in market practice toward a more unified and defensible standard for valuing terminated derivatives.

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## The 1992 ISDA Agreement a Dual-Method Framework

Under the 1992 ISDA [Master Agreement](https://prime.greeks.live/question/in-what-ways-does-the-single-agreement-principle-of-the-isda-master-agreement-differ-from-traditional-contract-law/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), parties selected either “Market Quotation” or “Loss” as their primary method for calculating payments upon an [early termination](https://prime.greeks.live/area/early-termination/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). This choice, made in the Schedule to the Agreement, had significant strategic consequences.

- 
**Market Quotation** This method was designed to be the more objective of the two. It required the [non-defaulting party](https://prime.greeks.live/question/in-what-scenarios-might-a-non-defaulting-party-strategically-prefer-the-standard-close-out-process-over-aet/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) to seek quotes from at least three leading dealers in the relevant market for a [replacement transaction](https://prime.greeks.live/question/how-can-a-firm-quantify-the-risk-of-a-phased-rollout-versus-a-full-system-replacement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). The calculation was based on the average of these quotes. The underlying principle was to establish a fair market value through a defined, procedural polling of the market. The standard of reasonableness here was largely procedural; if the party followed the steps of obtaining quotes, the result was generally deemed reasonable. However, this method proved problematic in stressed or illiquid markets where obtaining firm quotes was difficult or impossible.

- 
**Loss** This method was more subjective. It allowed the non-defaulting party to determine, in its reasonable and good faith opinion, its total losses and costs resulting from the early termination. This could include the cost of a replacement transaction, but it could also encompass funding costs and other less tangible losses. The standard of reasonableness for “Loss” was based on the English legal concept of “Wednesbury unreasonableness,” a test of rationality which dictates that a decision can only be overturned if it is so unreasonable that no reasonable party would have come to it. This gave the calculating party considerable discretion.

> The 1992 Agreement’s dual-method system created potential for subjectivity and disputes, particularly when market conditions made objective valuations difficult.

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## Comparative Analysis of 1992 Valuation Methods

The choice between Market Quotation and Loss involved a trade-off between procedural objectivity and discretionary flexibility. The following table illustrates the key distinctions:

| Feature | Market Quotation | Loss |
| --- | --- | --- |
| Calculation Basis | Average of quotes from at least three reference market-makers for a replacement transaction. | The determining party’s calculation of its total losses and costs, including the cost of replacement hedges. |
| Standard of Reasonableness | Primarily procedural. Adherence to the process of obtaining quotes was the key focus. | Subjective test of rationality (Wednesbury unreasonableness). The determination must not be one that no reasonable party could have reached. |
| Operational Challenge | Difficult to apply in illiquid or stressed markets where obtaining quotes is impossible. | Prone to disputes due to the high degree of discretion afforded to the calculating party. |
| Flexibility | Low. The process is rigidly defined. | High. Allows for the inclusion of a broader range of costs and losses. |

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## The 2002 ISDA Agreement a Unified Close-Out Amount

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) eliminated the dual-method choice and introduced a single, harmonized concept ▴ the “Close-out Amount.” This approach was engineered to synthesize the better elements of the previous methods while imposing a more rigorous and balanced standard of conduct. The definition of Close-out Amount gives the [determining party](https://prime.greeks.live/question/what-are-the-primary-legal-risks-when-acting-as-the-determining-party-in-a-close-out/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) significant flexibility in the types of information it can use for its calculation. This can include quotes from third parties, relevant market data, and information from internal pricing models.

Crucially, this flexibility is constrained by a new, more demanding standard of reasonableness. Section 6(e) of the 2002 Agreement requires the determining party to act in good faith and “use [commercially reasonable procedures](https://prime.greeks.live/question/what-are-the-legal-ramifications-of-failing-to-use-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/what-constitutes-a-commercially-unreasonable-result-in-a-derivatives-close-out-scenario/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite).” This creates a two-part test:

- 
**[Commercially Reasonable](https://prime.greeks.live/question/what-specific-evidence-is-required-to-prove-a-close-out-calculation-was-commercially-reasonable/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) Procedures** The process used to arrive at the valuation must be sound and appropriate. This is an objective test of the methodology itself.

- 
**Commercially [Reasonable Result](https://prime.greeks.live/question/can-an-arrival-price-strategy-still-result-in-a-high-implementation-shortfall-and-why/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)** The final calculated amount must be fair and reasonable from a commercial standpoint. This is an objective test of the outcome.

This dual requirement is a significant upgrade from the 1992 standard. The English courts have affirmed that this is a stricter test than the “rationality” standard applied to the “Loss” calculation in the 1992 Agreement. It demands that the calculating party’s actions stand up to scrutiny from the perspective of an objective, commercially-minded third party. The system no longer permits a party to arrive at a conclusion that, while perhaps rational from its own perspective, is commercially unreasonable to the broader market.

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## Execution

The operational execution of a close-out under the 2002 ISDA Master Agreement is a disciplined process governed by the dual mandate of procedural and substantive commercial reasonableness. This requires a systematic approach to information gathering, valuation, and documentation to ensure the final [Close-out Amount](https://prime.greeks.live/area/close-out-amount/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) is robust and defensible. A failure to adhere to this standard can expose a non-defaulting party to legal challenges and potential re-calculation of the termination payment.

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## Operational Protocol for Calculating the Close-Out Amount

A non-defaulting party executing a close-out must construct a process that is both transparent and grounded in objective data. The following steps outline an operational protocol consistent with the requirements of the [2002 ISDA Agreement](https://prime.greeks.live/area/2002-isda-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite).

- 
**Step 1 Initial Assessment** Immediately following an Early Termination Date, the determining party must assess the portfolio of terminated transactions. This involves identifying all affected trades and gathering the relevant contractual documentation and market data available as of the termination date.

- 
**Step 2 Information Gathering** The party must gather a wide array of valuation information. The 2002 Agreement permits the use of various sources, and a robust process would involve consulting several. This includes [obtaining quotes](https://prime.greeks.live/question/how-does-isda-streamline-the-process-of-obtaining-legal-opinions-for-its-members/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) from dealers, sourcing data from electronic platforms, consulting internal pricing models, and identifying the cost of any actual replacement transactions entered into.

- 
**Step 3 Valuation Methodology Selection** The determining party must select and apply one or more valuation methodologies. The choice of methodology must be commercially reasonable for the types of transactions being valued. For liquid, plain-vanilla swaps, market quotes might be sufficient. For exotic or illiquid derivatives, internal models may be necessary, but their inputs and assumptions must be justifiable.

- 
**Step 4 Calculation and Documentation** The party calculates the Close-out Amount based on the gathered information and chosen methodologies. Every step of this process must be meticulously documented. This includes records of all quotes sought and received, market data snapshots, model parameters, and the rationale for any judgments made.

- 
**Step 5 Delivery of the Calculation Statement** A statement must be delivered to the defaulting party showing in reasonable detail how the Close-out Amount was calculated. This statement is a critical piece of evidence demonstrating that a commercially reasonable process was followed.

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## Quantitative Analysis and Data Synthesis

The “commercially reasonable” standard necessitates a quantitative approach grounded in verifiable data. The determining party cannot simply assert a number; it must be able to show its work. The synthesis of different data points is a key part of this process, as a single source may not be sufficient to produce a commercially reasonable result.

> A defensible Close-out Amount under the 2002 ISDA framework is the product of a rigorous, data-driven valuation process, not a subjective estimate.

Consider a hypothetical scenario where a non-defaulting party is closing out a portfolio of interest rate swaps. A robust data synthesis process would look like the following table:

| Valuation Input Source | Transaction A (5Y IRS) | Transaction B (10Y IRS) | Notes |
| --- | --- | --- | --- |
| Dealer Quote 1 | +$1,050,000 | -$2,200,000 | Indicative quote from a major dealer. |
| Dealer Quote 2 | +$1,025,000 | -$2,250,000 | Indicative quote from another major dealer. |
| Internal Model Price | +$1,030,000 | -$2,235,000 | Based on the firm’s proprietary valuation model, using observable yield curve data. |
| Replacement Transaction Cost | N/A | -$2,240,000 | An actual replacement hedge was executed for Transaction B. |
| Synthesized Value | +$1,035,000 | -$2,240,000 | Value for A is an average of quotes and model. Value for B is based on the actual replacement cost. |

In this example, the determining party uses a blend of external quotes and internal models for one transaction while relying on the actual cost of a replacement hedge for the other. This multi-faceted approach, when properly documented, provides strong evidence of a commercially reasonable procedure designed to produce a commercially reasonable result. The 2002 standard effectively compels firms to build and maintain a sophisticated and auditable valuation architecture for their derivatives portfolio.

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## References

- Hudson, A. (2019). _The Law of Finance_. Sweet & Maxwell.

- International Swaps and Derivatives Association. (2003). _2002 ISDA Master Agreement_. ISDA.

- International Swaps and Derivatives Association. (1992). _1992 ISDA Master Agreement_. ISDA.

- Firth, A. (2010). _Derivatives ▴ Law and Practice_. Sweet & Maxwell.

- Flavell, R. (2010). _Swaps and Other Derivatives_. John Wiley & Sons.

- Mengle, D. (2010). The ISDA Master Agreement ▴ A Practical Guide. Financial Analysts Journal, 66(3), 24-33.

- Schofield, P. (2007). _Derivative contracts and difference schemes_. Tottel Publishing.

- Coates, J. C. (2014). Cost-Benefit Analysis of Financial Regulation ▴ Case Studies and Implications. The Yale Law Journal, 124(4), 882-1011.

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## Reflection

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## From Subjective Loss to Objective Valuation

The transition from the 1992 [ISDA Agreement](https://prime.greeks.live/area/isda-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)’s valuation framework to the 2002 standard marks a critical evolution in the market’s risk management infrastructure. It reflects a systemic acknowledgment that in moments of counterparty default, ambiguity is the enemy of stability. The 1992 framework, with its subjective “Loss” calculation and potentially unworkable “Market Quotation” mechanic, contained structural weaknesses that could be exploited or could simply fail under stress.

The 2002 “Close-out Amount” represents a significant architectural improvement. By mandating a dual standard of commercially reasonable procedures and a commercially reasonable result, the framework compels market participants to build and maintain a more robust, transparent, and ultimately more defensible valuation apparatus. This is an upgrade to the entire system’s integrity.

It forces an objective discipline upon what can be a chaotic and contentious process, ensuring that the resolution of a default is grounded in verifiable data and sound commercial logic. The ultimate benefit is a more resilient and predictable financial system, where contractual obligations are harder to dispute and the costs of default are allocated in a manner that the broader market can recognize as fair.

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## Glossary

<a href="https://prime.greeks.live/area/1992-isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## 1992 Isda Master Agreement

Meaning ▴ The 1992 ISDA Master Agreement is a standardized bilateral contract document published by the International Swaps and Derivatives Association, serving as the primary legal framework for over-the-counter derivative transactions between two parties. </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/commercial-reasonableness/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Commercial Reasonableness

Meaning ▴ Commercial reasonableness refers to the standard by which a transaction or action is judged to be consistent with prevailing market practices, industry norms, and sound business judgment, particularly concerning pricing, terms, and execution methodology. </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/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/early-termination/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A precision mechanism with a central circular core and a linear element extending to a sharp tip, encased in translucent material. This symbolizes an institutional RFQ protocol's market microstructure, enabling high-fidelity execution and price discovery for digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/precision-engineered-institutional-digital-asset-derivatives-rfq-execution-engine-microstructure-facilitating-optimal-price-discovery-and-best-execution.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/in-what-ways-does-the-single-agreement-principle-of-the-isda-master-agreement-differ-from-traditional-contract-law/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A central dark nexus with intersecting data conduits and swirling translucent elements depicts a sophisticated RFQ protocol's intelligence layer. This visualizes dynamic market microstructure, precise price discovery, and high-fidelity execution for institutional digital asset derivatives, optimizing capital efficiency and mitigating counterparty risk](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-engine-visualizing-high-fidelity-execution-and-market-microstructure-dynamics.jpg)

## Master Agreement

The ISDA's Single Agreement principle architects a unified risk entity, replacing severable contracts with one indivisible agreement to enable close-out netting. </a><a href="https://prime.greeks.live/question/how-can-a-firm-quantify-the-risk-of-a-phased-rollout-versus-a-full-system-replacement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Replacement Transaction

A firm quantifies transition risk by modeling the expected monetary value of failure points for both phased and full replacement scenarios. </a><a href="https://prime.greeks.live/question/in-what-scenarios-might-a-non-defaulting-party-strategically-prefer-the-standard-close-out-process-over-aet/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Non-Defaulting Party

Preferring standard close-out is a strategic decision to exert manual control over valuation and timing in complex market or legal environments. </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/question/what-are-the-primary-legal-risks-when-acting-as-the-determining-party-in-a-close-out/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Angularly connected segments portray distinct liquidity pools and RFQ protocols. A speckled grey section highlights granular market microstructure and aggregated inquiry complexities for digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-execution-efficiency.jpg)

## Determining Party

The Determining Party's primary legal risk is a challenge to its close-out valuation's "commercial reasonableness.". </a><a href="https://prime.greeks.live/question/what-are-the-legal-ramifications-of-failing-to-use-commercially-reasonable-procedures/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Abstract geometric forms depict a Prime RFQ for institutional digital asset derivatives. A central RFQ engine drives block trades and price discovery with high-fidelity execution](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-engine-optimizing-market-microstructure-for-high-fidelity-execution.jpg)

## Commercially Reasonable Procedures

Failing to use commercially reasonable procedures shifts the burden of proof, jeopardizing a creditor's right to a deficiency judgment. </a><a href="https://prime.greeks.live/question/what-constitutes-a-commercially-unreasonable-result-in-a-derivatives-close-out-scenario/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A macro view reveals a robust metallic component, signifying a critical interface within a Prime RFQ. This secure mechanism facilitates precise RFQ protocol execution, enabling atomic settlement for institutional-grade digital asset derivatives, embodying high-fidelity execution](https://options.greeks.live/wp-content/uploads/2025/07/core-secure-institutional-digital-asset-derivatives-rfq-trade-system-element.jpg)

## Commercially Reasonable Result

A commercially unreasonable result in a derivatives close-out is a valuation that fails the test of objective market-based evidence. </a><a href="https://prime.greeks.live/question/what-specific-evidence-is-required-to-prove-a-close-out-calculation-was-commercially-reasonable/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Geometric planes, light and dark, interlock around a central hexagonal core. This abstract visualization depicts an institutional-grade RFQ protocol engine, optimizing market microstructure for price discovery and high-fidelity execution of digital asset derivatives including Bitcoin options and multi-leg spreads within a Prime RFQ framework, ensuring atomic settlement](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-engine-architecture.jpg)

## Commercially Reasonable

Proving a commercially reasonable close-out requires a meticulously documented, data-driven process that is objectively justifiable. </a><a href="https://prime.greeks.live/question/can-an-arrival-price-strategy-still-result-in-a-high-implementation-shortfall-and-why/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![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)

## Reasonable Result

An arrival price strategy yields high shortfall when market impact and timing risk are not systemically managed. </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">
![Detailed metallic disc, a Prime RFQ core, displays etched market microstructure. Its central teal dome, an intelligence layer, facilitates price discovery](https://options.greeks.live/wp-content/uploads/2025/07/principal-operating-system-intelligence-layer-powering-digital-asset-derivatives-rfq-protocols-for-optimal-execution.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/2002-isda-agreement/?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)

## 2002 Isda Agreement

Meaning ▴ The 2002 ISDA Master Agreement represents the industry-standard legal framework governing bilateral over-the-counter derivatives transactions globally. </a><a href="https://prime.greeks.live/question/how-does-isda-streamline-the-process-of-obtaining-legal-opinions-for-its-members/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Close-up reveals robust metallic components of an institutional-grade execution management system. Precision-engineered surfaces and central pivot signify high-fidelity execution for digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/institutional-grade-digital-asset-derivatives-rfq-execution-precision-optimizing-market-microstructure-for-best-execution-and-prime-os.jpg)

## Obtaining Quotes

ISDA provides a centralized legal utility, commissioning and digitizing opinions to give members scalable, on-demand certainty. </a><a href="https://prime.greeks.live/area/isda-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Abstract forms depict interconnected institutional liquidity pools and intricate market microstructure. Sharp algorithmic execution paths traverse smooth aggregated inquiry surfaces, symbolizing high-fidelity execution within a Principal's operational framework](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-microstructure-prime-os-1.jpg)

## Isda Agreement

Meaning ▴ The ISDA Master Agreement represents a foundational contractual framework for over-the-counter (OTC) derivatives transactions, establishing a standardized set of terms that govern all individual trades executed between two counterparties. </a>

**Tags:** [Financial Derivatives Law](https://options.greeks.live/area/financial-derivatives-law/), [1992 ISDA](https://options.greeks.live/area/1992-isda/), [Early Termination](https://options.greeks.live/area/early-termination/), [2002 ISDA Agreement](https://options.greeks.live/area/2002-isda-agreement/), [2002 ISDA](https://options.greeks.live/area/2002-isda/), [ISDA Agreement](https://options.greeks.live/area/isda-agreement/)	

## Discover More

- 
### [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.

- 
### [What Constitutes a Commercially Reasonable Procedure in a Derivatives Close-Out?](https://options.greeks.live/question/what-constitutes-a-commercially-reasonable-procedure-in-a-derivatives-close-out/)
![A teal sphere with gold bands, symbolizing a discrete digital asset derivative block trade, rests on a precision electronic trading platform. This illustrates granular market microstructure and high-fidelity execution within an RFQ protocol, driven by a Prime RFQ intelligence layer.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivative-rfq-protocol-high-fidelity-execution-platform-microstructure-intelligence-layer.jpg)

A commercially reasonable procedure is an objective, evidence-based protocol for valuing a terminated derivative to ensure a fair result.

- 
### [How Does the 2002 ISDA’S Close-Out Amount Calculation Differ from the 1992 Version’s Loss Method?](https://options.greeks.live/question/how-does-the-2002-isdas-close-out-amount-calculation-differ-from-the-1992-versions-loss-method/)
![Abstract geometric forms converge at a central point, symbolizing institutional digital asset derivatives trading. This depicts RFQ protocol aggregation and price discovery across diverse liquidity pools, ensuring high-fidelity execution. The structure reflects a robust Prime RFQ optimizing capital efficiency for multi-leg spreads.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-rfq-execution-microstructure-core-liquidity-hub.jpg)

The 2002 ISDA's Close-Out Amount mandates an objective, commercially reasonable process using diverse inputs, replacing the 1992's subjective Loss calculation.

- 
### [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-2/)
![A precise, multi-layered disk embodies a dynamic Volatility Surface or deep Liquidity Pool for Digital Asset Derivatives. Dual metallic probes symbolize Algorithmic Trading and RFQ protocol inquiries, driving Price Discovery and High-Fidelity Execution of Multi-Leg Spreads within a Principal's operational framework.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-grade-rfq-protocol-mechanism-for-digital-asset-derivatives-price-discovery-and-high-fidelity-execution-via-prime-os.jpg)

The 2002 ISDA Agreement replaces a rigid, dual-method system with a single, flexible standard based on commercial reasonableness.

- 
### [Why Was the “First Method” Payment System in the 1992 ISDA Considered Problematic?](https://options.greeks.live/question/why-was-the-first-method-payment-system-in-the-1992-isda-considered-problematic/)
![Robust metallic structures, one blue-tinted, one teal, intersect, covered in granular water droplets. This depicts a principal's institutional RFQ framework facilitating multi-leg spread execution, aggregating deep liquidity pools for optimal price discovery and high-fidelity atomic settlement of digital asset derivatives for enhanced capital efficiency.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocols-optimized-for-high-fidelity-execution.jpg)

The 1992 ISDA's "First Method" was problematic due to its one-way payment system, creating unfairness and systemic risk.

- 
### [How Does the 2002 Isda Agreement Handle Illegality and Force Majeure Events?](https://options.greeks.live/question/how-does-the-2002-isda-agreement-handle-illegality-and-force-majeure-events/)
![A central teal column embodies Prime RFQ infrastructure for institutional digital asset derivatives. Angled, concentric discs symbolize dynamic market microstructure and volatility surface data, facilitating RFQ protocols and price discovery. Small fasteners denote precise atomic settlement and high-fidelity execution.](https://options.greeks.live/wp-content/uploads/2025/07/digital-asset-derivatives-rfq-protocol-alpha-generation-execution.jpg)

The 2002 ISDA Agreement uses Illegality and Force Majeure clauses to provide a structured, orderly termination protocol for unforeseen legal or physical impossibilities.

- 
### [How Does the Close out Amount Calculation Differ from Market Quotation and Loss?](https://options.greeks.live/question/how-does-the-close-out-amount-calculation-differ-from-market-quotation-and-loss/)
![Abstract layers in grey, mint green, and deep blue visualize a Principal's operational framework for institutional digital asset derivatives. The textured grey signifies market microstructure, while the mint green layer with precise slots represents RFQ protocol parameters, enabling high-fidelity execution, private quotation, capital efficiency, and atomic settlement.](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-layered-rfq-protocol-for-digital-asset-execution-system.jpg)

The Close-Out Amount calculation is a flexible, principles-based valuation system superseding the rigid Market Quotation and subjective Loss methods.

- 
### [How Does the 2002 Isda Master Agreement Differ from the 1992 Version regarding Close out Amounts?](https://options.greeks.live/question/how-does-the-2002-isda-master-agreement-differ-from-the-1992-version-regarding-close-out-amounts/)
![A fractured, polished disc with a central, sharp conical element symbolizes fragmented digital asset liquidity. This Principal RFQ engine ensures high-fidelity execution, precise price discovery, and atomic settlement within complex market microstructure, optimizing capital efficiency.](https://options.greeks.live/wp-content/uploads/2025/07/principal-rfq-engine-unifying-fragmented-digital-asset-derivatives-liquidity-for-best-execution.jpg)

The 2002 ISDA replaces the 1992's subjective close-out methods with a unified, objectively reasonable standard for greater legal certainty.

- 
### [What Specific Documentation Is Essential to Create a Defensible Audit Trail for a Close out Valuation?](https://options.greeks.live/question/what-specific-documentation-is-essential-to-create-a-defensible-audit-trail-for-a-close-out-valuation/)
![A sharp, metallic blue instrument with a precise tip rests on a light surface, suggesting pinpoint price discovery within market microstructure. This visualizes high-fidelity execution of digital asset derivatives, highlighting RFQ protocol efficiency. It represents the intelligence layer of a Prime RFQ for atomic settlement.](https://options.greeks.live/wp-content/uploads/2025/07/precision-digital-asset-derivative-rfq-execution-market-microstructure-high-fidelity-alpha-generation-prime-os-system.jpg)

A defensible close-out audit trail is the complete, time-stamped evidence proving a valuation's commercial reasonableness.

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**Original URL:** https://options.greeks.live/question/how-does-the-2002-isda-standard-of-commercial-reasonableness-differ-from-the-1992-standard/
