# How Does the Rationality Standard of the 1992 ISDA Differ from the 2002 Standard? ▴ Question

**Published:** 2025-08-04
**Categories:** Question

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## Concept

The architecture of global finance rests upon a series of meticulously engineered protocols. Among the most critical is the [ISDA Master Agreement](https://prime.greeks.live/area/isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), the foundational operating system for the over-the-counter derivatives market. Within this system, the protocols for handling a default are paramount, dictating the orderly termination of transactions and the calculation of a final settlement amount.

The evolution of the rationality standard from the [1992 ISDA Master Agreement](https://prime.greeks.live/area/1992-isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) to the 2002 version represents a fundamental upgrade in this system’s logic, moving from a subjective assessment of loss to an objective standard of commercial conduct. This was a necessary architectural shift, designed to enhance the system’s integrity and predictability under stress.

The 1992 Agreement established a standard of “rationality” for the [non-defaulting party](https://prime.greeks.live/area/non-defaulting-party/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) when calculating its losses upon a counterparty’s default. This standard is rooted in the English legal concept of “[Wednesbury unreasonableness](https://prime.greeks.live/area/wednesbury-unreasonableness/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite).” A determination of loss made by the non-defaulting party would stand unless it was a decision that no reasonable non-defaulting party could have possibly reached. This created a very high threshold for any challenge.

The focus was on the subjective determination of the party making the calculation, granting it significant discretion as long as it acted in [good faith](https://prime.greeks.live/area/good-faith/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). The system’s logic presumed the calculating party’s internal assessment was valid unless proven to be overtly irrational.

> The core distinction lies in the 2002 ISDA’s demand for objective, verifiable commercial reasonableness, replacing the 1992 version’s more subjective rationality test.

The 2002 ISDA Master Agreement fundamentally re-architected this process. It replaced the subjective rationality test with a more stringent, two-part objective standard. Under the 2002 framework, the non-defaulting party must use “[commercially reasonable procedures](https://prime.greeks.live/question/how-can-an-institution-best-document-its-adherence-to-commercially-reasonable-procedures-during-a-close-out/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)” to produce a “[commercially reasonable result](https://prime.greeks.live/question/what-constitutes-a-commercially-unreasonable-result-in-a-derivatives-close-out-scenario/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite).” This is a profound change. The system now requires an externally verifiable process.

The calculating party must demonstrate that its methodology aligns with standard market practices and that the resulting figure is, itself, fair from the perspective of an objective, informed observer. This dual requirement for both procedural and substantive reasonableness introduces a level of discipline and transparency absent in the prior framework.

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## What Drove the System Upgrade?

The transition from the 1992 to the 2002 standard was driven by the market’s need for greater certainty and the reduction of disputes. The subjectivity inherent in the 1992 Agreement could lead to outcomes that, while not technically irrational, were perceived as inequitable, potentially fostering protracted legal battles. The 2002 Agreement seeks to preempt these conflicts by establishing a clear, objective benchmark for behavior.

It codifies a standard of conduct that is observable and measurable against prevailing industry norms. This shift reflects a maturation of the derivatives market, demanding a more robust and defensible protocol for managing the critical process of close-out in a default scenario.

- **[1992 ISDA](https://prime.greeks.live/area/1992-isda/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) Standard** ▴ This framework centers on the concept of “Loss,” which the non-defaulting party determines in good faith. The legal test for challenging this determination is one of rationality, meaning the decision must be so unreasonable that no sensible person could have arrived at it.

- **2002 ISDA Standard** ▴ This version introduces the “Close-out Amount.” Its calculation is governed by a dual obligation. The non-defaulting party is required to use [commercially reasonable](https://prime.greeks.live/area/commercially-reasonable/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) procedures, and these procedures must also yield a commercially [reasonable result](https://prime.greeks.live/question/can-an-arrival-price-strategy-still-result-in-a-high-implementation-shortfall-and-why/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), both judged objectively.

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## Strategy

The strategic decision to adopt one ISDA Master Agreement over the other involves a calculated assessment of risk, control, and legal defensibility. The choice between the 1992 and 2002 standards is a choice between two distinct strategic postures in the event of a [counterparty default](https://prime.greeks.live/area/counterparty-default/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). Financial institutions must weigh the greater discretion afforded by the 1992 Agreement against the enhanced clarity and dispute-reduction mechanisms of the 2002 version. This is a fundamental consideration in the architecture of [counterparty risk](https://prime.greeks.live/area/counterparty-risk/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) management.

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## The Strategic Calculus of Discretion versus Objectivity

The 1992 Agreement’s rationality standard offers a strategy of maximum discretion for the non-defaulting party. In a default scenario, the institution calculating its loss has a wide operational latitude. Its determination is presumptively valid, protected by the high legal barrier of the Wednesbury test.

This can be strategically advantageous, allowing the institution to resolve ambiguity in its own favor and present a [loss calculation](https://prime.greeks.live/area/loss-calculation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) that is difficult to challenge successfully. The risk in this strategy is that a perceived abuse of this discretion can poison a commercial relationship and lead to costly, reputation-damaging litigation, even if the legal case is strong.

Conversely, the 2002 Agreement embodies a strategy of procedural integrity and objective validation. By adhering to a standard of [commercial reasonableness](https://prime.greeks.live/area/commercial-reasonableness/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), an institution builds a position that is inherently more defensible and transparent. The focus shifts from protecting a subjective decision to demonstrating a fair process. This strategy aims to minimize legal friction and accelerate the resolution of the close-out process.

The trade-off is a reduction in discretion; the non-defaulting party is bound to a standard that can be scrutinized by courts and arbitrators against objective market data and practices. This framework prioritizes systemic stability and certainty over individual party discretion.

> Choosing between the 1992 and 2002 standards is a strategic trade-off between the latitude of subjective judgment and the certainty of objective process.

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## Comparative Framework of ISDA Close-Out Standards

To fully grasp the strategic implications, a direct comparison of the operational standards is necessary. The following table breaks down the key attributes of each agreement’s close-out calculation methodology.

| Attribute | 1992 ISDA Master Agreement | 2002 ISDA Master Agreement |
| --- | --- | --- |
| Governing Concept | Loss | Close-out Amount |
| Primary Standard | Good faith and “rationality” (reasonableness) | Good faith and “commercial reasonableness” |
| Nature of Test | Subjective. (Based on the non-defaulting party’s perspective) | Objective. (Based on an external, market-based perspective) |
| Key Obligation | To determine an amount that is not irrational. | To use commercially reasonable procedures to achieve a commercially reasonable result. |
| Level of Discretion | High. The determination is difficult to overturn. | Lower. The process and result are subject to objective scrutiny. |
| Strategic Posture | Maximizes control for the non-defaulting party. | Prioritizes fairness, transparency, and dispute avoidance. |

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## How Does This Affect Counterparty Risk Models?

The choice of ISDA standard has direct input into quantitative models for counterparty risk. The 1992 standard introduces a higher degree of model uncertainty, as the potential recovery amount in a default is subject to the wide discretion of the counterparty. Risk models might incorporate a wider distribution of potential outcomes.

The 2002 standard, with its objective criteria, allows for more precise modeling. Analysts can make more reliable assumptions about the likely [close-out amount](https://prime.greeks.live/area/close-out-amount/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) by referencing observable market data and standard industry procedures, leading to a narrower and more predictable distribution of potential losses.

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## Execution

The execution of a close-out under an ISDA [Master Agreement](https://prime.greeks.live/area/master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) is a precise operational procedure, activated at a moment of significant market stress. The difference between the 1992 and 2002 standards manifests directly in the steps a non-defaulting party must take to calculate and defend its claim. The 2002 Agreement imposes a more rigorous and document-intensive process, demanding a level of procedural discipline that is less explicit in the 1992 version. This section details the execution playbook for each standard, providing a clear guide to the operational mechanics.

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## Executing a Close out under the 1992 Agreement

When executing a close-out under the 1992 Agreement, the operational focus is on calculating the “Loss.” This process, while requiring good faith, is largely internal and affords the non-defaulting party considerable latitude.

- **Internal Valuation** ▴ The primary step is for the non-defaulting party’s trading desk and risk functions to perform an internal valuation of the terminated transactions. This involves marking the positions to their current market value.

- **Cost Aggregation** ▴ The party then aggregates all associated costs and expenses incurred due to the early termination. This can include administrative costs, legal fees, and costs related to unwinding or replacing hedges.

- **Good Faith Determination** ▴ The party’s management must make a final determination of the total “Loss” figure. This decision is made in good faith, based on the internal valuations and cost assessments. The standard here is subjective reasonableness.

- **Notification** ▴ The non-defaulting party communicates the final Loss amount to the defaulted counterparty, along with a summary of how it was calculated. The supporting detail provided can be less exhaustive than what is required under the 2002 standard.

The defensibility of this execution rests on the “rationality” of the outcome. The calculation will be upheld unless the defaulting party can prove it was so outside the bounds of reason that no other market participant in the same position would have reached it.

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## Executing a Close out under the 2002 Agreement

The 2002 Agreement’s “Close-out Amount” requires a more structured and externally-focused execution. The dual requirements of commercially [reasonable procedures](https://prime.greeks.live/question/how-can-an-institution-best-document-its-adherence-to-commercially-reasonable-procedures-during-a-close-out/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) and a commercially reasonable result impose a higher standard of care.

> The 2002 ISDA’s execution protocol demands a transparent, well-documented process that can withstand objective, third-party scrutiny.

This process is designed to be robust and transparent, anticipating potential challenges and building a defensible record from the outset.

| Procedural Step | Execution Detail | Objective |
| --- | --- | --- |
| 1. Initial Assessment and Documentation | Immediately upon termination, document the prevailing market conditions, including volatility, liquidity, and any relevant market disruption events. | To establish the objective context in which the close-out is being calculated. |
| 2. Solicitation of Market Quotes | Obtain quotations for replacement trades from multiple, independent market makers (typically three to five). This should be done in a commercially reasonable timeframe. | To provide objective, third-party data points for the valuation. This is a core part of demonstrating “commercially reasonable procedures.” |
| 3. Use of Internal Models | Supplement external quotes with internal, model-based valuations. The models used should be consistent with those used in the ordinary course of business for risk management and financial reporting. | To provide a comprehensive valuation that blends external data with the firm’s own sophisticated analytics. |
| 4. Calculation and Justification | Calculate the final Close-out Amount by synthesizing the market quotes and model valuations. Create a detailed record explaining the methodology, including why certain quotes may have been discounted or relied upon more heavily. | To produce a “commercially reasonable result” and to document the logic connecting the procedures to the final amount. |
| 5. Final Review and Notification | Have the process and final amount reviewed internally by a separate function (e.g. an independent risk group) before issuing the final notification to the counterparty. The notification should include sufficient detail to show the calculation was performed in a commercially reasonable manner. | To ensure procedural integrity and to provide the counterparty with the necessary transparency, thereby reducing the likelihood of a dispute. |

The execution under the 2002 Agreement is an exercise in building a robust, evidence-based case. Every step is designed to demonstrate that the non-defaulting party acted not just in its own interest, but as a reasonable market participant would under the circumstances. This procedural rigor is the price of the greater legal certainty the 2002 Agreement provides.

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## References

- Faegre Drinker Biddle & Reath LLP. “ISDA Master Agreement Close-out Provisions ▴ English Courts Highlight a Difference Between the 1992 and 2002 Versions.” 4 May 2018.

- PricewaterhouseCoopers. “The ISDA Master Agreements.” PwC UK, Legal, 2014.

- International Swaps and Derivatives Association. “Comparison between the 1992 and 2002 ISDA Master Agreement.” ISDA Publications, 2003.

- Anthracite Rated Investments (Jersey) Limited v Lehman Brothers Finance S.A. EWHC 1822 (Ch).

- Lomas v JFB Firth Rixson Inc EWCA Civ 419.

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## Reflection

The evolution from the 1992 to 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) is more than a mere textual revision; it is a recalibration of the core principles governing financial agreements under stress. This shift compels market participants to look inward at their own operational frameworks. Is your institution’s process for managing default built on a foundation of subjective discretion, or is it architected around principles of objective, verifiable reasonableness? The knowledge of this distinction is a component in a larger system of institutional intelligence.

A superior operational framework anticipates sources of friction and engineers them out of the system. The ultimate strategic advantage lies in building a risk architecture that is not only robust and efficient but also transparent and defensible in the most challenging market conditions.

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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/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/wednesbury-unreasonableness/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Wednesbury Unreasonableness

Meaning ▴ Wednesbury Unreasonableness, within the context of automated financial systems, denotes a critical threshold where a system's output or a decision made by an algorithmic module deviates so extremely from rational, defensible parameters that no properly configured and logical system should have produced it. </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">
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## Non-Defaulting Party

Meaning ▴ The Non-Defaulting Party designates the entity within a bilateral or multilateral contractual agreement, particularly in digital asset derivatives, that remains in full compliance with its obligations and terms when a counterparty fails to meet its own, thereby triggering a default event. </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/question/how-can-an-institution-best-document-its-adherence-to-commercially-reasonable-procedures-during-a-close-out/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Commercially Reasonable Procedures

Mastering close-out documentation transforms a procedural burden into a defensible record of commercially reasonable action. </a><a href="https://prime.greeks.live/question/what-constitutes-a-commercially-unreasonable-result-in-a-derivatives-close-out-scenario/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Commercially Reasonable Result

A commercially unreasonable result in a derivatives close-out is a valuation that fails the test of objective market-based evidence. </a><a href="https://prime.greeks.live/area/1992-isda/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## 1992 Isda

Meaning ▴ The 1992 ISDA Master Agreement represents a standardized contractual framework for privately negotiated over-the-counter (OTC) derivative transactions between two counterparties. </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/question/can-an-arrival-price-strategy-still-result-in-a-high-implementation-shortfall-and-why/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Reasonable Result

An arrival price strategy yields high shortfall when market impact and timing risk are not systemically managed. </a><a href="https://prime.greeks.live/area/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/counterparty-risk/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## 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><a href="https://prime.greeks.live/area/loss-calculation/?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)

## Loss Calculation

Meaning ▴ Loss Calculation quantifies the financial depreciation of an asset or position against its cost basis or a specified liquidation threshold. </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">
![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)

## Commercial Reasonableness

Meaning ▴ Commercial reasonableness refers to the standard by which a transaction or action is judged to be consistent with prevailing market practices, industry norms, and sound business judgment, particularly concerning pricing, terms, and execution methodology. </a><a href="https://prime.greeks.live/area/close-out-amount/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sleek, pointed object, merging light and dark modular components, embodies advanced market microstructure for digital asset derivatives. Its precise form represents high-fidelity execution, price discovery via RFQ protocols, emphasizing capital efficiency, institutional grade alpha generation](https://options.greeks.live/wp-content/uploads/2025/07/institutional-grade-digital-asset-rfq-execution-system-microstructure.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/master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A crystalline sphere, representing aggregated price discovery and implied volatility, rests precisely on a secure execution rail. This symbolizes a Principal's high-fidelity execution within a sophisticated digital asset derivatives framework, connecting a prime brokerage gateway to a robust liquidity pipeline, ensuring atomic settlement and minimal slippage for institutional block trades](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-execution-platform-optimizing-liquidity-and-risk-management-through-advanced-protocols.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/question/how-can-an-institution-best-document-its-adherence-to-commercially-reasonable-procedures-during-a-close-out/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Geometric planes, light and dark, interlock around a central hexagonal core. This abstract visualization depicts an institutional-grade RFQ protocol engine, optimizing market microstructure for price discovery and high-fidelity execution of digital asset derivatives including Bitcoin options and multi-leg spreads within a Prime RFQ framework, ensuring atomic settlement](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-engine-architecture.jpg)

## Reasonable Procedures

Mastering close-out documentation transforms a procedural burden into a defensible record of commercially reasonable action. </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 sleek, light interface, a Principal's Prime RFQ, overlays a dark, intricate market microstructure. This represents institutional-grade digital asset derivatives trading, showcasing high-fidelity execution via RFQ protocols](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-prime-os-execution-system.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>

**Tags:** [2002 ISDA](https://options.greeks.live/area/2002-isda/), [Financial Regulation](https://options.greeks.live/area/financial-regulation/), [Master Agreement](https://options.greeks.live/area/master-agreement/), [Good Faith](https://options.greeks.live/area/good-faith/), [Commercial Reasonableness](https://options.greeks.live/area/commercial-reasonableness/), [Non-Defaulting Party](https://options.greeks.live/area/non-defaulting-party/)	

## Discover More

- 
### [What Are the Primary Legal and Operational Risks of Remaining on the 1992 ISDA Master Agreement?](https://options.greeks.live/question/what-are-the-primary-legal-and-operational-risks-of-remaining-on-the-1992-isda-master-agreement/)
![A central glowing blue mechanism with a precision reticle is encased by dark metallic panels. This symbolizes an institutional-grade Principal's operational framework for high-fidelity execution of digital asset derivatives. It embodies RFQ processing, enabling price discovery within a deep liquidity pool, optimizing market microstructure.](https://options.greeks.live/wp-content/uploads/2025/07/precision-core-enabling-institutional-digital-asset-derivatives-rfq-execution.jpg)

Reliance on the 1992 ISDA embeds legal ambiguity and operational friction into a firm's core risk architecture.

- 
### [How Does the ISDA Master Agreement Facilitate Close-Out Netting?](https://options.greeks.live/question/how-does-the-isda-master-agreement-facilitate-close-out-netting/)
![Sharp, layered planes, one deep blue, one light, intersect a luminous sphere and a vast, curved teal surface. This abstractly represents high-fidelity algorithmic trading and multi-leg spread execution. The sphere symbolizes a prime brokerage liquidity pool, interacting with latent liquidity for optimal RFQ protocol price discovery within complex market microstructure.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-execution-system-microstructure.jpg)

The ISDA Master Agreement facilitates close-out netting by creating a single contract that allows for the termination and valuation of all trades into one net payment upon default.

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

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

- 
### [What Is the Legal Precedent for Challenging a Close-Out Calculation’s Rationality?](https://options.greeks.live/question/what-is-the-legal-precedent-for-challenging-a-close-out-calculations-rationality/)
![A translucent teal dome, brimming with luminous particles, symbolizes a dynamic liquidity pool within an RFQ protocol. Precisely mounted metallic hardware signifies high-fidelity execution and the core intelligence layer for institutional digital asset derivatives, underpinned by granular market microstructure.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-core-intelligence-layer.jpg)

A close-out challenge's success depends on the ISDA version: the 1992 text requires proving irrationality, the 2002, objective unreasonableness.

- 
### [How Does the 2002 ISDA Master Agreement Change Valuation Risk?](https://options.greeks.live/question/how-does-the-2002-isda-master-agreement-change-valuation-risk/)
![A central control knob on a metallic platform, bisected by sharp reflective lines, embodies an institutional RFQ protocol. This depicts intricate market microstructure, enabling high-fidelity execution, precise price discovery for multi-leg options, and robust Prime RFQ deployment, optimizing latent liquidity across digital asset derivatives.](https://options.greeks.live/wp-content/uploads/2025/08/institutional-rfq-digital-asset-derivatives-execution-engine-core-microstructure.jpg)

The 2002 ISDA Agreement re-architects valuation risk by mandating an objective, evidence-based close-out process.

- 
### [Can Parties Still Use a 1992 ISDA Master Agreement and How Do They Incorporate 2002 Provisions?](https://options.greeks.live/question/can-parties-still-use-a-1992-isda-master-agreement-and-how-do-they-incorporate-2002-provisions/)
![Abstract geometric forms depict a sophisticated Principal's operational framework for institutional digital asset derivatives. Sharp lines and a control sphere symbolize high-fidelity execution, algorithmic precision, and private quotation within an advanced RFQ protocol. This visualizes market microstructure optimization and robust capital efficiency.](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-architecture-for-optimized-digital-asset-derivatives-rfq-protocols.jpg)

Parties can use the 1992 ISDA but incorporate 2002's superior risk provisions via bilateral amendment or the ISDA Protocol.

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

A commercially reasonable procedure is a defensible, objective process for valuing terminated derivatives to ensure a fair and equitable settlement.

- 
### [How Does the Calculation of a Close out Amount Differ between the 1992 and 2002 ISDA Master Agreements?](https://options.greeks.live/question/how-does-the-calculation-of-a-close-out-amount-differ-between-the-1992-and-2002-isda-master-agreements/)
![Intricate circuit boards and a precision metallic component depict the core technological infrastructure for Institutional Digital Asset Derivatives trading. This embodies high-fidelity execution and atomic settlement through sophisticated market microstructure, facilitating RFQ protocols for private quotation and block trade liquidity within a Crypto Derivatives OS.](https://options.greeks.live/wp-content/uploads/2025/08/institutional-crypto-derivatives-execution-system-microstructure.jpg)

The 2002 ISDA Agreement replaces the 1992 version's subjective and optional calculations with a single, objective close-out standard.

- 
### [What Is the Difference between the 1992 and 2002 Isda Master Agreement Close out Standards?](https://options.greeks.live/question/what-is-the-difference-between-the-1992-and-2002-isda-master-agreement-close-out-standards/)
![Sleek Prime RFQ interface for institutional digital asset derivatives. An elongated panel displays dynamic numeric readouts, symbolizing multi-leg spread execution and real-time market microstructure. A transparent sphere signifies RFQ protocol private quotation and implied volatility, emphasizing atomic settlement and low latency.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-prime-os-rfq-options.jpg)

The 2002 ISDA replaces the 1992 version's rigid close-out options with a flexible, yet more rigorous, "Close-out Amount" standard.

---

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---

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