# How Does the Concept of Good Faith Impact the Calculation of a Close out Amount? ▴ Question

**Published:** 2025-08-06
**Categories:** Question

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## Concept

The calculation of a close-out amount following a [counterparty default](https://prime.greeks.live/area/counterparty-default/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) is a critical juncture in the lifecycle of any derivatives portfolio. At this moment, the abstract architecture of the [ISDA Master Agreement](https://prime.greeks.live/area/isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) materializes into a concrete financial outcome. The principle of “good faith” acts as a fundamental governor on the discretion afforded to the calculating party, the entity tasked with determining the final sum owed.

This is a procedural safeguard, a system parameter designed to ensure that the process of replacing or valuing [terminated transactions](https://prime.greeks.live/question/in-what-ways-can-the-valuation-of-terminated-derivatives-be-disputed-during-a-default/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) adheres to a standard of [commercial reasonableness](https://prime.greeks.live/area/commercial-reasonableness/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). It transforms the calculation from a purely mechanical exercise into a governed process, subject to objective scrutiny.

In the context of 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), the concept is explicitly codified. The determining party must act in good faith and use “[commercially reasonable procedures](https://prime.greeks.live/area/commercially-reasonable-procedures/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) in order to produce a commercially reasonable result”. This language establishes an objective standard. The focus shifts to the integrity of the valuation process itself.

The [determining party](https://prime.greeks.live/area/determining-party/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) is not granted unlimited latitude; its actions are measured against prevailing market practices and the observable data available at the time of the close-out. This requirement serves to protect the defaulting party from a punitive or self-serving valuation while allowing the non-defaulting party to be made whole for its economic losses.

> The good faith standard ensures that the discretion used in a close-out calculation is tethered to objective, commercially defensible actions.

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## The Evolution from Rationality to Reasonableness

Understanding the impact of [good faith](https://prime.greeks.live/area/good-faith/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) requires acknowledging its evolution within the ISDA framework. 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) employed a different standard, often summarized as a test of rationality. Under that regime, the calculating party determined its “Loss,” an amount it “reasonably determines in good faith to be its total losses and costs”.

This created a more subjective threshold; a court might only intervene if the determination was so outside the bounds of plausibility that no rational party could have reached it. This placed a heavy burden of proof on the challenging party.

The [2002 ISDA](https://prime.greeks.live/area/2002-isda/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) framework deliberately elevated this standard. The shift to requiring “[commercially reasonable](https://prime.greeks.live/area/commercially-reasonable/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) procedures” and a “commercially reasonable result” imposes a duty that is externally verifiable. A firm’s internal models, choice of replacement quote, or timing of the valuation are all subject to analysis based on what a comparable market participant would have done under similar circumstances.

Good faith, in this system, is demonstrated through the diligent application of these objective procedures. It is the adherence to a defensible and transparent methodology that fulfills the obligation.

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## What Is the Systemic Function of Good Faith in Terminations?

From a systems architecture perspective, the good faith obligation functions as a critical control mechanism that promotes market stability and predictability. In the event of a systemic shock leading to multiple defaults, this standard prevents exacerbating market stress through arbitrary or punitive close-out valuations. It forces a degree of procedural discipline that ensures the liquidation of positions reflects genuine replacement costs, rather than fire-sale prices or opportunistic gains. This disciplined approach helps contain financial contagion by ensuring that close-out amounts are grounded in economic reality, thereby preserving the integrity of the broader derivatives market.

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## Strategy

Strategically, the obligation to act in good faith and use commercially [reasonable procedures](https://prime.greeks.live/question/how-do-courts-interpret-commercially-reasonable-procedures-in-close-out-amount-calculations/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) dictates the entire operational approach to a close-out event. For the non-defaulting party, the primary strategy is to construct a valuation process that is not only accurate but also robust enough to withstand legal and commercial scrutiny. This involves a proactive and documented methodology for gathering [market data](https://prime.greeks.live/area/market-data/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), soliciting quotes, and making valuation judgments. The objective is to create an evidentiary trail that demonstrates every step was taken to achieve a fair market replacement cost for the terminated transactions.

A core component of this strategy is the selection of valuation inputs. The ISDA framework provides a non-exhaustive list of potential sources, including third-party quotations and various forms of market data. A strategic approach involves diversifying these sources. Relying on a single [dealer quote](https://prime.greeks.live/question/how-can-an-initiator-differentiate-between-a-competitive-quote-and-a-quote-that-signals-high-dealer-risk/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), especially if that dealer has a vested interest, may be perceived as a failure to use commercially reasonable procedures.

A more robust strategy involves obtaining multiple indicative and firm quotes from a range of credible market makers. It also means cross-referencing these quotes with internal models and observable market data points, such as closing prices on exchanges or data from consensus pricing services.

> A robust close-out strategy prioritizes the creation of a defensible audit trail, documenting the commercial reasonableness of each valuation decision.

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## Navigating Valuation Methodologies

The choice of valuation methodology is a key strategic decision. The determining party must select a path that aligns with the “commercially reasonable” standard. The table below outlines common methodologies and assesses their alignment with the good faith requirement.

| Valuation Methodology | Description | Alignment with Good Faith & Reasonableness |
| --- | --- | --- |
| Replacement Transaction | Entering into an actual, binding transaction with a third party to replace the material terms of the terminated trade. | High. This provides a definitive, market-tested price. The key is documenting that the chosen counterparty and price were commercially reasonable at the time of execution. |
| Multiple Dealer Quotes | Soliciting firm or indicative quotes from several independent market makers for a hypothetical replacement transaction. | High. Demonstrates a thorough survey of the available market. The process should be documented, including which quotes were deemed actionable and why. |
| Internal Model-Based Valuation | Using the firm’s own proprietary models to calculate the present value of the terminated transaction’s future cash flows. | Moderate to High. This is acceptable if the models are consistent with those used for internal reporting and risk management, and can be benchmarked against observable market inputs. Transparency is critical. |
| Market Data Consensus | Relying on prices from third-party consensus services or observable data from exchanges or clearing houses. | High. This method is grounded in objective, widely available data, making it inherently transparent and defensible as a commercially reasonable procedure. |

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## How Does Documentation Support a Good Faith Argument?

Comprehensive documentation is the shield that defends a [close-out calculation](https://prime.greeks.live/area/close-out-calculation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). The strategic imperative is to record not just the final number, but the entire decision-making process that produced it. This documentation should function as a complete record of the actions taken by the determining party.

Every choice, from the selection of dealers for quotes to the justification for disregarding an outlier price, must be logged and explained. This creates a contemporaneous record that is invaluable in demonstrating that procedures were commercially reasonable and that the party acted in good faith.

- **Quote Solicitation Log** A detailed record of every market maker contacted. This should include timestamps, the specific parameters of the requested quote, the response received (or lack thereof), and the name of the individual contact at the dealer. 

- **Valuation Rationale Memo** An internal document that explains the final methodology chosen. If multiple sources were used, it should detail how they were weighted or reconciled. If a specific quote was chosen as the basis for the calculation, the memo must justify why it was the most commercially reasonable option. 

- **Market Conditions Snapshot** A collection of relevant market data from the time of the close-out. This can include screenshots of pricing screens, reports from data vendors, and commentary on market liquidity and volatility. This context is vital for justifying decisions made under prevailing circumstances. 

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## Execution

The execution of a close-out calculation under the good faith standard is a procedural and data-intensive undertaking. It requires a systematic approach to asset valuation, data collection, and documentation. The objective is to produce a [final Close-out Amount](https://prime.greeks.live/question/how-does-market-illiquidity-affect-the-validity-of-a-close-out-amount-calculation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) that is not only financially accurate but also procedurally unimpeachable. This process begins the moment an [Early Termination Date](https://prime.greeks.live/area/early-termination-date/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) is triggered and must be conducted with precision and diligence.

The first phase of execution involves identifying and cataloging all Terminated Transactions. For a complex portfolio, this requires a detailed inventory of every trade, its material terms, and any associated collateral. Once the portfolio is defined, the determining party must establish a clear timeline for the valuation.

The ISDA [Master Agreement](https://prime.greeks.live/area/master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) specifies that the valuation should occur as of the [Early Termination](https://prime.greeks.live/area/early-termination/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) Date, or a commercially reasonable date thereafter. If the valuation is delayed, the rationale for this delay must be thoroughly documented, citing factors such as market illiquidity or the complexity of the portfolio.

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## A Procedural Playbook for Close-Out Calculation

Executing a defensible close-out requires a structured operational plan. The following steps provide a framework for the determining party to follow, ensuring compliance with the dual obligations of good faith and commercial reasonableness.

- **Portfolio Assembly and Verification** Immediately upon the trigger of an Early Termination Date, assemble a complete and final list of all transactions with the defaulting counterparty. This list must be verified against internal records and, if possible, reconciled with the defaulting party’s records to prevent disputes over the scope of the close-out. 

- **Establishment of Valuation Hierarchy** Define and document the firm’s preferred hierarchy of valuation sources before beginning the process. For example, a firm might decide to prioritize firm quotes from three independent dealers, falling back to a model-based valuation only if insufficient quotes are available. This pre-defined logic demonstrates a principled, non-opportunistic approach. 

- **Systematic Data Gathering** Execute the data gathering process according to the established hierarchy. Contact dealers for quotes simultaneously, providing identical parameters for the hypothetical replacement trades. Capture all relevant market data, including interest rate curves, volatility surfaces, and credit spreads as of the valuation date. 

- **Analysis and Selection of Inputs** Review the collected data. Discard any quotes that are clear outliers, but document the reason for their exclusion (e.g. “Quote was 5 standard deviations from the mean and dealer admitted to having no active axe in the product”). Average the remaining actionable quotes or select the most representative one, providing a clear justification for the choice. 

- **Calculation and Internal Review** Calculate the final [Close-out Amount](https://prime.greeks.live/area/close-out-amount/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) based on the selected inputs. This calculation should be independently reviewed and verified by a separate team or individual within the firm to check for mathematical errors and to provide a second opinion on the commercial reasonableness of the result. The entire review process must be documented. 

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## Illustrative Valuation Scenario

Consider a portfolio of terminated interest rate swaps. The determining party must calculate the cost of replacing these positions in the prevailing market. The following table illustrates how different data sources might be synthesized to arrive at a commercially reasonable valuation for a single swap.

| Valuation Source | Mid-Market Mark (USD) | Replacement Offer (USD) | Justification Notes |
| --- | --- | --- | --- |
| Dealer A Quote | +1,050,000 | +975,000 | Firm, actionable quote from a major dealer. Represents a direct, executable replacement cost. |
| Dealer B Quote | +1,065,000 | +980,000 | Firm, actionable quote. Price is consistent with Dealer A, providing market consensus. |
| Dealer C Quote | +1,150,000 | +1,090,000 | Indicative quote only. Noted as an outlier and given less weight as it was not a firm offer. |
| Internal Model Price | +1,055,000 | N/A | Model price based on observable swap curves. Used as a verification tool to confirm that dealer quotes are aligned with internal, consistent valuation methods. |
| Final Determined Value | N/A | +977,500 | Calculated as the average of the two firm quotes (A and B). This is a highly defensible approach as it relies on executable prices from independent sources. |

> The execution of a close-out calculation culminates in a single number derived from a multi-faceted, documented, and procedurally sound valuation process.

This detailed execution process, supported by robust documentation and transparent methodologies, is the ultimate expression of acting in good faith. It transforms a subjective legal standard into an objective operational discipline, ensuring that the final Close-out Amount is a true economic reflection of the terminated transactions.

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## References

- Lehman Brothers Special Financing Inc. v National Power Corporation & Anor EWHC 487 (Comm).

- Fondazione Enasarco v Lehman Brothers Finance SA EWHC 1307 (Ch).

- Lehman Brothers International (Europe) v Lehman Brothers Finance SA EWCA Civ 188.

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

- International Swaps and Derivatives Association. “1992 ISDA Master Agreement.” ISDA, 1992.

- Henderson, Schuyler K. “Henderson on Derivatives.” LexisNexis, 2017.

- Gregory, Jon. “The xVA Challenge ▴ Counterparty Credit Risk, Funding, Collateral, and Capital.” Wiley Finance, 2015.

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## Reflection

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## Calibrating Your Operational Framework

The principles governing a close-out calculation extend beyond the immediate context of a counterparty default. They compel a deeper examination of a firm’s entire valuation and risk management architecture. The requirement for objective, commercially reasonable procedures serves as a benchmark against which all internal processes can be measured.

How does your firm’s daily portfolio valuation methodology stand up to this standard of external verifiability? Are the models and data sources used for risk reporting consistent with the procedures that would be deployed in a termination event?

Viewing the good faith standard not as a legal constraint but as a design principle for a robust operational system can yield significant advantages. It encourages the development of transparent, well-documented, and consistent valuation practices across the organization. This creates a more resilient infrastructure, one that is prepared to act decisively and defensibly in a crisis.

Ultimately, the integrity of a close-out calculation is a reflection of the integrity of the system that produces it. The true measure of preparedness lies in the coherence and transparency of that system long before any Early Termination Date is declared.

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## Glossary

<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/counterparty-default/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Counterparty Default

Meaning ▴ Counterparty Default refers to the failure of a party to a financial transaction to fulfill its contractual obligations, such as delivering assets, making payments, or settling positions. </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/question/in-what-ways-can-the-valuation-of-terminated-derivatives-be-disputed-during-a-default/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Terminated Transactions

Disputing a terminated derivative's value involves a forensic audit of the close-out process and its commercial reasonableness. </a><a href="https://prime.greeks.live/area/commercially-reasonable-procedures/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Commercially Reasonable Procedures

Meaning ▴ Commercially Reasonable Procedures defines the standard of conduct for actions taken within a financial context, mandating diligence and adherence to prevailing market practices and conditions. </a><a href="https://prime.greeks.live/area/2002-isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## 2002 Isda Master Agreement

Meaning ▴ The 2002 ISDA Master Agreement represents a standardized bilateral contractual framework for over-the-counter (OTC) derivatives transactions. </a><a href="https://prime.greeks.live/area/determining-party/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sleek, symmetrical digital asset derivatives component. It represents an RFQ engine for high-fidelity execution of multi-leg spreads](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-engine-for-optimized-market-microstructure.jpg)

## Determining Party

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

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

Meaning ▴ Commercially Reasonable refers to actions, terms, or conditions that a prudent party would undertake or accept in a similar business context, aiming to achieve a desired outcome efficiently and effectively while considering prevailing market conditions, industry practices, and available alternatives. </a><a href="https://prime.greeks.live/area/2002-isda/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Abstract geometric representation of an institutional RFQ protocol for digital asset derivatives. Two distinct segments symbolize cross-market liquidity pools and order book dynamics](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-protocol-2.jpg)

## 2002 Isda

Meaning ▴ The 2002 ISDA Master Agreement constitutes a standardized contractual framework, widely adopted within the over-the-counter (OTC) derivatives market, establishing foundational terms for bilateral derivatives transactions. </a><a href="https://prime.greeks.live/question/how-do-courts-interpret-commercially-reasonable-procedures-in-close-out-amount-calculations/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Institutional-grade infrastructure supports a translucent circular interface, displaying real-time market microstructure for digital asset derivatives price discovery. Geometric forms symbolize precise RFQ protocol execution, enabling high-fidelity multi-leg spread trading, optimizing capital efficiency and mitigating systemic risk](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-request-for-quote-protocol-high-fidelity-execution-market-microstructure-intelligence-layer.jpg)

## Reasonable Procedures

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

## Market Data

Meaning ▴ Market Data comprises the real-time or historical pricing and trading information for financial instruments, encompassing bid and ask quotes, last trade prices, cumulative volume, and order book depth. </a><a href="https://prime.greeks.live/question/how-can-an-initiator-differentiate-between-a-competitive-quote-and-a-quote-that-signals-high-dealer-risk/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A complex interplay of translucent teal and beige planes, signifying multi-asset RFQ protocol pathways and structured digital asset derivatives. Two spherical nodes represent atomic settlement points or critical price discovery mechanisms within a Prime RFQ](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-for-optimal-liquidity-aggregation-and-high-fidelity-execution.jpg)

## Dealer Quote

Differentiating quotes requires decoding dealer risk signals embedded in price, latency, and context to secure optimal execution. </a><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">
![A translucent blue sphere is precisely centered within beige, dark, and teal channels. This depicts RFQ protocol for digital asset derivatives, enabling high-fidelity execution of a block trade within a controlled market microstructure, ensuring atomic settlement and price discovery on a Prime RFQ](https://options.greeks.live/wp-content/uploads/2025/07/precision-execution-pathway-for-institutional-digital-asset-derivatives-leveraging-rfq-protocols-and-high-fidelity-market-microstructure.jpg)

## Close-Out Calculation

Meaning ▴ The Close-Out Calculation is the precise algorithmic determination of a final net financial obligation or entitlement arising from the termination or liquidation of one or more derivative positions, typically triggered by a pre-defined event such as a margin breach or contract expiry. </a><a href="https://prime.greeks.live/question/how-does-market-illiquidity-affect-the-validity-of-a-close-out-amount-calculation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Abstract layers visualize institutional digital asset derivatives market microstructure. Teal dome signifies optimal price discovery, high-fidelity execution](https://options.greeks.live/wp-content/uploads/2025/08/high-fidelity-digital-asset-derivatives-rfq-execution-protocol-layers-and-market-microstructure-optimization.jpg)

## Final Close-Out Amount

Market illiquidity degrades a close-out amount's validity by replacing executable prices with ambiguous, model-dependent valuations. </a><a href="https://prime.greeks.live/area/early-termination-date/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Glowing teal conduit symbolizes high-fidelity execution pathways and real-time market microstructure data flow for digital asset derivatives. Smooth grey spheres represent aggregated liquidity pools and robust counterparty risk management within a Prime RFQ, enabling optimal price discovery](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-market-microstructure-prime-os.jpg)

## Early Termination Date

Meaning ▴ The Early Termination Date specifies a pre-agreed date or a date triggered by specific events, upon which a derivative contract or financial agreement concludes prior to its originally scheduled maturity. </a><a href="https://prime.greeks.live/area/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 ▴ 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/area/master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Polished metallic disks, resembling data platters, with a precise mechanical arm poised for high-fidelity execution. This embodies an institutional digital asset derivatives platform, optimizing RFQ protocol for efficient price discovery, managing market microstructure, and leveraging a Prime RFQ intelligence layer to minimize execution latency](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-precision-execution-via-advanced-rfq-protocols-and-prime-os-intelligence-layer-for-optimal-market-microstructure.jpg)

## Master Agreement

Meaning ▴ The Master Agreement is a foundational legal contract establishing a comprehensive framework for all subsequent transactions between two parties. </a><a href="https://prime.greeks.live/area/close-out-amount/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![An Institutional Grade RFQ Engine core for Digital Asset Derivatives. This Prime RFQ Intelligence Layer ensures High-Fidelity Execution, driving Optimal Price Discovery and Atomic Settlement for Aggregated Inquiries](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-engine-core-high-fidelity.jpg)

## Close-Out Amount

Meaning ▴ The Close-Out Amount represents the definitive financial value required to terminate a derivatives contract or position, typically calculated upon a default event or a pre-defined termination trigger. </a>

**Tags:** [Commercial Reasonableness](https://options.greeks.live/area/commercial-reasonableness/), [Commercially Reasonable](https://options.greeks.live/area/commercially-reasonable/), [Loss Calculation](https://options.greeks.live/area/loss-calculation/), [2002 ISDA](https://options.greeks.live/area/2002-isda/), [Early Termination Date](https://options.greeks.live/area/early-termination-date/), [Commercially Reasonable Procedures](https://options.greeks.live/area/commercially-reasonable-procedures/)	

## Discover More

- 
### [What Are the Primary Differences between the 1992 Isda’s Loss Method and the 2002 Close-Out Amount?](https://options.greeks.live/question/what-are-the-primary-differences-between-the-1992-isdas-loss-method-and-the-2002-close-out-amount/)
![Abstract dual-cone object reflects RFQ Protocol dynamism. It signifies robust Liquidity Aggregation, High-Fidelity Execution, and Principal-to-Principal negotiation. Essential for Crypto Derivatives OS Block Trades, ensuring Atomic Settlement and Volatility Surface integrity.](https://options.greeks.live/wp-content/uploads/2025/08/institutional-grade-rfq-execution-framework-for-digital-asset-derivatives-optimal-liquidity-aggregation-and-atomic-settlement.jpg)

The 2002 Close-Out Amount replaces the 1992's subjective Loss calculation with an objective, dual-standard of commercial reasonableness.

- 
### [How Can a Determining Party Defend Its Close out Calculation in Court?](https://options.greeks.live/question/how-can-a-determining-party-defend-its-close-out-calculation-in-court/)
![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 defensible close-out calculation is the output of a rigorously documented, objectively reasonable valuation process.

- 
### [Why Was the 1992 Isda’s Market Quotation Method Problematic in a Crisis?](https://options.greeks.live/question/why-was-the-1992-isdas-market-quotation-method-problematic-in-a-crisis/)
![A precision-engineered, multi-layered system component, symbolizing the intricate market microstructure of institutional digital asset derivatives. Two distinct probes represent RFQ protocols for price discovery and high-fidelity execution, integrating latent liquidity and pre-trade analytics within a robust Prime RFQ framework, ensuring best execution.](https://options.greeks.live/wp-content/uploads/2025/08/digital-asset-derivatives-rfq-protocols-high-fidelity-execution.jpg)

The 1992 ISDA Market Quotation method failed in a crisis due to its reliance on dealer quotes that vanished in illiquid, stressed markets.

- 
### [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 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.

- 
### [What Are the Consequences If a Court Finds a Close-Out Calculation Was Not Commercially Reasonable?](https://options.greeks.live/question/what-are-the-consequences-if-a-court-finds-a-close-out-calculation-was-not-commercially-reasonable/)
![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. This visualizes high-fidelity execution and price discovery across diverse trading venues, emphasizing capital efficiency and minimizing slippage.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-market-microstructure-1.jpg)

A non-compliant close-out calculation cedes financial control to the court, which will impose its own objective valuation.

- 
### [What Is the Standard for Commercial Reasonability under the 2002 Isda?](https://options.greeks.live/question/what-is-the-standard-for-commercial-reasonability-under-the-2002-isda/)
![Intersecting muted geometric planes, with a central glossy blue sphere. This abstract visualizes market microstructure for institutional digital asset derivatives. The sphere embodies a block trade or private quotation via RFQ protocols, ensuring high-fidelity execution and atomic settlement on a Prime RFQ.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-microstructure-5.jpg)

The standard for commercial reasonability is an objective, evidence-based framework for calculating a fair termination value.

- 
### [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.

- 
### [How Did the 2008 Financial Crisis Influence the Interpretation of ISDA Close-Out Provisions?](https://options.greeks.live/question/how-did-the-2008-financial-crisis-influence-the-interpretation-of-isda-close-out-provisions/)
![A multi-faceted crystalline star, symbolizing the intricate Prime RFQ architecture, rests on a reflective dark surface. Its sharp angles represent precise algorithmic trading for institutional digital asset derivatives, enabling high-fidelity execution and price discovery. This encapsulates RFQ protocols, multi-leg spread optimization, capital efficiency, and market microstructure dynamics.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocols-high-fidelity-execution-market-microstructure-optimization-for-prime-os-alpha-generation.jpg)

The 2008 crisis shifted ISDA close-out interpretation from contractual certainty to a system focused on commercially reasonable valuations.

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            "acceptedAnswer": {
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                "text": "From a systems architecture perspective, the good faith obligation functions as a critical control mechanism that promotes market stability and predictability. In the event of a systemic shock leading to multiple defaults, this standard prevents exacerbating market stress through arbitrary or punitive close-out valuations. It forces a degree of procedural discipline that ensures the liquidation of positions reflects genuine replacement costs, rather than fire-sale prices or opportunistic gains. This disciplined approach helps contain financial contagion by ensuring that close-out amounts are grounded in economic reality, thereby preserving the integrity of the broader derivatives market."
            }
        },
        {
            "@type": "Question",
            "name": "How Does Documentation Support A Good Faith Argument?",
            "acceptedAnswer": {
                "@type": "Answer",
                "text": "Comprehensive documentation is the shield that defends a close-out calculation. The strategic imperative is to record not just the final number, but the entire decision-making process that produced it. This documentation should function as a complete record of the actions taken by the determining party. Every choice, from the selection of dealers for quotes to the justification for disregarding an outlier price, must be logged and explained. This creates a contemporaneous record that is invaluable in demonstrating that procedures were commercially reasonable and that the party acted in good faith."
            }
        }
    ]
}
```


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**Original URL:** https://options.greeks.live/question/how-does-the-concept-of-good-faith-impact-the-calculation-of-a-close-out-amount/
