# How Does the Force Majeure Clause in the 2002 Isda Agreement Affect a Party's Obligations? ▴ Question

**Published:** 2025-08-14
**Categories:** Question

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## Concept

The [2002 ISDA Master Agreement](https://prime.greeks.live/area/2002-isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) operates as the foundational architecture for privately negotiated derivatives transactions, establishing a standardized framework of rules that govern the relationship between counterparties. Within this complex system, the [Force Majeure clause](https://prime.greeks.live/question/what-are-the-essential-elements-to-include-when-drafting-a-robust-force-majeure-clause/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), codified in Section 5(b)(ii), functions as a critical, pre-defined protocol for managing catastrophic, non-financial disruptions. It is a mechanism designed to address circumstances where performance becomes physically impossible or legally prohibited due to an external event beyond a party’s control. Its inclusion in the 2002 version of the agreement marked a significant evolution from the 1992 text, providing a structured pathway for parties to navigate market-wide paralysis, natural disasters, or governmental actions that fundamentally prevent the fulfillment of contractual obligations.

The core purpose of the clause is to create a clear, albeit narrow, exit ramp when the machinery of a transaction grinds to a halt for reasons unrelated to the creditworthiness or financial default of either party. It distinguishes between a failure to perform due to financial distress, which is covered under Events of Default, and an inability to perform due to an external impediment. This distinction is paramount.

A [Force Majeure Event](https://prime.greeks.live/area/force-majeure-event/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) is classified as a [Termination Event](https://prime.greeks.live/area/termination-event/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), not an Event of Default, a categorization that carries profoundly different consequences for the calculation of termination payments and the narrative of what transpired. It allows for an orderly wind-down of affected transactions without the punitive implications associated with a default, reflecting a mutual recognition that an unforeseen, insurmountable barrier has emerged.

> The Force Majeure clause in the 2002 ISDA Agreement provides a structured termination process when external events make performance impossible or illegal, treating the situation as a no-fault Termination Event rather than a default.

Understanding this clause requires appreciating its role within the agreement’s broader system of checks and balances. It is not a general-purpose escape hatch for any difficult or economically disadvantageous situation. Courts and market participants interpret its provisions narrowly. The trigger requires that a party, its relevant office, or its credit support provider is physically or legally prevented from making payments or deliveries, or complying with a material obligation.

Furthermore, the [affected party](https://prime.greeks.live/question/what-is-the-difference-in-impact-between-volcker-affected-and-non-volcker-affected-dealers/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) must demonstrate that it could not overcome the event using “all [reasonable efforts](https://prime.greeks.live/question/what-constitutes-reasonable-efforts-to-overcome-a-force-majeure-event-under-the-isda-framework/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite),” a standard that compels proactive problem-solving without demanding financially ruinous actions. This precise calibration ensures the clause is reserved for genuinely exceptional circumstances, preserving the integrity and predictability of the derivatives market while offering a measured response to true impossibility.

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## Strategy

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## Navigating the Termination Protocol

The strategic utility of the Force [Majeure clause](https://prime.greeks.live/question/what-are-the-essential-elements-to-include-when-drafting-a-robust-force-majeure-clause/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) resides in its structured, non-default pathway to terminating derivatives obligations. When an event like a government-mandated shutdown, a natural disaster incapacitating a settlement system, or a new law rendering a transaction illegal occurs, a party must engage in a careful strategic analysis. The initial step is to determine if the event meets the stringent criteria of Section 5(b)(ii) ▴ it must be a “[force majeure](https://prime.greeks.live/question/how-does-the-close-out-amount-calculation-differ-between-a-force-majeure-event-and-a-standard-event-of-default/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) or act of state” beyond the party’s control, rendering performance impossible or impracticable, and be insurmountable through reasonable efforts. This assessment is critical because an incorrect invocation can create significant legal and financial risks.

A key strategic element is the built-in “[Waiting Period](https://prime.greeks.live/area/waiting-period/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite).” For most obligations, the clause mandates an eight-business-day waiting period from the onset of the Force Majeure Event before a party can designate an [Early Termination Date](https://prime.greeks.live/area/early-termination-date/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). This period serves as a mandatory pause, allowing time for the disruptive event to potentially resolve. During this time, payment and delivery obligations under the affected transactions are suspended for both parties, preventing a cascade of technical defaults. This suspension is automatic and provides a crucial buffer.

The strategic decision for a party is whether to wait out the period in hopes of resolution or to prepare for termination. This choice depends on the perceived duration of the disruption and the financial implications of the suspended transactions.

> Activating the Force Majeure clause requires a careful strategic assessment of the event’s qualifications, the implications of the mandatory waiting period, and the procedural hierarchy of the ISDA Agreement.

The clause’s interaction with other parts of the ISDA framework is a central strategic consideration. Section 5(c) establishes a hierarchy of events, stipulating that if a situation qualifies as both a Force [Majeure Event](https://prime.greeks.live/question/how-does-the-close-out-amount-calculation-differ-between-a-force-majeure-event-and-a-standard-event-of-default/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) and an [Illegality](https://prime.greeks.live/area/illegality/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), it is treated as an Illegality. Illegality has a shorter waiting period of three business days, making it a potentially faster route to termination. A party’s strategy must therefore involve a precise classification of the event.

Furthermore, if the circumstances also constitute an Event of Default (e.g. bankruptcy), the event is typically treated as a default, which takes precedence over Force Majeure. This hierarchy prevents a defaulting party from using a concurrent force majeure event to shield itself from the consequences of its own financial failure.

![Angularly connected segments portray distinct liquidity pools and RFQ protocols. A speckled grey section highlights granular market microstructure and aggregated inquiry complexities for digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-execution-efficiency.jpg)

## Trigger Event Analysis and Procedural Steps

A disciplined, procedural approach is essential when contemplating the use of the Force Majeure clause. The following tables outline the core components of the strategic analysis and the subsequent procedural sequence that a party must follow.

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## Table 1 ▴ Force Majeure Trigger Qualification Matrix

This table provides a framework for assessing whether a specific event qualifies for invocation under Section 5(b)(ii).

| Criterion | Description | Strategic Questions for the Affected Party |
| --- | --- | --- |
| Event Type | The event must be a “force majeure” or an “act of state.” This is not explicitly defined, relying on established legal interpretation. | Is the event external and unforeseeable? Does it fall under recognized categories like natural disasters, war, terrorism, or direct government action? |
| Causation and Effect | The event must directly prevent, or make impossible or impracticable, the performance of a material obligation (e.g. payment, delivery). | Is performance truly impossible, or merely more expensive or difficult? Can the specific obligation be linked directly to the event? |
| Control | The event must be beyond the reasonable control of the party, its acting office, or its Credit Support Provider. | Did any action or inaction by our firm contribute to the event’s impact? |
| Reasonable Efforts | The party must be unable to overcome the event’s effects after using “all reasonable efforts.” This does not require incurring a material financial loss. | Have all viable workarounds been explored (e.g. using another office, alternative settlement systems)? What is the cost of these alternatives? |

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## Procedural Sequence for Termination

Once a party determines a Force Majeure Event has occurred and is continuing, a clear sequence of actions is prescribed by the agreement.

- **Notification** ▴ Both parties have an obligation to promptly notify the other upon becoming aware of a Force Majeure Event, detailing its nature. This is a crucial step to formally establish the timeline.

- **Waiting Period Commencement** ▴ A Waiting Period of eight Local Business Days automatically begins on the date the [Force Majeure Event occurs](https://prime.greeks.live/question/how-does-the-close-out-amount-calculation-differ-between-a-force-majeure-event-and-a-standard-event-of-default/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). During this period, payment and delivery obligations are suspended.

- **Monitoring** ▴ Throughout the Waiting Period, the affected party must monitor the situation to see if the event ceases to exist.

- **Designation of [Early Termination](https://prime.greeks.live/question/how-does-the-concept-of-an-automatic-early-termination-change-strategic-considerations/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) Date** ▴ If the event persists after the eight-day Waiting Period, either party may designate an Early Termination Date by giving notice to the other party. This formally triggers the close-out process.

- **Calculation of [Close-out Amount](https://prime.greeks.live/area/close-out-amount/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)** ▴ Upon designation of an Early Termination Date, the parties proceed to calculate the “Close-out Amount” under Section 6(e) of the agreement. This is a valuation of the terminated transactions based on market data to determine what one party owes the other.

- **Settlement** ▴ The final step is the payment of the net Close-out Amount, settling the financial obligations between the parties.

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## Execution

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## Operationalizing the Termination Process

The execution phase of a Force Majeure Termination Event is a highly structured process governed by the precise mechanics of the [ISDA Master Agreement](https://prime.greeks.live/area/isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). It transforms a strategic decision into a series of operational tasks aimed at the orderly and legally sound termination and settlement of all Affected Transactions. The primary objective is to arrive at a single net figure representing the market value of the terminated portfolio and to settle that amount. This process demands meticulous documentation, clear communication, and a robust valuation methodology.

Upon the conclusion of the eight-business-day Waiting Period with the Force Majeure Event still in effect, the right to terminate crystallizes. The non-affected party typically has the primary right to designate an Early Termination Date, but the affected party may also gain this right in certain circumstances. The notice of termination is a critical legal document. It must be delivered in accordance with the notice provisions of the agreement and clearly state the designated Early Termination Date.

This date becomes the anchor for all subsequent valuation activities. All obligations to make payments or deliveries scheduled after the Early Termination Date are extinguished and replaced by the obligation to pay the final Close-out Amount.

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## Valuation and the Close-Out Amount Calculation

The core of the execution process is the calculation of the Close-out Amount. The [2002 ISDA Agreement](https://prime.greeks.live/area/2002-isda-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) requires the determining party (usually the non-affected party) to calculate this amount in good faith and using [commercially reasonable procedures](https://prime.greeks.live/area/commercially-reasonable-procedures/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) to produce a commercially reasonable result. This calculation represents the losses or gains associated with replacing or obtaining the economic equivalent of the terminated transactions. The methodology provides a degree of flexibility, allowing the determining party to consider various sources of information.

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## Table 2 ▴ Components of Close-Out Amount Calculation

This table breaks down the inputs that a determining party would consider when calculating the final settlement figure.

| Component | Description | Data Sources and Considerations |
| --- | --- | --- |
| Replacement Quotes | Obtaining quotes from third-party dealers for transactions that would replicate the material terms of the terminated trades. | Requires outreach to multiple leading market makers. The number and quality of quotes are key to demonstrating commercial reasonableness. |
| Market Data | Using relevant market data, such as interest rates, FX rates, commodity prices, and volatility surfaces, to value the terminated transactions internally. | Sources include established data providers (e.g. Bloomberg, Reuters), exchange-traded prices, and other verifiable market information. |
| Internal Models | Employing proprietary valuation models consistent with those used by the party for its own internal risk management and reporting. | The models must be demonstrably robust and the inputs must be commercially reasonable and transparent. |
| Unpaid Amounts | Incorporating any payments or deliveries that were due and unpaid prior to the Early Termination Date. | Requires a full reconciliation of the account history between the two parties. |
| Costs of Termination | Including, where reasonable, any costs and expenses incurred in connection with terminating and liquidating the transactions (e.g. brokerage fees, legal fees). | These costs must be directly attributable to the termination process and must be documented. |

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## Hypothetical Close-Out Calculation Scenario

Imagine Party A and Party B have a portfolio of interest rate swaps. A Force Majeure Event occurs, and Party A (the non-affected party) designates an Early Termination Date. Party A must now calculate the Close-out Amount.

- **Transaction 1 (Receive-Fixed Swap)** ▴ The swap is in-the-money to Party A. Based on prevailing interest rates, its replacement value is determined to be +$1,500,000.

- **Transaction 2 (Pay-Fixed Swap)** ▴ This swap is out-of-the-money to Party A. Its replacement value is determined to be -$800,000.

- **Unpaid Amounts** ▴ Party B failed to make a scheduled coupon payment of $50,000 to Party A before the termination. This is an Unpaid Amount owed to Party A.

- **Termination Costs** ▴ Party A incurred $10,000 in legal fees to manage the [termination process](https://prime.greeks.live/question/how-does-the-2002-isda-improve-upon-the-1992-agreements-termination-process/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite).

- **Net Calculation** ▴ The Close-out Amount is calculated as follows:
($1,500,000 – $800,000) + $50,000 + $10,000 = $760,000.

In this scenario, Party B would be obligated to pay Party A a single lump sum of $760,000 to settle all outstanding obligations under the terminated ISDA [Master Agreement](https://prime.greeks.live/question/in-what-ways-does-the-single-agreement-principle-of-the-isda-master-agreement-differ-from-traditional-contract-law/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). This netting process is a cornerstone of the ISDA architecture, significantly reducing settlement risk by consolidating all valuations into a single payment.

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## References

- Charles, S. (n.d.). The ISDA Master Agreement ▴ Part II ▴ Negotiated Provisions. Charles Law PLLC.

- Katten Muchin Rosenman LLP. (2020, April 1). Force Majeure Clauses and Financially Settled Transactions Under the ISDA Master Agreement.

- Fieldfisher. (2020, March 24). ISDA Force Majeure Provisions ▴ competing notices.

- The Jolly Contrarian. (2024). Force Majeure Event – ISDA Provision.

- International Swaps and Derivatives Association, Inc. (2002). ISDA 2002 Master Agreement. U.S. Securities and Exchange Commission.

- McGrath, T. J. (2002). The 2002 ISDA Master Agreement ▴ A Practical Approach. Journal of International Banking Law and Regulation, 17(11), 389-395.

- Henderson, S. K. (2003). The 2002 ISDA Master Agreement ▴ an overview. Law and Financial Markets Review, 1(4), 324-331.

- Kenyon, A. (2002). The 2002 ISDA Master Agreement. Butterworths Journal of International Banking and Financial Law, 17(8), 294-297.

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## Reflection

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## Systemic Resilience and Counterparty Risk

The Force Majeure clause within the 2002 [ISDA Agreement](https://prime.greeks.live/area/isda-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) is a testament to the evolution of financial market architecture. It represents a codified understanding that certain risks are external to the system of credit and performance, requiring a distinct resolution protocol. Integrating this understanding into a firm’s operational framework moves beyond simple legal compliance. It prompts a deeper consideration of systemic resilience.

How does your own [counterparty risk](https://prime.greeks.live/area/counterparty-risk/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) management system differentiate between a financial failure and a logistical or legal paralysis? The mechanisms of the ISDA provide a robust model for this differentiation.

Ultimately, mastering the nuances of the ISDA framework is about more than managing legal obligations; it is about building a more intelligent and resilient operational model. The knowledge of how and when a protocol like the Force Majeure clause is activated becomes a component in a larger system of institutional intelligence. This system allows a firm to navigate market disruptions with precision and confidence, preserving capital and maintaining stability in the face of profound uncertainty. The true advantage lies in viewing these contractual clauses not as static legal text, but as dynamic components of a comprehensive risk architecture.

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## Glossary

<a href="https://prime.greeks.live/area/2002-isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A central teal column embodies Prime RFQ infrastructure for institutional digital asset derivatives. Angled, concentric discs symbolize dynamic market microstructure and volatility surface data, facilitating RFQ protocols and price discovery](https://options.greeks.live/wp-content/uploads/2025/07/digital-asset-derivatives-rfq-protocol-alpha-generation-execution.jpg)

## 2002 Isda Master Agreement

Meaning ▴ The 2002 ISDA Master Agreement represents a standardized bilateral contractual framework for over-the-counter (OTC) derivatives transactions. </a><a href="https://prime.greeks.live/question/what-are-the-essential-elements-to-include-when-drafting-a-robust-force-majeure-clause/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A metallic disc, reminiscent of a sophisticated market interface, features two precise pointers radiating from a glowing central hub. This visualizes RFQ protocols driving price discovery within institutional digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocols-price-discovery.jpg)

## Force Majeure Clause

A robust force majeure clause is an engineered protocol for managing systemic shocks to contractual performance. </a><a href="https://prime.greeks.live/area/force-majeure-event/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![An abstract visual depicts a central intelligent execution hub, symbolizing the core of a Principal's operational framework. Two intersecting planes represent multi-leg spread strategies and cross-asset liquidity pools, enabling private quotation and aggregated inquiry for institutional digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-rfq-protocol-engine-for-institutional-digital-asset-derivatives.jpg)

## Force Majeure Event

Meaning ▴ A Force Majeure Event denotes an unforeseeable and unavoidable circumstance that prevents a party from fulfilling its contractual obligations, thereby absolving them from liability for non-performance. </a><a href="https://prime.greeks.live/area/termination-event/?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)

## Termination Event

Meaning ▴ A Termination Event denotes a pre-specified condition or set of criteria, contractually defined or algorithmically encoded, whose verified occurrence mandates the immediate cessation or unwinding of a financial agreement, especially prevalent within institutional digital asset derivatives. </a><a href="https://prime.greeks.live/question/what-constitutes-reasonable-efforts-to-overcome-a-force-majeure-event-under-the-isda-framework/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A precision institutional interface features a vertical display, control knobs, and a sharp element. This RFQ Protocol system ensures High-Fidelity Execution and optimal Price Discovery, facilitating Liquidity Aggregation](https://options.greeks.live/wp-content/uploads/2025/08/institutional-digital-asset-derivatives-rfq-execution-platform-interface.jpg)

## Reasonable Efforts

Reasonable efforts under ISDA are a mandatory, auditable protocol of mitigation to overcome performance impediments. </a><a href="https://prime.greeks.live/question/what-is-the-difference-in-impact-between-volcker-affected-and-non-volcker-affected-dealers/?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)

## Affected Party

The Volcker Rule bifurcated dealers into compliance-driven bank agents and risk-seeking non-bank principals, altering liquidity and risk. </a><a href="https://prime.greeks.live/question/what-are-the-essential-elements-to-include-when-drafting-a-robust-force-majeure-clause/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A transparent glass sphere rests precisely on a metallic rod, connecting a grey structural element and a dark teal engineered module with a clear lens. This symbolizes atomic settlement of digital asset derivatives via private quotation within a Prime RFQ, showcasing high-fidelity execution and capital efficiency for RFQ protocols and liquidity aggregation](https://options.greeks.live/wp-content/uploads/2025/07/architecting-high-fidelity-execution-for-institutional-digital-asset-derivatives-rfq-protocols-and-systemic-liquidity-aggregation.jpg)

## Majeure Clause

A robust force majeure clause is an engineered protocol for managing systemic shocks to contractual performance. </a><a href="https://prime.greeks.live/question/how-does-the-close-out-amount-calculation-differ-between-a-force-majeure-event-and-a-standard-event-of-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)

## Force Majeure

The close-out calculation shifts from a unilateral, protective valuation by the non-breaching party in a default to a bilateral, equitable mid-market valuation by both parties in a force majeure. </a><a href="https://prime.greeks.live/area/early-termination-date/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A precision optical component on an institutional-grade chassis, vital for high-fidelity execution. It supports advanced RFQ protocols, optimizing multi-leg spread trading, rapid price discovery, and mitigating slippage within the Principal's digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-optical-component-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/waiting-period/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Abstract forms depict interconnected institutional liquidity pools and intricate market microstructure. Sharp algorithmic execution paths traverse smooth aggregated inquiry surfaces, symbolizing high-fidelity execution within a Principal's operational framework](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-microstructure-prime-os-1.jpg)

## Waiting Period

Meaning ▴ A waiting period represents a mandated temporal delay imposed before a specific system action, such as order execution or data release, can proceed. </a><a href="https://prime.greeks.live/question/how-does-the-close-out-amount-calculation-differ-between-a-force-majeure-event-and-a-standard-event-of-default/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Intricate metallic mechanisms portray a proprietary matching engine or execution management system. Its robust structure enables algorithmic trading and high-fidelity execution for institutional digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-engine-market-microstructure.jpg)

## Majeure Event

The close-out calculation shifts from a unilateral, protective valuation by the non-breaching party in a default to a bilateral, equitable mid-market valuation by both parties in a force majeure. </a><a href="https://prime.greeks.live/area/illegality/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sleek metallic device with a central translucent sphere and dual sharp probes. This symbolizes an institutional-grade intelligence layer, driving high-fidelity execution for digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-platform-precision.jpg)

## Illegality

Meaning ▴ Illegality, within the operational framework of institutional digital asset derivatives, signifies a state of non-compliance with established statutory mandates, regulatory protocols, or contractual obligations. </a><a href="https://prime.greeks.live/question/how-does-the-close-out-amount-calculation-differ-between-a-force-majeure-event-and-a-standard-event-of-default/?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)

## Force Majeure Event Occurs

The close-out calculation shifts from a unilateral, protective valuation by the non-breaching party in a default to a bilateral, equitable mid-market valuation by both parties in a force majeure. </a><a href="https://prime.greeks.live/question/how-does-the-concept-of-an-automatic-early-termination-change-strategic-considerations/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sleek blue surface with droplets represents a high-fidelity Execution Management System for digital asset derivatives, processing market data. A lighter surface denotes the Principal's Prime RFQ](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-rfq-execution-for-optimal-price-discovery.jpg)

## Early Termination

Automatic Early Termination transforms counterparty risk strategy by replacing discretionary action with a pre-programmed, systemic close-out. </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 sophisticated proprietary system module featuring precision-engineered components, symbolizing an institutional-grade Prime RFQ for digital asset derivatives. Its intricate design represents market microstructure analysis, RFQ protocol integration, and high-fidelity execution capabilities, optimizing liquidity aggregation and price discovery for block trades within a multi-leg spread environment](https://options.greeks.live/wp-content/uploads/2025/07/institutional-grade-proprietary-architecture-driving-high-fidelity-digital-asset-derivatives-execution-via-rfq-protocols-and-optimized-market-microstructure-dynamics.jpg)

## Close-Out Amount

Meaning ▴ The Close-Out Amount represents the definitive financial value required to terminate a derivatives contract or position, typically calculated upon a default event or a pre-defined termination trigger. </a><a href="https://prime.greeks.live/area/isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Sleek, domed institutional-grade interface with glowing green and blue indicators highlights active RFQ protocols and price discovery. This signifies high-fidelity execution within a Prime RFQ for digital asset derivatives, ensuring real-time liquidity and capital efficiency](https://options.greeks.live/wp-content/uploads/2025/08/institutional-digital-asset-derivatives-rfq-prime-os-execution-interface.jpg)

## 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/commercially-reasonable-procedures/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A deconstructed spherical object, segmented into distinct horizontal layers, slightly offset, symbolizing the granular components of an institutional digital asset derivatives platform. Each layer represents a liquidity pool or RFQ protocol, showcasing modular execution pathways and dynamic price discovery within a Prime RFQ architecture for high-fidelity execution and systemic risk mitigation](https://options.greeks.live/wp-content/uploads/2025/08/modular-institutional-digital-asset-derivatives-execution-framework-dissected-for-optimal-rfq-performance.jpg)

## 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-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Intersecting digital architecture with glowing conduits symbolizes Principal's operational framework. An RFQ engine ensures high-fidelity execution of Institutional Digital Asset Derivatives, facilitating block trades, multi-leg spreads](https://options.greeks.live/wp-content/uploads/2025/07/principal-digital-asset-derivatives-rfq-engine-high-fidelity-execution.jpg)

## 2002 Isda Agreement

Meaning ▴ The 2002 ISDA Master Agreement represents the industry-standard legal framework governing bilateral over-the-counter derivatives transactions globally. </a><a href="https://prime.greeks.live/question/how-does-the-2002-isda-improve-upon-the-1992-agreements-termination-process/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A high-fidelity institutional digital asset derivatives execution platform. A central conical hub signifies precise price discovery and aggregated inquiry for RFQ protocols](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-rfq-protocol-high-fidelity-digital-asset-derivatives-execution-1.jpg)

## Termination Process

The 2002 ISDA enhances termination by replacing subjective loss with an objective, commercially reasonable close-out valuation protocol. </a><a href="https://prime.greeks.live/question/in-what-ways-does-the-single-agreement-principle-of-the-isda-master-agreement-differ-from-traditional-contract-law/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A specialized hardware component, showcasing a robust metallic heat sink and intricate circuit board, symbolizes a Prime RFQ dedicated hardware module for institutional digital asset derivatives. It embodies market microstructure enabling high-fidelity execution via RFQ protocols for block trade and multi-leg spread](https://options.greeks.live/wp-content/uploads/2025/08/prime-os-dedicated-hardware-for-institutional-rfq-execution.jpg)

## Master Agreement

The ISDA's Single Agreement principle architects a unified risk entity, replacing severable contracts with one indivisible agreement to enable close-out netting. </a><a href="https://prime.greeks.live/area/isda-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Prime RFQ visualizes institutional digital asset derivatives RFQ protocol and high-fidelity execution. Glowing liquidity streams converge at intelligent routing nodes, aggregating market microstructure for atomic settlement, mitigating counterparty risk within dark liquidity](https://options.greeks.live/wp-content/uploads/2025/08/prime-os-high-fidelity-digital-asset-derivatives-rfq-protocol.jpg)

## Isda Agreement

Meaning ▴ The ISDA Master Agreement represents a foundational contractual framework for over-the-counter (OTC) derivatives transactions, establishing a standardized set of terms that govern all individual trades executed between two counterparties. </a><a href="https://prime.greeks.live/area/counterparty-risk/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Polished concentric metallic and glass components represent an advanced Prime RFQ for institutional digital asset derivatives. It visualizes high-fidelity execution, price discovery, and order book dynamics within market microstructure, enabling efficient RFQ protocols for block trades](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-prime-os-precision.jpg)

## Counterparty Risk

Meaning ▴ Counterparty risk denotes the potential for financial loss stemming from a counterparty's failure to fulfill its contractual obligations in a transaction. </a>

**Tags:** [Derivatives Contract](https://options.greeks.live/area/derivatives-contract/), [Early Termination Date](https://options.greeks.live/area/early-termination-date/), [ISDA Agreement](https://options.greeks.live/area/isda-agreement/), [Act of State](https://options.greeks.live/area/act-of-state/), [Section 5(B)(Ii)](https://options.greeks.live/area/section-5bii/), [Force Majeure Event](https://options.greeks.live/area/force-majeure-event/)	

## Discover More

- 
### [How Does Market Volatility Affect the Determination of a Commercially Reasonable Close out Amount?](https://options.greeks.live/question/how-does-market-volatility-affect-the-determination-of-a-commercially-reasonable-close-out-amount-2/)
![Abstract image showing interlocking metallic and translucent blue components, suggestive of a sophisticated RFQ engine. This depicts the precision of an institutional-grade Crypto Derivatives OS, facilitating high-fidelity execution and optimal price discovery within complex market microstructure for multi-leg spreads and atomic settlement.](https://options.greeks.live/wp-content/uploads/2025/07/precision-engineered-market-microstructure-for-institutional-digital-asset-derivatives-rfq.jpg)

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

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

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

- 
### [How Does the 2002 ISDA Standard Affect the Speed of Default Resolution?](https://options.greeks.live/question/how-does-the-2002-isda-standard-affect-the-speed-of-default-resolution/)
![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 standard accelerates default resolution by mandating a single, objective Close-out Amount calculation.

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

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

- 
### [Can a Party Unilaterally Revise Its Close out Amount Calculation after It Has Been Submitted?](https://options.greeks.live/question/can-a-party-unilaterally-revise-its-close-out-amount-calculation-after-it-has-been-submitted/)
![A multi-layered, circular device with a central concentric lens. It symbolizes an RFQ engine for precision price discovery and high-fidelity execution. This robust system enables institutional digital asset derivatives trading, reflecting advanced market microstructure, volatility surface analysis, Principal's operational framework, and efficient options trading.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-engine-for-precision-execution.jpg)

A party cannot unilaterally revise a submitted close-out amount; the calculation creates a binding obligation alterable only by mutual consent or court order.

- 
### [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.

- 
### [How Does the 2002 ISDA’S’Close-out Amount’ Affect Valuation Disputes in Practice?](https://options.greeks.live/question/how-does-the-2002-isdas-close-out-amount-affect-valuation-disputes-in-practice/)
![A focused view of a robust, beige cylindrical component with a dark blue internal aperture, symbolizing a high-fidelity execution channel. This element represents the core of an RFQ protocol system, enabling bespoke liquidity for Bitcoin Options and Ethereum Futures, minimizing slippage and information leakage.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-grade-digital-asset-derivatives-rfq-engine-core-precision-component.jpg)

The 2002 ISDA's Close-out Amount transforms valuation disputes from procedural challenges to substantive debates over commercial reasonableness.

- 
### [What Is the Primary Difference between the 1992 and 2002 ISDA Close out Calculations?](https://options.greeks.live/question/what-is-the-primary-difference-between-the-1992-and-2002-isda-close-out-calculations/)
![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 primary difference is the 1992 ISDA's rigid, dual-method system versus the 2002's flexible, single "Close-out Amount" standard.

- 
### [What Is the Standard for a Commercially Reasonable Close out Calculation?](https://options.greeks.live/question/what-is-the-standard-for-a-commercially-reasonable-close-out-calculation/)
![A pristine teal sphere, symbolizing an optimal RFQ block trade or specific digital asset derivative, rests within a sophisticated institutional execution framework. A black algorithmic routing interface divides this principal's position from a granular grey surface, representing dynamic market microstructure and latent liquidity, ensuring high-fidelity execution.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-rfq-protocol-precision-for-digital-asset-derivatives-execution.jpg)

A commercially reasonable close-out is the objective, auditable calculation of a terminated derivative's replacement cost.

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---

**Original URL:** https://options.greeks.live/question/how-does-the-force-majeure-clause-in-the-2002-isda-agreement-affect-a-partys-obligations/
