# What Are the Key Differences between the 1992 and 2002 Isda Master Agreements regarding Close-Out Valuation? ▴ Question

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

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## Concept

The transition from the 1992 International Swaps and Derivatives Association (ISDA) [Master Agreement](https://prime.greeks.live/area/master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) to its 2002 successor represents a fundamental redesign of the market’s core risk management architecture. This evolution centers on the critical mechanism of [close-out valuation](https://prime.greeks.live/area/close-out-valuation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), the protocol for calculating the final settlement amount when a derivatives contract is terminated prematurely due to a default or other termination event. The shift was a direct response to the systemic lessons learned from market crises of the 1990s, which revealed the operational fragilities and potential for dispute inherent in the earlier framework.

Viewing this change through a systems lens, the 1992 Agreement operated on a principle of delegated authority with a subjective backstop, while the 2002 Agreement implements a system of mandated procedural objectivity. This is the central architectural distinction from which all other differences in close-out valuation flow.

At the heart of the 1992 Agreement were two potential valuation methodologies a [non-defaulting party could](https://prime.greeks.live/question/in-what-scenarios-might-a-non-defaulting-party-strategically-prefer-the-standard-close-out-process-over-aet/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) elect ▴ “Market Quotation” and “Loss”. Market Quotation was the preferred route, a process requiring the [non-defaulting party](https://prime.greeks.live/area/non-defaulting-party/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) to seek quotes from leading market makers for a replacement transaction. This method was prescriptive, aiming for a degree of objective, market-based evidence. The “Loss” methodology, conversely, was a more flexible and encompassing calculation.

It allowed the non-defaulting party to determine, in its reasonable good faith, the total losses and costs it incurred as a result of the [early termination](https://prime.greeks.live/area/early-termination/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). This standard, while practical, was inherently subjective. Its application relied heavily on the internal models and judgments of the [calculating party](https://prime.greeks.live/area/calculating-party/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), creating a significant potential for disagreement, particularly in distressed or illiquid markets where obtaining firm quotes was challenging.

> The 2002 ISDA Master Agreement replaces the subjective valuation standards of the 1992 version with a mandate for an objectively reasonable process and outcome.

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) consolidates these disparate concepts into a single, unified valuation standard known as the “[Close-out Amount](https://prime.greeks.live/area/close-out-amount/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite).” This new protocol completely excises the old methodologies and their elective nature. The Close-out Amount 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. The defining characteristic of this new system is its explicit standard of conduct.

The determining party is required to use “[commercially reasonable procedures](https://prime.greeks.live/area/commercially-reasonable-procedures/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) in order to produce a commercially reasonable result.” This language, meticulously chosen, shifts the entire framework from the subjective “good faith” determination of the 1992 Loss standard to a higher, more rigorous benchmark of [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). This change imposes a procedural and substantive obligation on the calculating party, demanding a process that is not just rational, but defensible to an impartial observer as being commercially sound.

This architectural evolution also addressed a critical flaw in the 1992 framework ▴ the potential for one-way payments. The 1992 Agreement allowed parties to select the “First Method,” a provision where, upon a counterparty’s default, the non-defaulting party was entitled to its net gains but was not obligated to pay out if the net value of the terminated trades was in the defaulting party’s favor. This punitive measure was seen as a significant deterrent to default. The alternative, “[Second Method](https://prime.greeks.live/area/second-method/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite),” required a [two-way payment](https://prime.greeks.live/area/two-way-payment/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), ensuring that the net value would be paid to the party to whom it was owed, regardless of default status.

The 2002 Agreement definitively resolves this by making the two-way payment system mandatory. This structural change reflects a market-wide consensus that the purpose of a close-out is to crystallize the economic value of a contract, not to create a punitive windfall. The Close-out Amount is always a two-way street, a systemic adjustment that promotes fairness and predictability in the settlement process, reinforcing the stability of the overall financial network.

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## Strategy

The strategic implications of the shift from the 1992 to the 2002 [ISDA Master Agreement](https://prime.greeks.live/area/isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)’s close-out provisions are profound, fundamentally altering the risk calculus and operational posture of any institution engaged in the derivatives market. The primary strategic change is the deliberate move away from a framework that permitted subjective judgment toward one that mandates objective defensibility. This pivot has direct consequences for how firms manage [counterparty risk](https://prime.greeks.live/area/counterparty-risk/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), structure their internal valuation procedures, and prepare for potential disputes.

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## From Rationality to Reasonableness a Higher Standard

The core strategic divergence lies in the standard of conduct applied to the [valuation process](https://prime.greeks.live/area/valuation-process/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). The 1992 Agreement’s “Loss” calculation required the non-defaulting party to act in [good faith](https://prime.greeks.live/area/good-faith/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) and make a “reasonable” determination. English courts interpreted this through the lens of rationality, specifically the “Wednesbury unreasonableness” test.

This standard is a relatively low bar to clear; a determination would only be overturned if it was so irrational that no reasonable party in that position could have possibly made it. This gave the calculating party considerable latitude, as long as its decision-making process was not entirely arbitrary or perverse.

The 2002 Agreement’s “Close-out Amount” imposes a much stricter, dual-pronged obligation. The determining party must use “[commercially reasonable](https://prime.greeks.live/area/commercially-reasonable/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) procedures” to achieve 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 not a test of mere rationality. It is an objective standard. The procedures themselves must be sound and justifiable in the context of prevailing market practices, and the final calculated amount must also fall within a range that would be considered commercially reasonable by an independent, informed observer.

This strategic shift from a subjective to an objective framework means a non-defaulting party can no longer simply rely on its [internal models](https://prime.greeks.live/area/internal-models/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) without external validation or benchmarking. Its [entire valuation process](https://prime.greeks.live/question/how-should-a-firms-due-diligence-process-evaluate-the-sufficiency-and-implementation-of-a-ccps-entire-default-waterfall/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) is now subject to scrutiny against a market-wide standard of commercial practice.

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## What Constitutes a Commercially Reasonable Procedure?

Under the 2002 framework, establishing and documenting commercially reasonable procedures becomes a paramount strategic objective. While the agreement does not prescribe a specific set of actions, market practice and legal precedent suggest a range of considerations that a [determining party](https://prime.greeks.live/area/determining-party/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) must take into account. The goal is to create an evidentiary trail that substantiates the final calculation.

- **Sources of Valuation** The determining party should consider a variety of information sources. This may include quotes from dealers, data from [electronic trading platforms](https://prime.greeks.live/question/how-do-electronic-trading-platforms-alter-information-dynamics-in-illiquid-markets/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), information from clearing systems, and its own internal models. Relying on a single source, especially an internal one, without cross-verification, is strategically risky.

- **[Market Conditions](https://prime.greeks.live/area/market-conditions/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)** The procedures must be adapted to the prevailing market environment. In a stable and liquid market, obtaining multiple, firm quotes from dealers might be the most reasonable procedure. In a volatile or illiquid market, where such quotes are unavailable, the party may need to rely more on internal models, but it must be able to justify why that reliance was commercially reasonable under the circumstances.

- **Documentation** A core element of a reasonable procedure is the creation of a contemporaneous record of the steps taken. This includes documenting who was contacted for quotes, the quotes received (or the reasons why they were not available), the models used, the inputs for those models, and the rationale for the final determination.

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## The Elimination of Optionality and Punitive Measures

Another key strategic evolution was the removal of optionality in the payment methodology. The 1992 Agreement presented a choice between the “[First Method](https://prime.greeks.live/area/first-method/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)” (one-way payments) and the “Second Method” ([two-way payments](https://prime.greeks.live/area/two-way-payments/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)). The First Method was a powerful strategic tool for a non-defaulting party, as it could withhold payment even if the net value of the terminated trades favored the defaulting party. This created a significant asymmetry in risk.

The 2002 Agreement completely eliminates the First Method. All close-outs operate on a two-way payment basis. This standardization is a strategic move toward greater market stability and fairness.

It ensures that the [close-out process](https://prime.greeks.live/area/close-out-process/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) is purely a mechanism for settling the economic value of the terminated trades, removing the punitive element. For institutions, this means that the creditworthiness of a counterparty must be assessed on the basis of its ability to meet its obligations, without the backstop of a potentially punitive close-out calculation that could erase legitimate claims against the non-defaulting party.

> The 2002 Agreement standardizes the close-out process by mandating two-way payments, focusing on economic settlement rather than punitive measures.

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## Comparative Valuation Frameworks

The strategic differences can be best understood through a direct comparison of the operational frameworks mandated by each agreement.

| Feature | 1992 ISDA Master Agreement | 2002 ISDA Master Agreement |
| --- | --- | --- |
| Primary Valuation Methodologies | Choice between “Market Quotation” (obtaining quotes) and “Loss” (calculating total losses and costs). | A single, unified “Close-out Amount” calculation. |
| Standard of Conduct (for Loss/Close-out Amount) | “Reasonably determines in good faith.” Interpreted as a test of rationality (a low threshold). | “Act in good faith and use commercially reasonable procedures in order to produce a commercially reasonable result.” An objective test of reasonableness. |
| Payment Methodology | Choice between “First Method” (one-way, punitive) and “Second Method” (two-way, settlement-focused). | “Second Method” (two-way payments) is mandatory. The Close-out Amount is always a two-way payment. |
| Focus of Dispute | Often centered on whether the calculating party’s determination was so irrational as to be invalid. | Can focus on both the procedures used and the final result. Did the party follow commercially reasonable steps? Was the outcome itself commercially reasonable? |

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## Execution

The execution of a close-out valuation under the [2002 ISDA](https://prime.greeks.live/area/2002-isda/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) Master Agreement demands a more rigorous, disciplined, and transparent operational protocol than its 1992 predecessor. The shift from a subjective standard to an objective one transforms the close-out process from an internal calculation into a defensible, auditable procedure. For an institution’s trading, legal, and operations teams, this requires a pre-emptive and systematic approach to valuation governance.

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## Operationalizing the Close-Out Amount

Executing a close-out under the 2002 Agreement is a multi-stage process that must be meticulously documented. The core challenge is to build a robust evidentiary file that demonstrates adherence to the standard of using “commercially reasonable procedures” to generate a “commercially reasonable result.”

A non-defaulting party, acting as the determining party, must design and follow a clear operational playbook. This playbook should be established well before any termination event occurs and should be part of the firm’s standard operating procedures for counterparty default management.

- **Immediate Assessment and Information Gathering** Upon an [Early Termination Date](https://prime.greeks.live/area/early-termination-date/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), the determining party must begin gathering all relevant information. This includes a complete inventory of all terminated transactions, their terms, and any associated collateral held or posted. The party must also assess the prevailing market conditions to determine the most appropriate valuation procedures. Is the market for the terminated assets liquid? Are reliable quotes obtainable?

- **Selection and Application of Valuation Inputs** The determining party must decide which valuation inputs to use. The 2002 Agreement provides a non-exhaustive list of types of information that can be considered, including:

<li>**Market Quotations** Obtaining quotes from leading dealers for replacement trades remains a primary input. The process should involve contacting multiple dealers and documenting the quotes received, or the reasons why quotes were unavailable.

- **Relevant Market Data** This can include data from electronic trading platforms, clearing houses, and other recognized market sources that provide insight into the value of the terminated transactions or their hedges.

- **Internal Models** If market quotes are unavailable or deemed unreliable, the party may use its own internal valuation models. Crucially, the party must be prepared to defend the model’s construction, its inputs, and its appropriateness for the specific transactions and market conditions. This involves a higher burden of proof than simply stating the model’s output.

</li>
- **Calculation and Documentation** The final Close-out Amount is calculated by aggregating the gains, losses, and costs associated with replacing or hedging the economic equivalent of the terminated transactions. This calculation must be documented in detail, showing how the various inputs were synthesized into a final number. The documentation should be clear enough for a third party to understand the entire process from information gathering to final calculation.

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## How Does the Burden of Proof Differ in Practice?

The practical difference in the evidentiary burden between the two agreements is substantial. Under the 1992 “Loss” standard, the non-defaulting party had significant discretion. A challenger would need to prove that the party’s determination was irrational. Under the 2002 “Close-out Amount” standard, the determining party has the affirmative obligation to demonstrate the reasonableness of its actions.

This flips the script. The focus is on the quality and integrity of the determining party’s process.

> The 2002 ISDA framework shifts the burden of proof, requiring the calculating party to affirmatively demonstrate the commercial reasonableness of its valuation process.

The table below outlines the contrasting operational workflows and evidentiary requirements for the determining party.

| Operational Step | Execution under 1992 ISDA (Loss Standard) | Execution under 2002 ISDA (Close-out Amount Standard) |
| --- | --- | --- |
| Valuation Approach | Party determines its total losses and costs in good faith. High degree of reliance on internal judgment and models is permissible. | Party must follow a structured, commercially reasonable process. Reliance on internal models must be justified, especially if external data is available. |
| Evidence Required | Evidence to show the determination was rational and made in good faith. The process did not have to be perfect, just not perverse. | Detailed evidence of the procedures followed, data sources consulted, quotes requested, and the rationale for the final result. The entire process must be defensible as objectively reasonable. |
| Interaction with Market | Contacting market participants for quotes is one option but not strictly required if the party can justify its internal loss calculation. | A demonstrable effort to survey the available market for replacement costs is expected. If quotes are not sought, a clear justification for why this was commercially reasonable is necessary. |
| Documentation Standard | Internal records supporting the final loss figure. | A comprehensive and contemporaneous audit trail of the entire valuation process, suitable for external review by a court or tribunal. |

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## Ancillary Execution Considerations

The 2002 Agreement also introduced other refinements that affect the execution of a close-out. 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) (Section 6(f)) provides a clear mechanism for the non-defaulting party to set off the final early termination amount against other amounts owed between the parties, streamlining the final settlement process. Additionally, the provisions for [default interest](https://prime.greeks.live/area/default-interest/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) were refined.

Under the 2002 ISDA, the interest rate applied to a late payment by a defaulting party is different from the rate applied to a late payment by a non-defaulting party, addressing an inequity in the 1992 framework where a non-defaulting party could be forced to pay interest at the defaulting party’s higher cost of funding. These changes, while ancillary to the core valuation methodology, contribute to a more predictable and equitable execution of the entire close-out and settlement protocol.

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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.

- “Derivatives Laws and Regulations Close-out Under the 1992 and 2002 ISDA Master Agreements 2025.” International Comparative Legal Guides, 17 June 2025.

- “High Court clarifies calculation of Close-out amount under 2002 ISDA Master Agreement.” Allen & Overy, 22 March 2018.

- Beaton, Michael. “The Meaning of Close-Out Under the 2002 ISDA Master Agreement.” DerivSource, 14 June 2012.

- Contrarian, Jolly. “ISDA Comparison.” The Jolly Contrarian, 24 September 2020.

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## Reflection

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## Calibrating Your Operational Architecture

The evolution from the 1992 to the 2002 ISDA Master Agreement is a signal of the market’s maturation. It reflects a systemic demand for greater transparency, objectivity, and procedural integrity in the critical moments of counterparty failure. The knowledge of these differences is foundational. The deeper challenge is to examine your own institution’s operational framework.

How is your firm architected to perform under the rigorous demands of the 2002 standard? Is your valuation process a robust, documented, and defensible protocol, or is it a legacy system reliant on individual judgment?

Viewing your counterparty risk management through this lens transforms it from a static legal issue into a dynamic operational capability. The strength of your valuation governance, the clarity of your internal playbooks, and the defensibility of your procedures are now core components of your competitive and strategic posture. The ultimate advantage lies in constructing an internal system that not only complies with the letter of the agreement but embodies its spirit of objective, [commercial reasonableness](https://prime.greeks.live/area/commercial-reasonableness/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) in every executed step.

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## Glossary

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

Meaning ▴ Close-Out Valuation refers to the precise calculation of a financial position's or an entire portfolio's worth at a specific point in time, primarily for the purpose of its termination, liquidation, or transfer. </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">
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## 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/in-what-scenarios-might-a-non-defaulting-party-strategically-prefer-the-standard-close-out-process-over-aet/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A 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)

## Non-Defaulting Party Could

Preferring standard close-out is a strategic decision to exert manual control over valuation and timing in complex market or legal environments. </a><a href="https://prime.greeks.live/area/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/calculating-party/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Calculating Party

Meaning ▴ This refers to the designated system component or entity responsible for executing specific computational tasks, such as determining settlement prices, collateral requirements, or risk exposures within a financial contract or platform. </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">
![Robust metallic structures, one blue-tinted, one teal, intersect, covered in granular water droplets. This depicts a principal's institutional RFQ framework facilitating multi-leg spread execution, aggregating deep liquidity pools for optimal price discovery and high-fidelity atomic settlement of digital asset derivatives for enhanced capital efficiency](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocols-optimized-for-high-fidelity-execution.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/2002-isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Intersecting sleek components of a Crypto Derivatives OS symbolize RFQ Protocol for Institutional Grade Digital Asset Derivatives. Luminous internal segments represent dynamic Liquidity Pool management and Market Microstructure insights, facilitating High-Fidelity Execution for Block Trade strategies within a Prime Brokerage framework](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-high-fidelity-engine.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/close-out-amount/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Interconnected, precisely engineered modules, resembling Prime RFQ components, illustrate an RFQ protocol for digital asset derivatives. The diagonal conduit signifies atomic settlement within a dark pool environment, ensuring high-fidelity execution and capital efficiency](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-protocol-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/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">
![Reflective and circuit-patterned metallic discs symbolize the Prime RFQ powering institutional digital asset derivatives. This depicts deep market microstructure enabling high-fidelity execution through RFQ protocols, precise price discovery, and robust algorithmic trading within aggregated liquidity pools](https://options.greeks.live/wp-content/uploads/2025/08/prime-os-architecture-driving-institutional-digital-asset-derivatives-rfq-protocols-for-optimal-liquidity-and-best-execution.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/commercially-reasonable-procedures/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Two distinct components, beige and green, are securely joined by a polished blue metallic element. This embodies a high-fidelity RFQ protocol for institutional digital asset derivatives, ensuring atomic settlement and optimal liquidity](https://options.greeks.live/wp-content/uploads/2025/07/institutional-rfq-protocol-for-digital-asset-derivatives-high-fidelity-link.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/two-way-payment/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Two distinct ovular components, beige and teal, slightly separated, reveal intricate internal gears. This visualizes an Institutional Digital Asset Derivatives engine, emphasizing automated RFQ execution, complex market microstructure, and high-fidelity execution within a Principal's Prime RFQ for optimal price discovery and block trade capital efficiency](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-automated-rfq-execution-microstructure-revealing-principal-prime-os-intelligence-layer-for-high-fidelity-execution-and-capital-efficiency.jpg)

## Two-Way Payment

Meaning ▴ A Two-Way Payment mechanism defines a bilateral financial flow capability where both parties in an agreement possess the systemic capacity to initiate or receive value transfers. </a><a href="https://prime.greeks.live/area/second-method/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sleek, two-part system, a robust beige chassis complementing a dark, reflective core with a glowing blue edge. This represents an institutional-grade Prime RFQ, enabling high-fidelity execution for RFQ protocols in digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-execution-microstructure-3.jpg)

## Second Method

Meaning ▴ The Second Method designates an alternative, specialized execution protocol or pricing mechanism within a digital asset derivatives trading system, distinct from primary methodologies. </a><a href="https://prime.greeks.live/area/isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A central blue structural hub, emblematic of a robust Prime RFQ, extends four metallic and illuminated green arms. These represent diverse liquidity streams and multi-leg spread strategies for high-fidelity digital asset derivatives execution, leveraging advanced RFQ protocols for optimal price discovery](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-prime-os-rfq-execution-platform.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/counterparty-risk/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Abstract spheres and a translucent flow visualize institutional digital asset derivatives market microstructure. It depicts robust RFQ protocol execution, high-fidelity data flow, and seamless liquidity aggregation](https://options.greeks.live/wp-content/uploads/2025/07/precision-market-microstructure-for-institutional-digital-asset-derivatives-leveraging-rfq-protocols-and-atomic-settlement-across-prime-os.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><a href="https://prime.greeks.live/area/valuation-process/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sleek Execution Management System diagonally spans segmented Market Microstructure, representing Prime RFQ for Institutional Grade Digital Asset Derivatives. It rests on two distinct Liquidity Pools, one facilitating RFQ Block Trade Price Discovery, the other a Dark Pool for Private Quotation](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-execution-optimizing-rfq-protocols-across-segmented-liquidity-pools.jpg)

## Valuation Process

Meaning ▴ The Valuation Process quantifies the current fair market value of an asset or portfolio, integrating real-time market data, instrument-specific characteristics, and approved pricing models. </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">
![A dark blue sphere and teal-hued circular elements on a segmented surface, bisected by a diagonal line. This visualizes institutional block trade aggregation, algorithmic price discovery, and high-fidelity execution within a Principal's Prime RFQ, optimizing capital efficiency and mitigating counterparty risk for digital asset derivatives and multi-leg spreads](https://options.greeks.live/wp-content/uploads/2025/07/market-microstructure-driven-institutional-digital-asset-derivatives-rfq.jpg)

## 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/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">
![Precisely engineered abstract structure featuring translucent and opaque blades converging at a central hub. This embodies institutional RFQ protocol for digital asset derivatives, representing dynamic liquidity aggregation, high-fidelity execution, and complex multi-leg spread price discovery](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-digital-asset-derivatives-rfq-multi-leg-execution-protocol.jpg)

## 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/commercially-reasonable/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Precision-engineered institutional grade components, representing prime brokerage infrastructure, intersect via a translucent teal bar embodying a high-fidelity execution RFQ protocol. This depicts seamless liquidity aggregation and atomic settlement for digital asset derivatives, reflecting complex market microstructure and efficient price discovery](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-prime-os-core.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/how-should-a-firms-due-diligence-process-evaluate-the-sufficiency-and-implementation-of-a-ccps-entire-default-waterfall/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![An abstract composition featuring two overlapping digital asset liquidity pools, intersected by angular structures representing multi-leg RFQ protocols. This visualizes dynamic price discovery, high-fidelity execution, and aggregated liquidity within institutional-grade crypto derivatives OS, optimizing capital efficiency and mitigating counterparty risk](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocols-optimizing-aggregated-liquidity-and-multi-leg-execution-via-advanced-market-microstructure.jpg)

## Entire Valuation Process

A firm's due diligence must model the CCP's default waterfall as a dynamic system to quantify the firm's specific contingent liabilities. </a><a href="https://prime.greeks.live/area/internal-models/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Sleek, two-tone devices precisely stacked on a stable base represent an institutional digital asset derivatives trading ecosystem. This embodies layered RFQ protocols, enabling multi-leg spread execution and liquidity aggregation within a Prime RFQ for high-fidelity execution, optimizing counterparty risk and market microstructure](https://options.greeks.live/wp-content/uploads/2025/08/institutional-digital-asset-derivatives-rfq-prime-os-architecture.jpg)

## Internal Models

Meaning ▴ Internal Models constitute a sophisticated computational framework utilized by financial institutions to quantify and manage various risk exposures, including market, credit, and operational risk, often serving as the foundation for regulatory capital calculations and strategic business decisions. </a><a href="https://prime.greeks.live/area/determining-party/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A precision-engineered, multi-layered system component, symbolizing the intricate market microstructure of institutional digital asset derivatives. Two distinct probes represent RFQ protocols for price discovery and high-fidelity execution, integrating latent liquidity and pre-trade analytics within a robust Prime RFQ framework, ensuring best execution](https://options.greeks.live/wp-content/uploads/2025/08/digital-asset-derivatives-rfq-protocols-high-fidelity-execution.jpg)

## Determining Party

Meaning ▴ The Determining Party is the designated entity, system component, or algorithmic agent possessing the final and binding authority to initiate, validate, or conclude a specific event, transaction, or state transition within a defined operational framework. </a><a href="https://prime.greeks.live/question/how-do-electronic-trading-platforms-alter-information-dynamics-in-illiquid-markets/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Sleek teal and beige forms converge, embodying institutional digital asset derivatives platforms. A central RFQ protocol hub with metallic blades signifies high-fidelity execution and price discovery](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-engine-microstructure.jpg)

## Electronic Trading Platforms

Electronic platforms restructure illiquid markets by centralizing information and enabling protocol-driven execution strategies. </a><a href="https://prime.greeks.live/area/market-conditions/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Interlocked, precision-engineered spheres reveal complex internal gears, illustrating the intricate market microstructure and algorithmic trading of an institutional grade Crypto Derivatives OS. This visualizes high-fidelity execution for digital asset derivatives, embodying RFQ protocols and capital efficiency](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-prime-os-rfq-execution-system.jpg)

## Market Conditions

Meaning ▴ Market Conditions denote the aggregate state of variables influencing trading dynamics within a given asset class, encompassing quantifiable metrics such as prevailing liquidity levels, volatility profiles, order book depth, bid-ask spreads, and the directional pressure of 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">
![The image depicts two distinct liquidity pools or market segments, intersected by algorithmic trading pathways. A central dark sphere represents price discovery and implied volatility within the market microstructure](https://options.greeks.live/wp-content/uploads/2025/07/digital-asset-derivatives-rfq-multi-leg-spread-execution-microstructure.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/first-method/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Robust institutional-grade structures converge on a central, glowing bi-color orb. This visualizes an RFQ protocol's dynamic interface, representing the Principal's operational framework for high-fidelity execution and precise price discovery within digital asset market microstructure, enabling atomic settlement for block trades](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-prime-os-engine.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/close-out-process/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sleek central sphere with intricate teal mechanisms represents the Prime RFQ for institutional digital asset derivatives. Intersecting panels signify aggregated liquidity pools and multi-leg spread strategies, optimizing market microstructure for RFQ execution, ensuring high-fidelity atomic settlement and capital efficiency](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-core-engine.jpg)

## Close-Out Process

Meaning ▴ The Close-Out Process represents the definitive, terminal phase of a financial transaction or a series of interconnected transactions, executing the final settlement of all outstanding obligations and exposures between counterparties. </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 central toroidal structure and intricate core are bisected by two blades: one algorithmic with circuits, the other solid. This symbolizes an institutional digital asset derivatives platform, leveraging RFQ protocols for high-fidelity execution and price discovery](https://options.greeks.live/wp-content/uploads/2025/07/digital-asset-derivatives-rfq-execution-hub-integrating-algorithmic-intelligence-for-high-fidelity-price-discovery-and-liquidity-aggregation.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/area/early-termination-date/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sleek, multi-component mechanism features a light upper segment meeting a darker, textured lower part. A diagonal bar pivots on a circular sensor, signifying High-Fidelity Execution and Price Discovery via RFQ Protocols for Digital Asset Derivatives](https://options.greeks.live/wp-content/uploads/2025/07/precision-engineered-institutional-digital-asset-derivatives-rfq-execution-microstructure-for-optimal-price-discovery-and-atomic-settlement-with-prime-os-integration.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/set-off-provision/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Two reflective, disc-like structures, one tilted, one flat, symbolize the Market Microstructure of Digital Asset Derivatives. This metaphor encapsulates RFQ Protocols and High-Fidelity Execution within a Liquidity Pool for Price Discovery, vital for a Principal's Operational Framework ensuring Atomic Settlement](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-high-fidelity-execution-liquidity-aggregation-optimizing-market-microstructure-principal-trading-best-execution-atomic-settlement.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/default-interest/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Sharp, intersecting elements, two light, two teal, on a reflective disc, centered by a precise mechanism. This visualizes institutional liquidity convergence for multi-leg options strategies in digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-block-trade-execution.jpg)

## Default Interest

Meaning ▴ Default interest is an escalated interest rate applied to an obligation upon a borrower's failure to meet contractual conditions, typically payment default. </a><a href="https://prime.greeks.live/area/commercial-reasonableness/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sleek, institutional-grade Crypto Derivatives OS with an integrated intelligence layer supports a precise RFQ protocol. Two balanced spheres represent principal liquidity units undergoing high-fidelity execution, optimizing capital efficiency within market microstructure for best execution](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-platform-3.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>

**Tags:** [Close-Out Amount](https://options.greeks.live/area/close-out-amount/), [Close-Out Valuation](https://options.greeks.live/area/close-out-valuation/), [Calculating Party](https://options.greeks.live/area/calculating-party/), [Good Faith](https://options.greeks.live/area/good-faith/), [Commercially Reasonable Procedures](https://options.greeks.live/area/commercially-reasonable-procedures/), [First Method](https://options.greeks.live/area/first-method/)	

## Discover More

- 
### [Is the 1992 Isda Loss Calculation Still a Viable Option for Modern Derivatives Portfolios?](https://options.greeks.live/question/is-the-1992-isda-loss-calculation-still-a-viable-option-for-modern-derivatives-portfolios/)
![A gleaming, translucent sphere with intricate internal mechanisms, flanked by precision metallic probes, symbolizes a sophisticated Principal's RFQ engine. This represents the atomic settlement of multi-leg spread strategies, enabling high-fidelity execution and robust price discovery within institutional digital asset derivatives markets, minimizing latency and slippage for optimal alpha generation and capital efficiency.](https://options.greeks.live/wp-content/uploads/2025/07/inst-digital-asset-deriv-rfq-os-for-optimal-high-fidelity-trade-exec.jpg)

The 1992 ISDA Loss calculation is a viable, high-risk valuation tool for illiquid markets, demanding rigorous, defensible execution.

- 
### [How Do Courts Interpret the Good Faith Requirement in ISDA Close-Outs?](https://options.greeks.live/question/how-do-courts-interpret-the-good-faith-requirement-in-isda-close-outs/)
![An intricate, high-precision mechanism symbolizes an Institutional Digital Asset Derivatives RFQ protocol. Its sleek off-white casing protects the core market microstructure, while the teal-edged component signifies high-fidelity execution and optimal price discovery. A detailed circular dial suggests real-time implied volatility and quantitative analysis for portfolio margin.](https://options.greeks.live/wp-content/uploads/2025/07/precision-engineered-institutional-digital-asset-derivatives-rfq-protocol-high-fidelity-market-microstructure-optimization.jpg)

Courts interpret the ISDA's good faith rule by prioritizing explicit contractual rights over implied duties of fairness.

- 
### [What Procedural Steps Are Essential for a Defensible Close-Out Calculation under the 2002 ISDA Master Agreement?](https://options.greeks.live/question/what-procedural-steps-are-essential-for-a-defensible-close-out-calculation-under-the-2002-isda-master-agreement/)
![Intersecting sleek components of a Crypto Derivatives OS symbolize RFQ Protocol for Institutional Grade Digital Asset Derivatives. Luminous internal segments represent dynamic Liquidity Pool management and Market Microstructure insights, facilitating High-Fidelity Execution for Block Trade strategies within a Prime Brokerage framework.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-high-fidelity-engine.jpg)

A defensible 2002 ISDA close-out is an objectively evidenced calculation of replacement cost derived from a rigorously documented process.

- 
### [How Has the Calculation of Close out Amounts Evolved Operationally since the 2008 Crisis?](https://options.greeks.live/question/how-has-the-calculation-of-close-out-amounts-evolved-operationally-since-the-2008-crisis/)
![Sharp, intersecting geometric planes in teal, deep blue, and beige form a precise, pointed leading edge against darkness. This signifies High-Fidelity Execution for Institutional Digital Asset Derivatives, reflecting complex Market Microstructure and Price Discovery. It embodies RFQ optimization, Capital Efficiency across Liquidity Pools, and Atomic Settlement via a Prime RFQ.](https://options.greeks.live/wp-content/uploads/2025/07/high-fidelity-digital-asset-derivatives-rfq-market-microstructure-2.jpg)

The 2008 crisis forced close-out calculations to evolve from rigid quote-based rules to a flexible, principles-based objective 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 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 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 Role Do Third-Party Quotations Play in Validating a Close-Out Amount Calculation?](https://options.greeks.live/question/what-role-do-third-party-quotations-play-in-validating-a-close-out-amount-calculation/)
![A central, metallic, complex mechanism with glowing teal data streams represents an advanced Crypto Derivatives OS. It visually depicts a Principal's robust RFQ protocol engine, driving high-fidelity execution and price discovery for institutional-grade digital asset derivatives. The intricate structure suggests a sophisticated market microstructure for atomic settlement.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-execution-engine-8.jpg)

Third-party quotations provide an objective, market-based anchor for validating a close-out amount as commercially reasonable.

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

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

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---

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