# What Are the Key Differences between the 1992 and 2002 Isda Close out Provisions? ▴ Question

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

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## Concept

The architecture of over-the-counter derivatives markets rests upon a foundational legal technology the [ISDA Master Agreement](https://prime.greeks.live/area/isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). Within this system, the close-out [netting](https://prime.greeks.live/area/netting/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) mechanism functions as the ultimate load-bearing wall, the protocol that prevents the failure of a single counterparty from initiating a catastrophic, systemic collapse. Understanding the evolution of this mechanism from the 1992 to the 2002 iteration is to understand a critical shift in the market’s own conception of risk, fairness, and operational resilience. The 2002 Agreement represents a direct architectural response to the lessons learned from market dislocations in the late 1990s, where the ambiguities and subjective elements of the 1992 framework were revealed under stress.

The core of this evolution is a deliberate migration from a subjective, relationship-based model of calculating termination payments to an objective, evidence-based framework. This was a move to re-engineer the system’s core fail-safe, making it more robust, transparent, and capable of withstanding severe market turbulence by codifying [commercial reasonableness](https://prime.greeks.live/area/commercial-reasonableness/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) as the governing principle of its operation.

> The transition from the 1992 to the 2002 ISDA Master Agreement marks a fundamental redesign of the close-out process, moving from a subjective standard of rationality to an objective standard of commercial reasonableness.

At the heart of the 1992 Agreement’s close-out provision was a significant degree of deference to the [non-defaulting party](https://prime.greeks.live/area/non-defaulting-party/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). The calculation of the final settlement amount, whether through the “Loss” or “[Market Quotation](https://prime.greeks.live/area/market-quotation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)” method, was ultimately governed by a standard of good faith and reasonableness. In practice, legal interpretations of this standard, particularly under English law, coalesced around a test of rationality. This meant a court would not intervene unless the non-defaulting party’s calculation was so irrational that no reasonable party in its position could have arrived at it.

This high threshold provided flexibility. It also created uncertainty and the potential for dispute, as the defaulting party had a steep hill to climb to challenge a calculation, even one that might seem commercially suspect. The system relied heavily on the presumed integrity and rational behavior of the [calculating party](https://prime.greeks.live/question/what-constitutes-a-commercially-reasonable-procedure-for-calculating-a-derivatives-close-out-amount/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), an assumption that proved fragile during periods of acute market stress when incentives could become distorted.

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) fundamentally alters this dynamic by re-architecting the calculation process around the concept of the “Close-Out Amount.” This new methodology discards the elective framework of its predecessor and institutes a single, unified standard. The defining feature of this new standard is its explicit two-part requirement the non-defaulting party must 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)” to produce a “commercially reasonable result.” This is a profound systemic change. It shifts the fulcrum of the evaluation from the internal, subjective state of the calculating party (what they “reasonably determine”) to an external, objective benchmark of prevailing market practice. The calculation is no longer a matter of what the party itself deemed rational.

It becomes a matter of what an objective, informed third party would consider [commercially reasonable](https://prime.greeks.live/area/commercially-reasonable/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) under the circumstances. This architectural enhancement was designed to increase transparency, reduce the scope for valuation disputes, and provide greater certainty of outcome for all market participants, thereby strengthening the entire OTC derivatives ecosystem.

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## Strategy

The strategic redesign embodied in the [2002 ISDA](https://prime.greeks.live/area/2002-isda/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) [Master Agreement](https://prime.greeks.live/question/what-are-the-key-differences-between-a-prime-brokerage-agreement-and-an-isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)’s close-out provisions reflects a sophisticated evolution in risk management philosophy. It was a direct response to the market’s demand for a more resilient and predictable framework following the financial crises of the late 1990s, such as the collapse of Long-Term Capital Management (LTCM). The core strategic thrust was to de-risk the close-out process itself by replacing ambiguity with objectivity and elective complexity with standardized procedure. This section explores the key strategic shifts that define the 2002 Agreement’s superiority as a risk management architecture.

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## The Mandate for Objective Commercial Reasonableness

The most significant strategic change is the move from the 1992 Agreement’s “rationality” standard to the 2002 Agreement’s explicit mandate for [objective commercial reasonableness](https://prime.greeks.live/question/what-are-the-key-differences-between-a-subjective-and-an-objective-standard-of-reasonableness/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). The 1992 standard, which required the non-defaulting party to determine its “[Loss](https://prime.greeks.live/area/loss/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)” in a manner it “reasonably determines in good faith,” was interpreted by courts as a test of rationality. A defaulting party challenging a calculation had to prove that the outcome was one that no reasonable non-defaulting party could have reached. This provided a wide margin of discretion to the calculating party.

The 2002 Agreement’s framework is strategically superior because it imposes a higher, dual standard. The calculating party must satisfy two distinct obligations:

- **Commercially Reasonable Procedures** This prong focuses on the process of valuation. The calculating party must be able to demonstrate that the steps it took to arrive at a value were consistent with standard market practices. This could include obtaining quotes from active dealers, using recognized valuation models, or consulting third-party valuation services. The focus is on the operational “how.”

- **Commercially Reasonable Result** This prong focuses on the outcome of the valuation. The final calculated [Close-Out Amount](https://prime.greeks.live/area/close-out-amount/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) must itself be a fair representation of market value at the time of termination. This provides a crucial backstop, preventing a situation where a party could follow a technically sound procedure that nonetheless produces a skewed or punitive result.

This dual requirement provides a more robust and defensible valuation, reducing the likelihood of protracted legal battles over the close-out amount. It creates a clear audit trail and forces the calculating party to ground its actions in observable [market data](https://prime.greeks.live/area/market-data/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) and practices.

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## Unification and Simplification of the Valuation Method

The 1992 Agreement presented parties with a choice between two different valuation methodologies upon termination “Loss” and “Market Quotation.” This created unnecessary complexity and potential for disagreement.

- **Market Quotation** This method required the non-defaulting party to obtain quotes from at least three leading dealers in the relevant market for a replacement transaction. While seemingly objective, it could be difficult to implement in illiquid or stressed markets where dealers might be unwilling or unable to provide firm quotes.

- **Loss** This was a broader, more flexible measure allowing the non-defaulting party to calculate its total losses and costs resulting from the termination. This flexibility came at the cost of certainty and objectivity, as it relied heavily on the internal calculations of the non-defaulting party.

The 2002 Agreement’s strategy was to eliminate this confusing bifurcation. It introduced a single, unified concept the “Close-Out Amount.” This measure is defined as the amount of losses or costs that are or would be incurred in replacing, or providing the economic equivalent of, the terminated transactions. While it is conceptually closer to the 1992 “Loss” definition, it is explicitly governed by the overarching duty of commercial reasonableness. This unified approach simplifies the process, removes a point of pre-dispute negotiation, and ensures a consistent valuation methodology is applied across all transactions under the agreement.

> By replacing the elective and complex valuation methods of the 1992 version, the 2002 ISDA Agreement institutes a single, more objective “Close-Out Amount” standard.

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## What Are the Implications of Mandating Two Way Payments?

A significant strategic enhancement in the 2002 Agreement was the elimination of the “[First Method](https://prime.greeks.live/area/first-method/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)” payment option. The 1992 Agreement allowed parties to choose between:

- **First Method (One-Way Payments)** Under this method, if the net value of the terminated transactions was positive for the non-defaulting party, it could claim that amount. However, if the net value was positive for the defaulting party, the non-defaulting party was not required to make any payment. This was a punitive “walk-away” clause.

- **Second Method ([Two-Way Payments](https://prime.greeks.live/area/two-way-payments/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite))** This method required a payment to be made to whichever party was “in the money” on a net basis, regardless of which party had defaulted.

The First Method was widely criticized as inequitable, as it could provide a windfall to the non-defaulting party and was out of step with the fundamental principle of contract law, which aims to compensate for loss rather than to punish. By the time the 2002 Agreement was drafted, the market had overwhelmingly rejected the First Method in practice. The 2002 Agreement simply codified this market consensus by providing only for two-way payments. This strategic move reinforced the integrity and fairness of the close-out process, ensuring that the mechanism serves as a tool for making the non-defaulting party whole, not for generating a profit from a counterparty’s misfortune.

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## Architectural Enhancements for Systemic Stability

The 2002 Agreement introduced several other strategic changes designed to create a more complete and resilient legal architecture.

One of the most important was the inclusion of a standardized [Set-Off Provision](https://prime.greeks.live/area/set-off-provision/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). While parties often added a set-off clause to the 1992 Agreement’s schedule, its absence from the main body of the agreement was a recognized weakness. The 2002 Agreement includes a broad set-off right in Section 6(f), allowing the non-defaulting party to set off the final [early termination](https://prime.greeks.live/area/early-termination/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) amount against any other amounts owed between the parties. This provides an additional layer of credit risk mitigation and enhances the efficiency of the final settlement process.

Furthermore, the 2002 Agreement introduced a more sophisticated framework for handling Illegality and [Force Majeure](https://prime.greeks.live/area/force-majeure/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) events. It provides clearer mechanics for suspending and ultimately terminating transactions affected by such events, with specific valuation rules designed to achieve a fair, mid-market valuation. This was a direct response to the increasing complexity of cross-border transactions and the potential for unforeseen legal or political events to disrupt performance.

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## Execution

The execution of close-out procedures under the ISDA Master Agreement is a precise operational sequence where the theoretical legal standards translate into tangible financial outcomes. The shift from the 1992 to the 2002 framework represents a significant change in the operational playbook for a non-defaulting party. The execution process under the 2002 Agreement demands a more rigorous, documented, and externally verifiable approach to valuation, reflecting the higher standard of objective commercial reasonableness. This section provides a granular analysis of the execution mechanics, comparing the operational steps and valuation inputs required under both agreements.

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## Procedural Walkthrough a Tale of Two Close Outs

To understand the practical differences in execution, consider the step-by-step process a non-defaulting party (Party A) would follow after a counterparty (Party B) defaults.

- **Declaration of an [Early Termination Date](https://prime.greeks.live/area/early-termination-date/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)** The initial step is the same under both agreements. Party A must serve a notice to Party B, specifying the [Event of Default](https://prime.greeks.live/area/event-of-default/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) and designating an Early Termination Date for all outstanding transactions.

- **Valuation The Operational Divergence** This is where the execution paths diverge significantly.

<li>**Under the 1992 [ISDA Agreement](https://prime.greeks.live/area/isda-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)** Party A must first consult the schedule to see if “Market Quotation” or “Loss” was elected.

<li>If **Market Quotation** is chosen, Party A’s operational team must contact at least three, and preferably four or five, leading dealers in the relevant derivatives market. They must request quotes for the cost of entering into a replacement transaction for the entire portfolio of terminated trades. The team must document all requests and responses. The final “Settlement Amount” is based on the arithmetic mean of the quotes obtained, after discarding any outliers. This process can be operationally burdensome and time-sensitive, especially in volatile markets.

- If **Loss** is chosen, Party A’s internal finance and risk teams must begin a comprehensive calculation. This involves not only marking the portfolio to market using internal models but also quantifying any associated costs, such as funding costs, hedging breakage costs, and legal expenses. This process requires robust internal modeling capabilities and is subject to the broad “rationality” standard.

</li>
- **Under the [2002 ISDA Agreement](https://prime.greeks.live/area/2002-isda-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)** Party A’s task is to calculate a single “Close-Out Amount.” The operational focus is on creating a defensible record that the procedures and the result were commercially reasonable. The playbook would involve:

<li>Gathering relevant market data as of the termination date. This includes end-of-day pricing data from recognized sources (e.g. Bloomberg, Reuters), consensus pricing services, and where appropriate, indicative quotes from market makers.

- Using internal, industry-standard valuation models to price the terminated transactions.

- Obtaining information on the cost of unwinding any related hedges.

- Potentially engaging a third-party valuation agent to provide an independent assessment, especially for complex or illiquid portfolios.

- Crucially, documenting every step of this process the data sources used, the models applied, the quotes received (even if indicative), and the rationale for the final determination. This documentation is the evidence that the “commercially reasonable procedures” test has been met.

</li>

</li>
- **Calculation of the Final Payment** In both cases, the final step is to combine the determined valuation amount with any “Unpaid Amounts” (payments that were due but unpaid prior to termination) to arrive at the final figure owed by one party to the other.

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## Valuation Methodologies a Comparative Analysis

The table below breaks down the key operational components of the valuation methods under each agreement, highlighting the shift in execution focus.

### Table 1 Comparative Analysis of Valuation Methodologies

| Component | 1992 ISDA Market Quotation | 1992 ISDA Loss | 2002 ISDA Close-Out Amount |
| --- | --- | --- | --- |
| Primary Input | Firm quotes from Reference Market-makers. | Internal calculations of all losses and costs. | Any commercially reasonable information, including quotes, market data, and internal models. |
| Objectivity Level | High (relies on external quotes). | Low (relies on internal determination). | Very High (judged against an objective external standard of commercial reasonableness). |
| Operational Burden | High (requires active solicitation of multiple firm quotes). | Moderate (relies on internal systems but requires extensive justification). | High (requires rigorous process and extensive documentation to prove reasonableness). |
| Legal Challenge Standard | Rationality test. | Rationality test. | Objective test of commercial reasonableness (both procedure and result). |

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## How Do the Legal Standards Impact Execution?

The difference in the governing legal standard has profound consequences for the execution of a close-out and the management of potential disputes.

### Table 2 Execution Implications of Legal Standards

| Aspect | 1992 ISDA (Rationality Standard) | 2002 ISDA (Commercial Reasonableness Standard) |
| --- | --- | --- |
| Focus of Internal Team | Arriving at a good faith determination of loss. Less emphasis on documenting the “how.” | Creating a detailed, contemporaneous record of the valuation process to withstand objective scrutiny. |
| Role of External Data | For Market Quotation, it is the primary driver. For Loss, it is a supporting factor for internal models. | Essential. Market data, indicative quotes, and other observable inputs are critical evidence of reasonableness. |
| Dispute Management | A challenger must prove the calculation was irrational or in bad faith, a very high bar. | A challenger can question whether the procedures or the result were commercially reasonable, a lower and more objective bar. The calculating party must be prepared to actively defend its process. |
| Documentation Requirement | Good practice, but not explicitly required by the standard itself. | Operationally critical. The documentation is the primary defense against a challenge. |

> The execution of a close-out under the 2002 ISDA Agreement requires a disciplined and transparent process designed to produce a result that is defensible in an objective market context.

In practice, the execution under the 2002 Agreement forces the non-defaulting party to act as if it were preparing for litigation from the moment of termination. Every choice, from the data sources consulted to the valuation models used, must be justifiable by reference to standard industry practices. This disciplined approach, while operationally demanding, ultimately serves the interests of both parties and the market as a whole by promoting transparency, fairness, and predictability in the critical process of closing out derivatives exposures.

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## References

- Flavell, Alastair. _The ISDA Master Agreement ▴ A Practical Guide_. Sweet & Maxwell, 2010.

- Firth, Richard. _Derivatives ▴ Law and Practice_. Sweet & Maxwell, 2013.

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

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

- Wood, Philip R. _The Law of Netting_. Sweet & Maxwell, 2007.

- Mengle, David C. “The Importance of Close-Out Netting.” ISDA Research Note, 2010.

- Gregory, Jon. _The xVA Challenge ▴ Counterparty Credit Risk, Funding, Collateral, and Capital_. Wiley, 2015.

- Hudson, Alastair. _The Law of Finance_. Sweet & Maxwell, 2013.

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## Reflection

The architectural evolution from the 1992 to the 2002 ISDA close-out mechanism is a testament to the market’s capacity for systemic learning. The framework you operate under is more than a legal document; it is a reflection of your institution’s risk philosophy. Does your operational playbook prioritize flexibility and internal discretion, or does it value objective, verifiable procedures that minimize the potential for dispute? The 2002 Agreement provides a robust, standardized architecture designed for resilience in periods of market stress.

As you evaluate your own [counterparty risk](https://prime.greeks.live/area/counterparty-risk/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) frameworks, consider how the principles of objectivity, transparency, and commercial reasonableness are embedded not just in your legal documents, but in the day-to-day execution of your risk management protocols. The strength of the system lies in the integrity of its every component.

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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/netting/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Netting

Meaning ▴ Netting is a financial mechanism consolidating multiple obligations or claims between two or more parties into a single, net payment obligation. </a><a href="https://prime.greeks.live/area/commercial-reasonableness/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Commercial Reasonableness

Meaning ▴ Commercial reasonableness refers to the standard by which a transaction or action is judged to be consistent with prevailing market practices, industry norms, and sound business judgment, particularly concerning pricing, terms, and execution methodology. </a><a href="https://prime.greeks.live/area/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/market-quotation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Market Quotation

Meaning ▴ A market quotation represents the current executable bid and ask prices for a specific financial instrument, typically accompanied by the corresponding tradable sizes or market depth at various price levels. </a><a href="https://prime.greeks.live/question/what-constitutes-a-commercially-reasonable-procedure-for-calculating-a-derivatives-close-out-amount/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Calculating Party

A commercially reasonable procedure for a derivatives close-out is a defensible, evidence-based process for valuing a terminated transaction. </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">
![A transparent, multi-faceted component, indicative of an RFQ engine's intricate market microstructure logic, emerges from complex FIX Protocol connectivity. Its sharp edges signify high-fidelity execution and price discovery precision for institutional digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-engine-optimized-for-best-execution.jpg)

## Commercially 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/2002-isda-master-agreement/?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)

## 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/commercially-reasonable/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Intersecting angular structures symbolize dynamic market microstructure, multi-leg spread strategies. Translucent spheres represent institutional liquidity blocks, digital asset derivatives, precisely balanced](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-platform-4.jpg)

## 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/what-are-the-key-differences-between-a-prime-brokerage-agreement-and-an-isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Visualizing a complex Institutional RFQ ecosystem, angular forms represent multi-leg spread execution pathways and dark liquidity integration. A sharp, precise point symbolizes high-fidelity execution for digital asset derivatives, highlighting atomic settlement within a Prime RFQ framework](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocols-high-fidelity-execution-1.jpg)

## Master Agreement

A Prime Brokerage Agreement is a centralized service contract; an ISDA Master Agreement is a standardized bilateral derivatives protocol. </a><a href="https://prime.greeks.live/area/2002-isda/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A complex, multi-layered electronic component with a central connector and fine metallic probes. This represents a critical Prime RFQ module for institutional digital asset derivatives trading, enabling high-fidelity execution of RFQ protocols, price discovery, and atomic settlement for multi-leg spreads with minimal latency](https://options.greeks.live/wp-content/uploads/2025/08/institutional-digital-asset-rfq-engine-driving-best-execution-and-liquidity.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/what-are-the-key-differences-between-a-subjective-and-an-objective-standard-of-reasonableness/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![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)

## Objective Commercial Reasonableness

An objective standard judges actions against a universal "reasonable person," while a subjective standard assesses them based on the individual's own perception. </a><a href="https://prime.greeks.live/area/loss/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A slender metallic probe extends between two curved surfaces. This abstractly illustrates high-fidelity execution for institutional digital asset derivatives, driving price discovery within market microstructure](https://options.greeks.live/wp-content/uploads/2025/07/precision-instrument-navigating-institutional-digital-asset-derivatives-rfq-protocols-for-optimal-price-discovery-and-high-fidelity-execution.jpg)

## Loss

Meaning ▴ Loss, within the context of institutional digital asset derivatives, signifies a negative variance between an asset's current valuation and its acquisition cost or a predefined benchmark, resulting in a reduction of capital or a negative impact on a portfolio's profit and loss (P&L) statement. </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 robust metallic framework supports a teal half-sphere, symbolizing an institutional grade digital asset derivative or block trade processed within a Prime RFQ environment. This abstract view highlights the intricate market microstructure and high-fidelity execution of an RFQ protocol, ensuring capital efficiency and minimizing slippage through precise system interaction](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-digital-asset-derivatives-rfq-protocol-execution-engine.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/market-data/?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)

## 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/area/first-method/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Abstract geometric forms depict a Prime RFQ for institutional digital asset derivatives. A central RFQ engine drives block trades and price discovery with high-fidelity execution](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-engine-optimizing-market-microstructure-for-high-fidelity-execution.jpg)

## First Method

Meaning ▴ The "First Method" denotes the default or primary execution algorithm configured within an institutional digital asset trading system, representing a highly optimized, low-latency pathway designed for standard order flow. </a><a href="https://prime.greeks.live/area/two-way-payments/?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)

## Two-Way Payments

Meaning ▴ Two-way payments represent a financial mechanism enabling bidirectional value transfer between two distinct entities or accounts within a single established channel. </a><a href="https://prime.greeks.live/area/early-termination/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sophisticated metallic mechanism with integrated translucent teal pathways on a dark background. This abstract visualizes the intricate market microstructure of an institutional digital asset derivatives platform, specifically the RFQ engine facilitating private quotation and block trade execution](https://options.greeks.live/wp-content/uploads/2025/07/systemic-framework-for-institutional-digital-asset-derivatives-rfq-price-discovery-and-atomic-settlement.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/set-off-provision/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A central dark nexus with intersecting data conduits and swirling translucent elements depicts a sophisticated RFQ protocol's intelligence layer. This visualizes dynamic market microstructure, precise price discovery, and high-fidelity execution for institutional digital asset derivatives, optimizing capital efficiency and mitigating counterparty risk](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-engine-visualizing-high-fidelity-execution-and-market-microstructure-dynamics.jpg)

## Set-Off Provision

Meaning ▴ A Set-Off Provision constitutes a contractual or statutory right allowing a party to net mutual debts or claims owed to and by another party, thereby reducing the aggregate gross exposure to a single net amount. </a><a href="https://prime.greeks.live/area/force-majeure/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A diagonal composition contrasts a blue intelligence layer, symbolizing market microstructure and volatility surface, with a metallic, precision-engineered execution engine. This depicts high-fidelity execution for institutional digital asset derivatives via RFQ protocols, ensuring atomic settlement](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-rfq-for-institutional-digital-asset-derivatives-execution.jpg)

## Force Majeure

Meaning ▴ Force Majeure designates a contractual clause excusing parties from fulfilling their obligations due to extraordinary events beyond their reasonable control, such as natural disasters, acts of war, or government prohibitions, which render performance impossible or commercially impracticable. </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">
![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)

## 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/event-of-default/?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)

## Event of Default

Meaning ▴ An Event of Default signifies a specific breach of contract or covenant by one party in a financial agreement, typically triggering pre-defined remedies for the non-defaulting party. </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">
![Close-up reveals robust metallic components of an institutional-grade execution management system. Precision-engineered surfaces and central pivot signify high-fidelity execution for digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/institutional-grade-digital-asset-derivatives-rfq-execution-precision-optimizing-market-microstructure-for-best-execution-and-prime-os.jpg)

## 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/2002-isda-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 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/area/counterparty-risk/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A macro view reveals a robust metallic component, signifying a critical interface within a Prime RFQ. This secure mechanism facilitates precise RFQ protocol execution, enabling atomic settlement for institutional-grade digital asset derivatives, embodying high-fidelity execution](https://options.greeks.live/wp-content/uploads/2025/07/core-secure-institutional-digital-asset-derivatives-rfq-trade-system-element.jpg)

## 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:** [2002 ISDA](https://options.greeks.live/area/2002-isda/), [Early Termination Date](https://options.greeks.live/area/early-termination-date/), [ISDA Master Agreement](https://options.greeks.live/area/isda-master-agreement/), [Counterparty Risk](https://options.greeks.live/area/counterparty-risk/), [Close-Out Amount](https://options.greeks.live/area/close-out-amount/), [Non-Defaulting Party](https://options.greeks.live/area/non-defaulting-party/)	

## Discover More

- 
### [How Does the Close-Out Amount in the 2002 ISDA Differ from Market Quotation?](https://options.greeks.live/question/how-does-the-close-out-amount-in-the-2002-isda-differ-from-market-quotation/)
![Abstract depiction of an institutional digital asset derivatives execution system. A central market microstructure wheel supports a Prime RFQ framework, revealing an algorithmic trading engine for high-fidelity execution of multi-leg spreads and block trades via advanced RFQ protocols, optimizing capital efficiency.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-prime-os-rfq-execution-system-1.jpg)

The 2002 ISDA's Close-Out Amount replaces rigid external polling with a flexible, commercially reasonable valuation standard.

- 
### [What Strategic Considerations Should Inform the Choice between Using a 1992 or 2002 ISDA Master Agreement Today?](https://options.greeks.live/question/what-strategic-considerations-should-inform-the-choice-between-using-a-1992-or-2002-isda-master-agreement-today/)
![A translucent institutional-grade platform reveals its RFQ execution engine with radiating intelligence layer pathways. Central price discovery mechanisms and liquidity pool access points are flanked by pre-trade analytics modules for digital asset derivatives and multi-leg spreads, ensuring high-fidelity execution.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-core-platform.jpg)

The 2002 ISDA provides a superior risk architecture through objective close-out protocols and integrated set-off capabilities.

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

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

- 
### [How Does the 2002 ISDA Master Agreement Differ from the 1992 Version regarding Close-Out Calculations?](https://options.greeks.live/question/how-does-the-2002-isda-master-agreement-differ-from-the-1992-version-regarding-close-out-calculations/)
![A sleek, multi-layered digital asset derivatives platform highlights a teal sphere, symbolizing a core liquidity pool or atomic settlement node. The perforated white interface represents an RFQ protocol's aggregated inquiry points for multi-leg spread execution, reflecting precise market microstructure.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-core-execution-system.jpg)

The 2002 ISDA Agreement replaces the 1992's rigid/subjective methods with a single, objective standard of commercial reasonableness.

- 
### [How Does the 2002 ISDA Master Agreement Differ from the 1992 Version regarding Netting?](https://options.greeks.live/question/how-does-the-2002-isda-master-agreement-differ-from-the-1992-version-regarding-netting/)
![A cutaway reveals the intricate market microstructure of an institutional-grade platform. Internal components signify algorithmic trading logic, supporting high-fidelity execution via a streamlined RFQ protocol for aggregated inquiry and price discovery within a Prime RFQ.](https://options.greeks.live/wp-content/uploads/2025/07/high-fidelity-execution-for-digital-asset-derivatives-via-rfq-protocols.jpg)

The 2002 ISDA Agreement enhances netting by replacing rigid valuation with a commercially reasonable standard for greater certainty.

- 
### [How Does the 2002 ISDA Close-Out Amount Differ from the 1992 Loss Calculation?](https://options.greeks.live/question/how-does-the-2002-isda-close-out-amount-differ-from-the-1992-loss-calculation/)
![An institutional-grade platform's RFQ protocol interface, with a price discovery engine and precision guides, enables high-fidelity execution for digital asset derivatives. Integrated controls optimize market microstructure and liquidity aggregation within a Principal's operational framework.](https://options.greeks.live/wp-content/uploads/2025/07/proprietary-institutional-digital-asset-derivatives-rfq-protocol-engine-facilitating-high-fidelity-execution-and-granular-market-microstructure-analysis-for-prime-os.jpg)

The 2002 ISDA's Close-Out Amount mandates an objectively reasonable process, replacing the 1992's more subjective Loss standard.

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

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

- 
### [How Did the 2002 Isda Master Agreement Attempt to Fix the 1992 Version’s Ambiguities?](https://options.greeks.live/question/how-did-the-2002-isda-master-agreement-attempt-to-fix-the-1992-versions-ambiguities/)
![An abstract composition of interlocking, precisely engineered metallic plates represents a sophisticated institutional trading infrastructure. Visible perforations within a central block symbolize optimized data conduits for high-fidelity execution and capital efficiency. This visual metaphor highlights seamless interoperability, robust Prime RFQ architecture, and intelligent routing for digital asset derivatives.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocols-multi-leg-execution-layer.jpg)

The 2002 ISDA Agreement replaced the 1992 version's ambiguities with objective, process-driven protocols for greater market stability.

- 
### [How Does the 2002 Isda Close out Amount Differ from the 1992 Agreement?](https://options.greeks.live/question/how-does-the-2002-isda-close-out-amount-differ-from-the-1992-agreement/)
![Abstract image showing interlocking metallic and translucent blue components, suggestive of a sophisticated RFQ engine. This depicts the precision of an institutional-grade Crypto Derivatives OS, facilitating high-fidelity execution and optimal price discovery within complex market microstructure for multi-leg spreads and atomic settlement.](https://options.greeks.live/wp-content/uploads/2025/07/precision-engineered-market-microstructure-for-institutional-digital-asset-derivatives-rfq.jpg)

The 2002 ISDA Close-Out Amount replaces subjective valuation with an objective standard of commercial reasonableness for greater certainty.

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---

**Original URL:** https://options.greeks.live/question/what-are-the-key-differences-between-the-1992-and-2002-isda-close-out-provisions-2/
