# How Does the Close out Calculation Differ between the 1992 and 2002 Isda Agreements? ▴ Question

**Published:** 2025-08-02
**Categories:** Question

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## Concept

The transition from the 1992 to the 2002 International [Swaps and Derivatives](https://prime.greeks.live/area/swaps-and-derivatives/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) Association (ISDA) Master Agreement represents a fundamental re-architecting of the market’s core operating system for risk management. At the heart of this upgrade lies the [close-out calculation](https://prime.greeks.live/area/close-out-calculation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), the critical protocol that executes upon a counterparty default. Viewing the ISDA Agreement as the foundational code governing trillions of dollars in transactions, the close-out provision functions as its most vital error-handling and system-recovery mechanism. The 1992 architecture provided two distinct, rigid procedures for this recovery ▴ Market Quotation and Loss.

The 2002 framework replaces this dualistic, and often problematic, system with a single, more dynamic and commercially focused engine known as the [Close-out Amount](https://prime.greeks.live/area/close-out-amount/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). This was a direct response to systemic challenges observed in volatile markets, where the rigid mechanics of the 1992 version proved inadequate.

Understanding the difference between these two versions is to understand the evolution of the market’s philosophy on risk itself. The 1992 Agreement’s approach was rooted in a search for an objective, external, and verifiable price through a polling of reference dealers. This prescriptive method sought to create a clear, auditable trail, prioritizing procedural certainty. The underlying assumption was the existence of a liquid, observable market from which such quotations could be readily sourced.

Events throughout the 1990s, including multiple sovereign debt crises and the collapse of Long-Term Capital Management, demonstrated the fragility of this assumption. In markets under severe stress, liquidity evaporates, and obtaining firm, executable quotes from reference dealers becomes an operational impossibility. This left the [Non-defaulting Party](https://prime.greeks.live/area/non-defaulting-party/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) in a precarious position, potentially unable to follow the prescribed methodology and facing legal challenges as a result.

> The core evolution in ISDA close-out calculations reflects a deliberate shift from a rigid, quote-driven process to a flexible, evidence-based valuation standard.

The 2002 Agreement’s Close-out Amount methodology addresses this systemic vulnerability directly. It de-emphasizes the prescriptive polling process and instead institutes a principles-based standard of “[commercial reasonableness](https://prime.greeks.live/area/commercial-reasonableness/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite).” This empowers the Non-defaulting Party to use a wider array of information to determine its total losses and costs resulting from the [early termination](https://prime.greeks.live/area/early-termination/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). This information can include not only quotations from third parties but also relevant market data, information from internal pricing models, and any other information that would be considered reasonable in the context of the prevailing market conditions. This shift acknowledges the reality of modern financial markets, where complex, illiquid instruments may not have a readily observable external price, and where sophisticated participants possess the internal capabilities to generate robust valuations.

This architectural change has profound implications for the operational and legal frameworks of all derivatives users. The 1992 system, while procedurally clear, could lead to economically inaccurate or unfair outcomes in distressed situations. The 2002 system provides the tools for a more economically precise result, yet it concurrently introduces a greater burden on 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 act in a [commercially reasonable](https://prime.greeks.live/area/commercially-reasonable/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) manner and to be able to justify its calculations with credible evidence.

The calculation evolved from a simple polling exercise into a comprehensive [valuation](https://prime.greeks.live/area/valuation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) process, demanding a higher level of sophistication and documentation from market participants. It is a testament to the market’s ability to adapt its foundational protocols in response to real-world stress events, optimizing for economic reality over procedural rigidity.

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## Strategy

The strategic impetus for redesigning the close-out calculation mechanism in 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) stemmed directly from the operational failures and legal uncertainties encountered under the 1992 framework during periods of significant market dislocation. The 1992 Agreement’s dual-track system of Market Quotation and Loss, while intended to provide clear options, created its own set of strategic dilemmas and potential inequities. The evolution to the single Close-out Amount in the 2002 Agreement was a deliberate strategic choice by the industry to enhance legal certainty, promote economic fairness, and create a more resilient protocol for managing [counterparty default](https://prime.greeks.live/area/counterparty-default/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) in an increasingly complex financial world.

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## The Strategic Deficiencies of the 1992 Framework

The 1992 Agreement required the Non-defaulting Party to choose between two methods for calculating the settlement amount upon a counterparty’s default ▴ [Market Quotation](https://prime.greeks.live/area/market-quotation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) or [Loss](https://prime.greeks.live/area/loss/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). This choice was not made at the time of default; it was a permanent election made when the agreement was first executed, often years before any termination event.

**Market Quotation** was the preferred method for many institutions due to its perceived objectivity. The process involved the Non-defaulting Party seeking quotes from at least three leading dealers ([Reference Market-makers](https://prime.greeks.live/area/reference-market-makers/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)) for a [replacement transaction](https://prime.greeks.live/area/replacement-transaction/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) economically equivalent to the terminated transaction. If at least three quotes were obtained, the settlement amount was based on the arithmetic mean of those quotes. This method’s strategic appeal was its reliance on external, third-party data, which was thought to provide a strong defense against any claim that the calculation was self-serving.

However, its primary strategic weakness was its brittleness. In a market crisis, the very dealers who were supposed to provide quotes would often refuse to do so, citing the lack of liquidity or extreme volatility. This left the Non-defaulting Party in an operational dead end, unable to fulfill the contractual requirements. Furthermore, for highly customized or exotic derivatives, a true “replacement transaction” was often a theoretical construct, making it difficult to obtain meaningful quotes even in normal market conditions.

**Loss** was the alternative method. Under this approach, the Non-defaulting Party was entitled to claim the total losses and costs it incurred as a result of the early termination, including the cost of entering into replacement trades. This method was more flexible and did not depend on polling external dealers. Its strategic advantage was its workability in illiquid markets.

However, it was often viewed as more subjective and potentially contentious. The Defaulting Party could challenge the Non-defaulting Party’s calculation of its “loss,” leading to protracted and costly legal disputes. The term “loss” itself was open to interpretation, and the methodology lacked a clear, universally accepted standard for calculation, creating significant legal uncertainty.

> The 2002 ISDA Agreement’s “Close-out Amount” was engineered to synthesize the objectivity of market data with the flexibility needed to operate in distressed market conditions.

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## The Strategic Architecture of the 2002 Close-Out Amount

The 2002 [ISDA Master Agreement](https://prime.greeks.live/area/isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) retired the bifurcated Market Quotation/Loss system and replaced it with a unified concept ▴ the Close-out Amount. This represented a significant strategic shift from a rules-based to a principles-based approach. The core principle is that of “commercial reasonableness.” The [determining party](https://prime.greeks.live/area/determining-party/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) calculates a single figure that represents its total gains or losses arising from the termination, taking into account all relevant factors.

What does “commercial reasonableness” mean in this context? It means the determining party must use procedures that a reasonable market participant would use in the same situation. This provides immense flexibility. The calculation can be based on a wide range of inputs, including:

- **Quotations** ▴ The party can still seek quotes from third parties, but it is not obligated to do so. These can be firm or indicative quotes.

- **[Market Data](https://prime.greeks.live/area/market-data/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)** ▴ It can rely on any relevant, publicly available market data, such as prices for similar instruments, volatility surfaces, and yield curves.

- **Internal Models** ▴ The party can use its own internal, proprietary models to value the terminated transactions. This is a critical provision for complex derivatives where no external market exists.

- **Hedging Costs** ▴ The calculation explicitly includes the costs of unwinding any hedges related to the terminated transactions.

This strategic redesign achieves several key objectives. First, it eliminates the operational fragility of the Market Quotation method. The Non-defaulting Party is no longer dependent on the willingness of third-party dealers to provide quotes in a crisis. Second, it provides a clearer, more robust legal standard than the ambiguous “Loss” calculation.

The standard of “commercial reasonableness” is a well-established concept in commercial law, providing a more predictable framework for resolving disputes. Third, it better reflects the economic reality of the terminated transaction by allowing for a more holistic valuation that considers all relevant factors, leading to a fairer outcome for both parties.

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## Comparative Analysis of Calculation Methodologies

The table below provides a strategic comparison of the key features of the 1992 and 2002 close-out calculation methodologies.

| Feature | 1992 ISDA Master Agreement | 2002 ISDA Master Agreement |
| --- | --- | --- |
| Calculation Method | A choice of two methods, elected at the outset ▴ Market Quotation or Loss. | A single, unified method ▴ Close-out Amount. |
| Core Principle | Procedural Rigidity (Market Quotation) or Subjective Loss (Loss). | Commercial Reasonableness. |
| Reliance on External Quotes | Mandatory for Market Quotation (requires polling of Reference Market-makers). | Optional. Quotes are one of several potential inputs. |
| Use of Internal Models | Not explicitly provided for under Market Quotation; implicit under Loss but legally uncertain. | Explicitly permitted as a basis for calculation, provided their use is commercially reasonable. |
| Flexibility in Illiquid Markets | Low. Market Quotation often fails in illiquid markets. | High. The framework is designed to be adaptable to any market condition. |
| Legal Standard for Disputes | Focused on whether the prescribed procedure was followed (Market Quotation) or the definition of “loss” (Loss). | Focused on whether the determining party’s actions and calculations were commercially reasonable. |

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## What Is the Strategic Impact on Market Participants?

The shift to the 2002 framework requires a more sophisticated approach to [risk management](https://prime.greeks.live/area/risk-management/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) and legal compliance. For a Non-defaulting Party, the flexibility of the Close-out Amount comes with the responsibility to maintain robust internal valuation procedures and to meticulously document the basis for its calculations. It must be prepared to defend its methodology as “commercially reasonable” in a potential legal challenge. For a Defaulting Party, the 2002 framework provides a stronger basis to challenge a calculation that appears punitive or disconnected from economic reality.

The focus of any dispute shifts from a narrow procedural question (“Did you call three dealers?”) to a broader, more substantive one (“Was your valuation methodology fair and reasonable given the market conditions?”). This strategic evolution has pushed the entire industry toward more rigorous and transparent valuation practices.

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## Execution

The execution of a close-out calculation under an ISDA [Master Agreement](https://prime.greeks.live/question/what-are-the-key-differences-between-a-prime-brokerage-agreement-and-an-isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) is a precise, high-stakes operational procedure. The difference in execution between the 1992 and 2002 frameworks is the difference between following a rigid, prescriptive checklist and conducting a comprehensive, evidence-based valuation exercise. A deep dive into the execution mechanics reveals the profound operational shift the 2002 Agreement represents.

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## Executing the 1992 ISDA Close-Out Calculation

Under the 1992 Agreement, the execution path is determined by the choice made at the inception of the contract. The Non-defaulting Party must execute either the Market Quotation or the Loss procedure.

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## The Market Quotation Protocol

The execution of Market Quotation is a highly structured process. The primary operational goal is to obtain a sufficient number of quotes from pre-defined Reference Market-makers to establish an objective market value.

- **Identification of Reference Market-makers** ▴ The first step is to consult the Schedule to the ISDA Agreement to identify the list of agreed-upon Reference Market-makers. These are typically major dealers in the relevant type of transaction.

- **Solicitation of Quotes** ▴ The Non-defaulting Party must request quotes from these dealers for a replacement transaction that is economically identical to the terminated transaction (or group of transactions). The request must specify the terms of this replacement transaction in precise detail.

- **Quote Requirements** ▴ For a quote to be valid, it must be a firm, executable price. Indicative or “subject to” quotes are generally not sufficient. The goal is to obtain at least three such quotes.

- **Calculation** ▴ If three or more quotes are obtained, the settlement amount is calculated based on the arithmetic mean of these quotes, after disregarding any outliers if specified in the Schedule. If fewer than three quotes are obtained, the Market Quotation method fails, and the agreement typically falls back to the Loss method.

- **Documentation** ▴ The entire process must be meticulously documented. This includes records of which dealers were contacted, the time of contact, the exact terms of the requested quote, and the responses received (or lack thereof).

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## The Loss Protocol

If Loss is the selected method, or if Market Quotation fails, the execution is less procedural but requires a different kind of diligence.

- **Internal Calculation** ▴ The Non-defaulting Party calculates, in good faith, the total losses and costs it has incurred due to the early termination.

- **Evidence Gathering** ▴ This calculation must be supported by evidence. This could include the actual cost of entering into replacement trades, the cost of unwinding hedges, and any associated funding costs.

- **Statement of Calculation** ▴ The Non-defaulting Party must provide the Defaulting Party with a statement showing its calculation of Loss in reasonable detail. This statement is the focal point of potential disputes.

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## Executing the 2002 ISDA Close-Out Calculation

The 2002 Agreement’s Close-out Amount execution is a holistic valuation process guided by the principle of commercial reasonableness. It is not a rigid procedure but a framework for making a determination.

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## The Close-Out Amount Determination Framework

The Non-defaulting Party (or “Determining Party”) has significant discretion, but that discretion is bounded by the duty to act in good faith and use commercially reasonable procedures.

- **Information Gathering** ▴ The Determining Party gathers all information it deems relevant to the valuation. This is a broad mandate. The ISDA Agreement explicitly states this can include, without limitation:

<li>Quotations from one or more third parties (dealers, brokers). These do not need to be firm quotes.

- Relevant market data, such as interest rate curves, credit spreads, volatility surfaces, and prices of comparable instruments.

- Information from internal sources, including proprietary valuation models. This is crucial for derivatives that are not actively traded.

</li>
- **Valuation Methodology** ▴ The party then uses this information to arrive at a single Close-out Amount. The methodology must be commercially reasonable. For example, relying solely on an uncorroborated [internal model](https://prime.greeks.live/area/internal-model/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) for a plain vanilla swap when market quotes are available would likely be deemed unreasonable. Conversely, using a sophisticated internal model for a highly structured, exotic option with no available market quotes would likely be considered reasonable.

- **Inclusion of Costs and Hedges** ▴ The calculation must also account for the cost of unwinding any hedges associated with the terminated transactions and any other costs or gains directly related to the termination.

- **Statement and Justification** ▴ The Determining Party must provide a statement to the Defaulting Party detailing the Close-out Amount and the calculations used to arrive at it. The level of detail should be sufficient to allow the other party to understand how the amount was determined. The key to avoiding disputes is a well-documented and defensible valuation report that clearly shows the inputs, methodology, and the rationale for the choices made.

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## Hypothetical Execution Scenario Close-Out Amount

To illustrate the execution of a Close-out Amount calculation, consider a bank (Party A) closing out a portfolio of interest rate swaps with a defaulted hedge fund (Party B) in a volatile market. Party A’s execution would involve the following steps:

| Valuation Component | Source of Information | Rationale / Execution Step | Result (USD) |
| --- | --- | --- | --- |
| 5-Year USD Interest Rate Swap | Consensus pricing services (e.g. Bloomberg, Refinitiv) and indicative quotes from 2 dealers. | This is a liquid instrument. Market data is readily available and reliable. The indicative quotes are used to cross-check the screen-based prices. | + $2,500,000 |
| 10-Year EUR/USD Cross-Currency Swap | Internal valuation model, calibrated with observable EUR and USD yield curves and the spot FX rate. | While the component curves are liquid, the full cross-currency basis swap market is less so. An internal model provides a more robust valuation than a single indicative quote might. | – $1,200,000 |
| Exotic Inflation-Indexed Swap | Proprietary internal model and an indicative quote from one specialized broker. | No liquid market exists. The internal model is the primary valuation tool. The single broker quote is used as a reasonableness check on the model’s output. | + $750,000 |
| Unwind of Treasury Hedges | Actual execution prices from unwinding corresponding positions in US Treasury futures. | These are realized costs, directly attributable to the termination of the swap portfolio. The execution prices are documented via trade confirmations. | – $150,000 |
| Administrative & Legal Costs | Internal cost allocation and external legal invoices. | Reasonable costs incurred as a direct result of managing the default process are included. | – $50,000 |
| Total Close-out Amount | Sum of all components | The final, single amount payable by the Defaulting Party (Party B) to the Non-defaulting Party (Party A). | $1,850,000 |

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## How Does the Burden of Proof Change in Execution?

The execution of the close-out calculation under the 2002 Agreement fundamentally shifts the burden of proof in a dispute. Under the 1992 Market Quotation method, the Non-defaulting Party simply had to prove it followed the prescribed steps. Under the 2002 Close-out Amount, it must prove that its entire valuation process was commercially reasonable.

This requires a much higher standard of internal governance, model validation, and record-keeping. The execution is no longer a clerical task of polling dealers; it is a sophisticated valuation and risk management function that must be executed with precision and be fully defensible upon review.

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## References

- Stout, Lynn A. “Derivatives and the Legal Origin of the 2008 Credit Crisis.” Harvard Business Law Review, vol. 1, 2011, pp. 1-36.

- Mengle, David. “The ISDA Master Agreement ▴ A Practical Guide.” Futures Industry Magazine, May/June 2009.

- Gregory, Jon. “The 2002 ISDA Master Agreement ▴ A Practical Guide to the New ISDA Master Agreement.” Globe Business Publishing Ltd, 2003.

- Flavell, Alastair. “Swaps and Other Derivatives.” John Wiley & Sons, 2002.

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

- International Swaps and Derivatives Association. “User’s Guide to the 2002 ISDA Master Agreement.” ISDA, 2003.

- Henderson, Schuyler K. “Henderson on Derivatives.” LexisNexis, 2nd ed. 2011.

- Goochen, R. “The 1992 and 2002 ISDA Master Agreements ▴ A Comparative Analysis.” The Journal of International Banking and Financial Law, vol. 18, no. 3, 2003, pp. 104-112.

- Johnson, Paul. “Counterparty Risk and the New ISDA Master Agreement.” Risk Magazine, vol. 15, no. 11, 2002, pp. 85-88.

- Firth, Charles. “Close-Out Netting Under the ISDA Master Agreements ▴ A Legal and Economic Analysis.” Banking & Finance Law Review, vol. 25, no. 2, 2010, pp. 245-278.

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## Reflection

The evolution from the 1992 to the 2002 [ISDA close-out](https://prime.greeks.live/area/isda-close-out/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) protocol is more than a mere technical adjustment; it is a reflection of the maturation of the derivatives market itself. This progression from a rigid, prescriptive system to a flexible, principles-based framework mirrors the development of risk management capabilities within financial institutions. The original framework was designed for a market where transparency was sought through external, observable actions. The modern framework acknowledges that true financial risk is often complex, bespoke, and best measured by the sophisticated internal systems that participants have developed to manage their own exposures.

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## Assessing Your Operational Readiness

This shift compels a critical self-assessment. Does your institution’s operational and legal infrastructure truly align with the principles-based world of the 2002 Agreement? The ability to execute a defensible Close-out Amount calculation is a direct measure of your firm’s valuation prowess and risk management sophistication. It requires not just the models, but the governance, documentation, and personnel capable of justifying their application under scrutiny.

The knowledge gained here is a component in a larger system of institutional intelligence. How does your framework for managing counterparty default stand up to the standard of commercial reasonableness, not just in process, but in substance and defensibility?

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## Glossary

<a href="https://prime.greeks.live/area/close-out-calculation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Close-Out Calculation

Meaning ▴ Close-Out Calculation refers to the process of determining the final financial value and obligations of outstanding positions or contracts when a trading relationship or specific agreements are terminated prematurely, often due to a default event or the exercise of a contractual right. </a><a href="https://prime.greeks.live/area/swaps-and-derivatives/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![An abstract composition featuring two overlapping digital asset liquidity pools, intersected by angular structures representing multi-leg RFQ protocols. This visualizes dynamic price discovery, high-fidelity execution, and aggregated liquidity within institutional-grade crypto derivatives OS, optimizing capital efficiency and mitigating counterparty risk](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocols-optimizing-aggregated-liquidity-and-multi-leg-execution-via-advanced-market-microstructure.jpg)

## Swaps and Derivatives

Meaning ▴ Swaps and derivatives, within the sophisticated crypto financial landscape, are contractual instruments whose value is derived from the price performance of an underlying cryptocurrency asset, index, or rate. </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">
![A dark, circular metallic platform features a central, polished spherical hub, bisected by a taut green band. This embodies a robust Prime RFQ for institutional digital asset derivatives, enabling high-fidelity execution via RFQ protocols, optimizing market microstructure for best execution, and mitigating counterparty risk through atomic settlement](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-optimizing-high-fidelity-execution-across-diverse-market-microstructures.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/non-defaulting-party/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Two high-gloss, white cylindrical execution channels with dark, circular apertures and secure bolted flanges, representing robust institutional-grade infrastructure for digital asset derivatives. These conduits facilitate precise RFQ protocols, ensuring optimal liquidity aggregation and high-fidelity execution within a proprietary Prime RFQ environment](https://options.greeks.live/wp-content/uploads/2025/08/institutional-grade-execution-channels-enabling-private-quotation-and-optimal-liquidity-aggregation-for-high-fidelity-digital-asset-derivatives-rfq-protocols-on-prime-os.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/commercial-reasonableness/?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)

## 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/early-termination/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Abstract institutional-grade Crypto Derivatives OS. Metallic trusses depict market microstructure](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-market-microstructure-optimizing-rfq-protocols-for-high-fidelity-execution-via-prime-os.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/commercially-reasonable/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Translucent teal panel with droplets signifies granular market microstructure and latent liquidity in digital asset derivatives. Abstract beige and grey planes symbolize diverse institutional counterparties and multi-venue RFQ protocols, enabling high-fidelity execution and price discovery for block trades via aggregated inquiry](https://options.greeks.live/wp-content/uploads/2025/07/digital-asset-derivatives-rfq-protocols-liquidity-aggregation.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/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">
![A stylized depiction of institutional-grade digital asset derivatives RFQ execution. A central glowing liquidity pool for price discovery is precisely pierced by an algorithmic trading path, symbolizing high-fidelity execution and slippage minimization within market microstructure via a Prime RFQ](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-high-fidelity-execution-1.jpg)

## 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/valuation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Geometric planes and transparent spheres represent complex market microstructure. A central luminous core signifies efficient price discovery and atomic settlement via RFQ protocol](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-microstructure-4.jpg)

## Valuation

Meaning ▴ Valuation, within the context of crypto assets and related financial instruments, is the systematic process of determining the economic worth or fair market value of a digital asset, a derivative contract, or a blockchain-based project. </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">
![A transparent cylinder containing a white sphere floats between two curved structures, each featuring a glowing teal line. This depicts institutional-grade RFQ protocols driving high-fidelity execution of digital asset derivatives, facilitating private quotation and liquidity aggregation through a Prime RFQ for optimal block trade atomic settlement](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-high-fidelity-execution-6.jpg)

## 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/counterparty-default/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![An abstract digital interface features a dark circular screen with two luminous dots, one teal and one grey, symbolizing active and pending private quotation statuses within an RFQ protocol. Below, sharp parallel lines in black, beige, and grey delineate distinct liquidity pools and execution pathways for multi-leg spread strategies, reflecting market microstructure and high-fidelity execution for institutional grade digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/08/institutional-digital-asset-derivatives-rfq-protocol-displaying-multi-leg-execution-status-and-optimal-liquidity-pathways.jpg)

## Counterparty Default

Meaning ▴ Counterparty Default, within the financial architecture of crypto investing and institutional options trading, signifies the failure of a party to a financial contract to fulfill its contractual obligations, such as delivering assets, making payments, or providing collateral as stipulated. </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">
![A central translucent disk, representing a Liquidity Pool or RFQ Hub, is intersected by a precision Execution Engine bar. Its core, an Intelligence Layer, signifies dynamic Price Discovery and Algorithmic Trading logic for Digital Asset Derivatives](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-engine-visualizing-microstructure.jpg)

## 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/loss/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![An abstract composition of intersecting light planes and translucent optical elements illustrates the precision of institutional digital asset derivatives trading. It visualizes RFQ protocol dynamics, market microstructure, and the intelligence layer within a Principal OS for optimal capital efficiency, atomic settlement, and high-fidelity execution](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocols-high-fidelity-execution-framework.jpg)

## Loss

Meaning ▴ Loss, in the financial context of crypto investing and trading, signifies a negative change in the economic value of an asset, position, or portfolio, typically realized when the proceeds from a sale are less than the initial acquisition cost, or when expenses exceed revenue over a period. </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 centralized intelligence layer for institutional digital asset derivatives, visually connected by translucent RFQ protocols. This Prime RFQ facilitates high-fidelity execution and private quotation for block trades, optimizing liquidity aggregation and price discovery](https://options.greeks.live/wp-content/uploads/2025/07/institutional-grade-digital-asset-derivatives-rfq-protocol-engine.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/replacement-transaction/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Abstract geometric forms in blue and beige represent institutional liquidity pools and market segments. A metallic rod signifies RFQ protocol connectivity for atomic settlement of digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-market-microstructure-1.jpg)

## Replacement Transaction

Meaning ▴ A Replacement Transaction in crypto refers to the execution of a new trade or contract designed to supersede or nullify the financial exposure of a previously initiated, often failed or unfulfilled, digital asset transaction. </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">
![A precisely engineered central blue hub anchors segmented grey and blue components, symbolizing a robust Prime RFQ for institutional trading of digital asset derivatives. This structure represents a sophisticated RFQ protocol engine, optimizing liquidity pool aggregation and price discovery through advanced market microstructure for high-fidelity execution and private quotation](https://options.greeks.live/wp-content/uploads/2025/08/prime-os-digital-asset-derivatives-rfq-execution-core-systemic-hub.jpg)

## 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/determining-party/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Transparent conduits and metallic components abstractly depict institutional digital asset derivatives trading. Symbolizing cross-protocol RFQ execution, multi-leg spreads, and high-fidelity atomic settlement across aggregated liquidity pools, it reflects prime brokerage infrastructure](https://options.greeks.live/wp-content/uploads/2025/07/cross-protocol-rfq-execution-digital-asset-derivatives-microstructure-system.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/market-data/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Translucent geometric planes, speckled with micro-droplets, converge at a central nexus, emitting precise illuminated lines. This embodies Institutional Digital Asset Derivatives Market Microstructure, detailing RFQ protocol efficiency, High-Fidelity Execution pathways, and granular Atomic Settlement within a transparent Liquidity Pool](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-rfq-protocol-market-microstructure.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/risk-management/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A glowing, intricate blue sphere, representing the Intelligence Layer for Price Discovery and Market Microstructure, rests precisely on robust metallic supports. This visualizes a Prime RFQ enabling High-Fidelity Execution within a deep Liquidity Pool via Algorithmic Trading and RFQ protocols](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-core-intelligence-layer-for-rfq.jpg)

## Risk Management

Meaning ▴ Risk Management, within the cryptocurrency trading domain, encompasses the comprehensive process of identifying, assessing, monitoring, and mitigating the multifaceted financial, operational, and technological exposures inherent in digital asset markets. </a><a href="https://prime.greeks.live/question/what-are-the-key-differences-between-a-prime-brokerage-agreement-and-an-isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Sleek, intersecting metallic elements above illuminated tracks frame a central oval block. This visualizes institutional digital asset derivatives trading, depicting RFQ protocols for high-fidelity execution, liquidity aggregation, and price discovery within market microstructure, ensuring best execution on a Prime RFQ](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-system-for-optimal-execution.jpg)

## Master Agreement

A Prime Brokerage Agreement is a centralized service contract; an ISDA Master Agreement is a standardized bilateral derivatives protocol. </a><a href="https://prime.greeks.live/area/internal-model/?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)

## Internal Model

Meaning ▴ An Internal Model defines a proprietary quantitative framework developed and utilized by financial institutions, including those active in crypto investing, to assess and manage various forms of risk, such as market, credit, and operational risk. </a><a href="https://prime.greeks.live/area/isda-close-out/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Sleek, abstract system interface with glowing green lines symbolizing RFQ pathways and high-fidelity execution. This visualizes market microstructure for institutional digital asset derivatives, emphasizing private quotation and dark liquidity within a Prime RFQ framework, enabling best execution and capital efficiency](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-rfq-protocol-for-institutional-digital-asset-derivatives.jpg)

## Isda Close-Out

Meaning ▴ ISDA Close-Out refers to the standardized termination and netting provisions outlined in the International Swaps and Derivatives Association (ISDA) Master Agreement, a foundational legal document for over-the-counter (OTC) derivatives transactions. </a>

**Tags:** [Early Termination](https://options.greeks.live/area/early-termination/), [Internal Model](https://options.greeks.live/area/internal-model/), [Commercial Reasonableness](https://options.greeks.live/area/commercial-reasonableness/), [Valuation](https://options.greeks.live/area/valuation/), [Loss](https://options.greeks.live/area/loss/), [ISDA Close-Out](https://options.greeks.live/area/isda-close-out/)	

## Discover More

- 
### [What Constitutes a Commercially Reasonable Procedure for Calculating a Close-Out Amount?](https://options.greeks.live/question/what-constitutes-a-commercially-reasonable-procedure-for-calculating-a-close-out-amount/)
![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)

A commercially reasonable procedure is an objective, evidence-based method for valuing terminated derivatives to restore economic equivalence.

- 
### [What Are the Primary Legal Risks When Determining a Derivatives Close out Amount?](https://options.greeks.live/question/what-are-the-primary-legal-risks-when-determining-a-derivatives-close-out-amount/)
![A central star-like form with sharp, metallic spikes intersects four teal planes, on black. This signifies an RFQ Protocol's precise Price Discovery and Liquidity Aggregation, enabling Algorithmic Execution for Multi-Leg Spread strategies, mitigating Counterparty Risk, and optimizing Capital Efficiency for institutional Digital Asset Derivatives.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-price-discovery-and-execution.jpg)

Determining a derivatives close-out amount is a legally fraught valuation of replacement costs, governed by a "commercially reasonable" standard.

- 
### [How Does the ‘Commercially Reasonable’ Standard of the 2002 Protocol Reduce Litigation Risk?](https://options.greeks.live/question/how-does-the-commercially-reasonable-standard-of-the-2002-protocol-reduce-litigation-risk/)
![A metallic structural component interlocks with two black, dome-shaped modules, each displaying a green data indicator. This signifies a dynamic RFQ protocol within an institutional Prime RFQ, enabling high-fidelity execution for digital asset derivatives. Internal mechanisms underscore algorithmic trading and pre-trade analytics for capital efficiency and best execution.](https://options.greeks.live/wp-content/uploads/2025/07/modular-rfq-protocol-engine-for-digital-asset-derivatives-prime-os.jpg)

The 2002 ISDA's 'commercially reasonable' standard reduces litigation by mandating an objective, evidence-based close-out calculation.

- 
### [How Did the Lehman Brothers Bankruptcy Influence the Adoption of the 2002 ISDA Close-Out Amount Protocol?](https://options.greeks.live/question/how-did-the-lehman-brothers-bankruptcy-influence-the-adoption-of-the-2002-isda-close-out-amount-protocol/)
![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)

The Lehman bankruptcy catalyzed the adoption of the 2002 ISDA Protocol by proving the systemic risk of subjective, crisis-unfit valuations.

- 
### [What Is the Process for Calculating a Close-Out Amount after a Force Majeure Termination Event?](https://options.greeks.live/question/what-is-the-process-for-calculating-a-close-out-amount-after-a-force-majeure-termination-event/)
![A central precision-engineered RFQ engine orchestrates high-fidelity execution across interconnected market microstructure. This Prime RFQ node facilitates multi-leg spread pricing and liquidity aggregation for institutional digital asset derivatives, minimizing slippage.](https://options.greeks.live/wp-content/uploads/2025/08/high-fidelity-rfq-execution-for-institutional-crypto-derivatives.jpg)

The process calculates a fair replacement value for terminated trades, integrating hedging costs and unpaid amounts into a single net settlement.

- 
### [How Did the 2002 ISDA Master Agreement Change the Landscape of Counterparty Risk Management?](https://options.greeks.live/question/how-did-the-2002-isda-master-agreement-change-the-landscape-of-counterparty-risk-management/)
![A sleek, futuristic object with a glowing line and intricate metallic core, symbolizing a Prime RFQ for institutional digital asset derivatives. It represents a sophisticated RFQ protocol engine enabling high-fidelity execution, liquidity aggregation, atomic settlement, and capital efficiency for multi-leg spreads.](https://options.greeks.live/wp-content/uploads/2025/07/advanced-institutional-digital-asset-derivatives-rfq-protocol-execution-engine-for-optimal-liquidity-aggregation-and-atomic-settlement.jpg)

The 2002 ISDA Master Agreement upgraded the derivatives market's OS by introducing a flexible close-out engine for superior risk control.

- 
### [How Can a Firm Prove Its Close-Out Calculation Was Commercially Reasonable in Court?](https://options.greeks.live/question/how-can-a-firm-prove-its-close-out-calculation-was-commercially-reasonable-in-court/)
![A metallic disc intersected by a dark bar, over a teal circuit board. This visualizes Institutional Liquidity Pool access via RFQ Protocol, enabling Block Trade Execution of Digital Asset Options with High-Fidelity Execution. It signifies Market Microstructure Optimization and Atomic Settlement on a Prime RFQ.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-principal-operational-framework-market-microstructure-high-fidelity-execution.jpg)

A firm proves its close-out calculation was commercially reasonable by systematically executing a pre-defined, evidence-based valuation protocol.

- 
### [What Constitutes a Commercially Reasonable Procedure in a Close-Out?](https://options.greeks.live/question/what-constitutes-a-commercially-reasonable-procedure-in-a-close-out/)
![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)

A commercially reasonable close-out is the systematic, good-faith execution of a defensible valuation to crystallize risk into a fair value.

- 
### [How Does the 2002 ISDA Close-Out Amount Improve upon the 1992 Market Quotation Method?](https://options.greeks.live/question/how-does-the-2002-isda-close-out-amount-improve-upon-the-1992-market-quotation-method/)
![A sleek, spherical intelligence layer component with internal blue mechanics and a precision lens. It embodies a Principal's private quotation system, driving high-fidelity execution and price discovery for digital asset derivatives through RFQ protocols, optimizing market microstructure and minimizing latency.](https://options.greeks.live/wp-content/uploads/2025/08/principals-private-quotation-system-intelligence-layer-component.jpg)

The 2002 ISDA Close-Out Amount replaces a rigid polling system with a flexible, commercially reasonable standard for greater accuracy.

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---

**Original URL:** https://options.greeks.live/question/how-does-the-close-out-calculation-differ-between-the-1992-and-2002-isda-agreements/
