# What Are the Primary Differences in Close out Procedures between the 1992 and 2002 Isda Master Agreements? ▴ Question

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

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## Concept

The architecture of over-the-counter derivatives markets rests upon a foundational protocol for managing [counterparty credit risk](https://prime.greeks.live/area/counterparty-credit-risk/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). The [ISDA Master Agreement](https://prime.greeks.live/area/isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) functions as this protocol, a standardized operating system for bilateral financial contracts. Its systemic purpose is to create a predictable and enforceable framework for netting obligations, thereby preventing the catastrophic failure of a single counterparty from causing a cascade of defaults across the financial system. At the core of this framework lies the close-out netting mechanism, a procedure designed to collapse all outstanding transactions with a defaulting counterparty into a single net payment.

The evolution from the 1992 to the 2002 version of this agreement represents a critical system upgrade, a deliberate architectural shift designed to enhance the stability and objectivity of this process during periods of extreme market stress. Understanding the differences in their close-out procedures is to understand a fundamental evolution in [financial risk management](https://prime.greeks.live/area/financial-risk-management/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), moving from a system that allowed for significant subjectivity to one that mandates a verifiable, [objective standard](https://prime.greeks.live/area/objective-standard/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) of commercial conduct.

The [1992 ISDA Master Agreement](https://prime.greeks.live/area/1992-isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) provided a robust framework for its time, yet its close-out mechanics contained ambiguities that could be exploited or lead to disputes during a credit event. The [valuation process](https://prime.greeks.live/area/valuation-process/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) for terminated trades offered two distinct pathways ▴ Market Quotation and Loss. The Market Quotation method was predicated on obtaining quotes from reference market-makers for replacement trades. This approach, while theoretically objective, proved fragile in practice.

During a systemic crisis, the very moment the mechanism was most needed, market-makers would often become unwilling or unable to provide such quotes, rendering the process inert. The alternative, the Loss method, granted the [non-defaulting party](https://prime.greeks.live/area/non-defaulting-party/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) significant latitude to determine its total losses and costs in good faith. This method relied on a standard of reasonableness that was largely subjective, a test of rationality that could be difficult to challenge. The potential for disparate outcomes and prolonged disputes under these dual methods created a degree of uncertainty that the market eventually deemed unacceptable, particularly after witnessing several major credit events in the late 1990s and early 2000s.

> The transition from the 1992 to the 2002 ISDA framework reflects a systemic demand for greater objectivity and predictability in derivatives close-out calculations.

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) was engineered to address these specific architectural vulnerabilities. It decommissioned the dual-track system of [Market Quotation](https://prime.greeks.live/area/market-quotation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) and Loss. In its place, it installed a single, unified valuation standard ▴ the Close-Out Amount. This new methodology represents a hybrid approach, integrating the most resilient elements of the previous methods into a more rigorous and commercially grounded process.

The defining characteristic of the Close-Out Amount is its mandate for objectivity. The determining party is required to 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](https://prime.greeks.live/question/what-constitutes-a-commercially-unreasonable-result-in-a-derivatives-close-out-scenario/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite).” This is a profound shift. The standard moved from the non-defaulting party’s internal, good-faith assessment of its own loss to an external, objective standard that could be evaluated and verified by a third party. This evolution was a direct response to the market’s need for a close-out mechanism that was not only robust but also transparent and defensible, ensuring that the final settlement amount accurately reflected the economic reality of replacing the terminated transactions in the prevailing market conditions.

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## Strategy

The strategic decision to migrate from the 1992 to the 2002 ISDA Master Agreement framework is driven by a desire for enhanced precision, objectivity, and legal defensibility in the management of counterparty default. The architectural changes in the close-out process are not merely semantic; they represent a fundamental shift in the strategic approach to risk mitigation. Financial institutions adopting the 2002 ISDA are choosing a system that prioritizes verifiable [commercial reasonableness](https://prime.greeks.live/area/commercial-reasonableness/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) over subjective loss assessment, thereby reducing ambiguity and the potential for protracted legal challenges following a [termination event](https://prime.greeks.live/area/termination-event/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). This section explores the strategic implications of the key differences, providing a clear analysis of how the 2002 ISDA’s architecture provides a superior risk management framework.

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## The Unification of Valuation under Close-Out Amount

The most significant strategic change is the replacement of the 1992 Agreement’s bifurcated Loss and Market Quotation methodologies with the single, consolidated [Close-Out Amount](https://prime.greeks.live/area/close-out-amount/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) calculation in the 2002 Agreement. This was a deliberate design choice aimed at eliminating the operational fragility and potential for strategic gamesmanship inherent in the previous system. Under the 1992 framework, a non-defaulting party could select the method it believed would produce a more favorable outcome, leading to disputes. Market Quotation often failed in illiquid or stressed markets, while Loss was criticized for its subjectivity.

The Close-Out Amount methodology synthesizes these approaches into a more flexible and robust process. It allows the determining party to consider a wide range of information, including quotations from third parties (without the rigid requirement of obtaining a specific number of quotes from “Reference Market-makers”), relevant market data, and information from internal models, so long as the overall procedure is [commercially reasonable](https://prime.greeks.live/area/commercially-reasonable/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). This provides a strategic advantage by allowing the valuation to be tailored to the specific circumstances of the termination, whether it involves a highly liquid [interest rate swap](https://prime.greeks.live/area/interest-rate-swap/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) or a bespoke, illiquid credit derivative. The focus shifts from following a rigid, and potentially unworkable, procedure to achieving a demonstrably fair economic outcome.

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## What Is the Impact of a Higher Standard of Reasonableness?

The [2002 ISDA](https://prime.greeks.live/area/2002-isda/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) introduced a more stringent standard for conduct by the party determining the close-out payment. This evolution is central to the agreement’s design philosophy. The 1992 Agreement required the non-defaulting party, when calculating Loss, to make a determination that was rational.

This is often equated with the English law “Wednesbury” test of reasonableness, which essentially means the determination could not be so unreasonable that no reasonable party would have made it. This is a relatively low legal hurdle to clear.

The 2002 Agreement elevates this standard significantly. Section 6(e) requires the [determining party](https://prime.greeks.live/area/determining-party/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) to use “commercially reasonable procedures in order to produce a commercially reasonable result.” This imposes a dual obligation ▴ the process must be sound, and the outcome must be fair. This is an objective test, meaning the actions of the determining party are judged against the standard of what a reasonable market participant would do in similar circumstances. The strategic implication is that the non-defaulting party must meticulously document its valuation process, demonstrating that it acted diligently and fairly.

This could involve soliciting multiple indicative quotes, consulting with internal valuation experts, and maintaining detailed records of all data and models used. While this imposes a greater operational burden, it also creates a more defensible and transparent result, reducing the likelihood of successful legal challenges.

> The 2002 ISDA’s requirement for commercially reasonable procedures and results establishes an objective, defensible standard for close-out calculations.

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## Expansion of Termination Events and Set-Off Rights

The strategic enhancements of the 2002 ISDA extend beyond the core valuation mechanics. The agreement introduced a [Force Majeure Termination Event](https://prime.greeks.live/question/what-are-the-key-differences-in-calculating-the-termination-amount-for-a-force-majeure-event-versus-an-event-of-default/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), providing a contractual mechanism for dealing with unforeseen circumstances, such as natural disasters or political turmoil, that prevent a party from performing its obligations. This provides a more orderly path to termination than relying on common law doctrines of frustration. The provisions for Illegality were also refined.

Furthermore, the 2002 ISDA incorporated a formal [Set-Off provision](https://prime.greeks.live/area/set-off-provision/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) directly into the main body of the agreement. Under the 1992 version, set-off rights were typically added via the Schedule. By including it as a standard provision, the 2002 Agreement strengthens the non-defaulting party’s ability to net amounts owed under the ISDA against other obligations between the two parties, providing a more comprehensive and efficient mechanism for settling all outstanding financial relationships following a default. These additions create a more complete and resilient operating system for managing the entire lifecycle of a derivatives relationship, particularly its termination.

The table below outlines the core strategic differences in the close-out frameworks of the two agreements.

### Table 1 ▴ Strategic Comparison of ISDA Close-Out Frameworks

| Feature | 1992 ISDA Master Agreement | 2002 ISDA Master Agreement |
| --- | --- | --- |
| Valuation Methodology | Choice between two methods ▴ Market Quotation (requires quotes from Reference Market-makers) or Loss (subjective calculation by non-defaulting party). | A single, unified method ▴ Close-Out Amount, a flexible calculation based on commercially reasonable actions. |
| Standard of Conduct | “Reasonably determines in good faith,” interpreted as a test of rationality (Wednesbury reasonableness). | Must use “commercially reasonable procedures to produce a commercially reasonable result,” an objective standard. |
| Payment Directionality | Allowed for “First Method” (one-way payments, where a defaulting party could not receive a net gain), though rarely used. The default was “Second Method” (two-way payments). | Mandates two-way payments exclusively. The concept of one-way payments is eliminated. |
| Force Majeure | No specific Force Majeure Termination Event included in the standard form. | Includes a Force Majeure Termination Event, providing a clear contractual path for termination due to external, unforeseen events. |
| Set-Off Provision | Not included in the standard form; had to be added to the Schedule if desired. | Includes a standard Set-Off provision (Section 6(f)), strengthening netting rights. |

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## Execution

The execution of a close-out under the 2002 ISDA [Master Agreement](https://prime.greeks.live/area/master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) is an operation that demands precision, diligence, and a robust internal process. The shift to an objective standard of commercial reasonableness means that the non-defaulting party must be prepared to defend both its procedures and its final calculation. This section provides an operational playbook for executing a close-out, focusing on the practical steps and analytical rigor required to comply with the enhanced obligations of the 2002 framework. It is a guide for transforming legal requirements into a concrete, defensible, and efficient operational workflow.

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## Operational Playbook for Calculating the Close-Out Amount

Upon the occurrence 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 determining party must initiate a structured process to calculate the Close-Out Amount. This process should be systematic and well-documented to stand up to scrutiny. The following steps provide a high-level operational guide:

- 
**Immediate Information Gathering** ▴ As soon as the termination is effective, the determining party should gather all relevant information regarding the Terminated Transactions. This includes transaction confirmations, valuations from [internal models](https://prime.greeks.live/area/internal-models/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), and any relevant [market data](https://prime.greeks.live/area/market-data/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) feeds. The goal is to establish a comprehensive baseline of the terminated portfolio’s economic value.

- 
**Formation of a Determination Team** ▴ A dedicated team should be assembled to oversee the close-out process. This team would typically include representatives from the trading desk, legal department, [risk management](https://prime.greeks.live/area/risk-management/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), and operations. This cross-functional approach ensures that all aspects of the determination are considered, from market realities to legal compliance.

- 
**Development of a Valuation Strategy** ▴ The team must decide on a commercially reasonable strategy for valuing the terminated portfolio. This involves identifying potential sources for replacement quotes or other valuation inputs. The strategy should be tailored to the specific nature of the transactions.
For liquid, vanilla swaps, obtaining multiple dealer quotes might be the most reasonable approach. For illiquid or exotic derivatives, the process might rely more heavily on internal models, supported by observable market inputs where possible.

- 
**Execution of the Valuation Strategy** ▴ This is the core of the process. If seeking quotes, the party should contact a reasonable number of market participants. All communications, including the timing and content of requests and any responses received, must be logged.
If using internal models, the model inputs, assumptions, and calibration data must be documented. The objective is to create a clear audit trail showing how the final valuation was derived.

- 
**Calculation and Notification** ▴ Once all gains, losses, and costs are determined, the Close-Out Amount is calculated. This amount represents the net sum that one party owes the other. A statement should be prepared and delivered to the other party, detailing the calculation in a manner that is clear and understandable. This statement should be provided as soon as reasonably practicable after the calculation is complete.

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## How Should a Firm Document Commercial Reasonableness?

Documentation is the bedrock of a defensible close-out calculation under the 2002 ISDA. The determining party must create a contemporaneous record that justifies its actions. This record serves as the primary evidence that the procedures used were commercially reasonable and that they produced a commercially reasonable result.

- 
**Valuation Source Log** ▴ Maintain a detailed log of all parties contacted for quotes. This should include the name of the institution, the individual contacted, the time of contact, the specific transactions for which quotes were requested, and the content of the response (including a refusal to quote).

- 
**Market Data Archive** ▴ Archive all relevant market data used in the valuation process. This includes interest rate curves, volatility surfaces, credit spreads, and any other data points that informed the calculation, whether for a direct quote or as an input to an [internal model](https://prime.greeks.live/area/internal-model/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite).

- 
**Internal Deliberation Memos** ▴ The determination team should keep minutes of its meetings. These memos should document the rationale for the chosen valuation strategy, the reasons for relying on certain sources over others, and the analysis of the results obtained. This provides insight into the firm’s decision-making process.

- 
**Cost Substantiation** ▴ Any costs included in the Close-Out Amount, such as legal fees or costs associated with unwinding hedges, must be substantiated with invoices or other concrete evidence. The connection between the cost and the termination must be clear.

> A meticulously documented and transparent valuation process is the most effective defense against challenges to a Close-Out Amount calculation.

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## Quantitative Modeling a Close-Out Scenario

To illustrate the execution process, consider a hypothetical scenario where a non-defaulting party terminates a single 5-year USD interest rate swap with a defaulting counterparty. The non-defaulting party is paying a fixed rate of 2.50% and receiving floating SOFR on a notional principal of $100 million. At the time of termination, prevailing 5-year swap rates have fallen to 1.50%. The non-defaulting party must now calculate its gain.

The determination team decides that a commercially reasonable procedure is to obtain quotes for a replacement swap from three leading derivatives dealers and to use its own internal model as a verification tool. The table below shows the data that would be gathered and analyzed.

### Table 2 ▴ Hypothetical Close-Out Amount Calculation Data

| Valuation Source | Valuation Type | Result (Gain to Non-Defaulting Party) | Comments |
| --- | --- | --- | --- |
| Dealer A | Firm Quote for Replacement Swap | $4,650,000 | Quote is firm and executable for one hour. Considers current market rates and credit profile of non-defaulting party. |
| Dealer B | Indicative Quote | $4,710,000 | Provided as a mid-market level, subject to final execution. |
| Dealer C | Refusal to Quote | N/A | Trader cited market volatility and internal risk limits. This refusal is documented. |
| Internal Model | PV of future cash flows | $4,685,000 | Based on proprietary valuation model using observable OIS curve for discounting. |
| Final Determination | Execution of Replacement Swap | $4,650,000 | The firm executes the replacement swap with Dealer A. This becomes the primary basis for the Close-Out Amount, as it represents a real, transacted cost. The other data points support the commercial reasonableness of this result. |

In this scenario, the non-defaulting party would declare a Close-Out Amount of $4,650,000, plus any documented legal or other costs. The detailed record of obtaining multiple quotes, using an internal model for verification, and documenting the refusal from Dealer C provides strong evidence that the procedure was commercially reasonable. The fact that the final amount is based on an executable quote for an actual replacement transaction provides a powerful argument that the result is also commercially reasonable.

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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.

- Walker Morris. “ISDA Master Agreements and the calculation of close-out payments.” 19 April 2018.

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

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

- International Swaps and Derivatives Association. “ISDA Close-out Amount Protocol.” ISDA, 2009.

- Henderson, Schuyler K. Henderson on Derivatives. LexisNexis, 2nd ed. 2017.

- Gregory, Jon. The xVA Challenge ▴ Counterparty Credit Risk, Funding, Collateral, and Capital. Wiley, 4th ed. 2020.

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## Reflection

The evolution from the 1992 to the 2002 ISDA Master Agreement is an exercise in systemic resilience. The architectural upgrades to the close-out mechanism were not theoretical adjustments; they were forged in the crucible of market crises. The core lesson is that in moments of profound stress, ambiguity is the enemy of stability. A financial system’s integrity depends on protocols that function predictably and objectively when they are needed most.

The 2002 Agreement’s mandate for commercial reasonableness is a mandate for demonstrable rigor. It compels market participants to build and maintain an internal operational framework capable of transparent, evidence-based decision-making under pressure. The analysis of these differences should prompt a deeper consideration of one’s own operational readiness. Is your firm’s valuation process a robust, documented, and defensible system, or is it a reactive scramble? The answer to that question reveals the true strength of your counterparty risk management architecture.

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## Glossary

<a href="https://prime.greeks.live/area/counterparty-credit-risk/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Counterparty Credit Risk

Meaning ▴ Counterparty Credit Risk, in the context of crypto investing and derivatives trading, denotes the potential for financial loss arising from a counterparty's failure to fulfill its contractual obligations in a transaction. </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">
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## Isda Master Agreement

Meaning ▴ The ISDA Master Agreement, while originating in traditional finance, serves as a crucial foundational legal framework for institutional participants engaging in over-the-counter (OTC) crypto derivatives trading and complex RFQ crypto transactions. </a><a href="https://prime.greeks.live/area/financial-risk-management/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Financial Risk Management

Meaning ▴ Financial Risk Management in the crypto investment sector is the systematic process of identifying, assessing, monitoring, and mitigating the various financial risks inherent in digital asset portfolios and trading operations. </a><a href="https://prime.greeks.live/area/objective-standard/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Objective Standard

Meaning ▴ An Objective Standard is a criterion or benchmark based on verifiable facts, measurable data, or widely accepted principles, independent of personal opinions or subjective interpretations. </a><a href="https://prime.greeks.live/area/1992-isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## 1992 Isda Master Agreement

Meaning ▴ The 1992 ISDA Master Agreement serves as a foundational contractual framework in traditional finance, establishing uniform terms and conditions for over-the-counter (OTC) derivatives transactions between two parties. </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">
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## Valuation Process

Meaning ▴ The Valuation Process refers to the systematic procedure employed to determine the fair economic worth of an asset, liability, or financial instrument. </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">
![A sophisticated mechanical core, split by contrasting illumination, represents an Institutional Digital Asset Derivatives RFQ engine. Its precise concentric mechanisms symbolize High-Fidelity Execution, Market Microstructure optimization, and Algorithmic Trading within a Prime RFQ, enabling optimal Price Discovery and Liquidity Aggregation](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-rfq-engine-for-institutional-digital-asset-derivatives-precision-execution.jpg)

## Non-Defaulting Party

Meaning ▴ A Non-Defaulting Party refers to the participant in a financial contract, such as a derivatives agreement or lending facility within the crypto ecosystem, that has fully adhered to its obligations while the other party has failed to do so. </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 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)

## 2002 Isda Master Agreement

Meaning ▴ The 2002 ISDA Master Agreement is the foundational legal document published by the International Swaps and Derivatives Association, designed to standardize the contractual terms for privately negotiated (Over-the-Counter) derivatives transactions between two counterparties globally. </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">
![A transparent glass sphere rests precisely on a metallic rod, connecting a grey structural element and a dark teal engineered module with a clear lens. This symbolizes atomic settlement of digital asset derivatives via private quotation within a Prime RFQ, showcasing high-fidelity execution and capital efficiency for RFQ protocols and liquidity aggregation](https://options.greeks.live/wp-content/uploads/2025/07/architecting-high-fidelity-execution-for-institutional-digital-asset-derivatives-rfq-protocols-and-systemic-liquidity-aggregation.jpg)

## Market Quotation

Meaning ▴ A market quotation, or simply a quote, represents the most recent price at which an asset has traded or, more commonly in active markets, the current best bid and ask prices at which it can be immediately bought or sold. </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">
![Brushed metallic and colored modular components represent an institutional-grade Prime RFQ facilitating RFQ protocols for digital asset derivatives. The precise engineering signifies high-fidelity execution, atomic settlement, and capital efficiency within a sophisticated market microstructure for multi-leg spread trading](https://options.greeks.live/wp-content/uploads/2025/08/institutional-grade-digital-asset-derivatives-rfq-protocol-high-fidelity-execution-system.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/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">
![Detailed metallic disc, a Prime RFQ core, displays etched market microstructure. Its central teal dome, an intelligence layer, facilitates price discovery](https://options.greeks.live/wp-content/uploads/2025/07/principal-operating-system-intelligence-layer-powering-digital-asset-derivatives-rfq-protocols-for-optimal-execution.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/commercial-reasonableness/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![An abstract digital interface features a dark circular screen with two luminous dots, one teal and one grey, symbolizing active and pending private quotation statuses within an RFQ protocol. Below, sharp parallel lines in black, beige, and grey delineate distinct liquidity pools and execution pathways for multi-leg spread strategies, reflecting market microstructure and high-fidelity execution for institutional grade digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/08/institutional-digital-asset-derivatives-rfq-protocol-displaying-multi-leg-execution-status-and-optimal-liquidity-pathways.jpg)

## Commercial Reasonableness

Meaning ▴ Commercial Reasonableness, in the context of crypto institutional options trading and RFQ systems, signifies the objective standard by which the terms, conditions, and pricing of a transaction are evaluated for their alignment with prevailing market practices, economic rationality, and prudent business judgment among sophisticated participants. </a><a href="https://prime.greeks.live/area/termination-event/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A reflective, metallic platter with a central spindle and an integrated circuit board edge against a dark backdrop. This imagery evokes the core low-latency infrastructure for institutional digital asset derivatives, illustrating high-fidelity execution and market microstructure dynamics](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-rfq-execution-infrastructure-precision.jpg)

## Termination Event

Meaning ▴ A Termination Event, within the structured finance and smart contract paradigms of crypto investing, signifies a predefined condition or specific occurrence that contractually triggers the early dissolution or cessation of a binding agreement or a complex financial instrument. </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">
![Polished concentric metallic and glass components represent an advanced Prime RFQ for institutional digital asset derivatives. It visualizes high-fidelity execution, price discovery, and order book dynamics within market microstructure, enabling efficient RFQ protocols for block trades](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-prime-os-precision.jpg)

## Close-Out Amount

Meaning ▴ The Close-Out Amount represents the aggregated net sum due between two parties upon the early termination or default of a master agreement, encompassing all outstanding obligations across multiple 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">
![A transparent cylinder containing a white sphere floats between two curved structures, each featuring a glowing teal line. This depicts institutional-grade RFQ protocols driving high-fidelity execution of digital asset derivatives, facilitating private quotation and liquidity aggregation through a Prime RFQ for optimal block trade atomic settlement](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-high-fidelity-execution-6.jpg)

## Commercially Reasonable

Meaning ▴ "Commercially Reasonable" is a legal and business standard requiring parties to a contract to act in a practical, prudent, and sensible manner, consistent with prevailing industry practices and good faith. </a><a href="https://prime.greeks.live/area/interest-rate-swap/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Abstract geometric planes delineate distinct institutional digital asset derivatives liquidity pools. Stark contrast signifies market microstructure shift via advanced RFQ protocols, ensuring high-fidelity execution](https://options.greeks.live/wp-content/uploads/2025/07/digital-asset-derivatives-execution-protocol-integrating-rfq-liquidity-and-advanced-market-microstructure.jpg)

## Interest Rate Swap

Meaning ▴ An Interest Rate Swap (IRS) is a derivative contract where two counterparties agree to exchange interest rate payments over a predetermined period. </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">
![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)

## 2002 Isda

Meaning ▴ The 2002 ISDA, or the 2002 ISDA Master Agreement, represents the prevailing global standard contractual framework developed by the International Swaps and Derivatives Association for documenting over-the-counter (OTC) derivatives transactions between two parties. </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">
![Precision cross-section of an institutional digital asset derivatives system, revealing intricate market microstructure. Toroidal halves represent interconnected liquidity pools, centrally driven by an RFQ protocol](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-prime-os-architecture-revealing-precision-rfq-protocol-engine-for-optimal-high-fidelity-execution-and-latent-liquidity-aggregation.jpg)

## Determining Party

Meaning ▴ In the precise terminology of complex crypto financial instruments, particularly institutional options or structured products, the Determining Party is the pre-designated entity, whether an on-chain oracle or an agreed-upon off-chain agent, explicitly responsible for definitively calculating and announcing specific parameters, values, or conditions that critically influence the payoff, settlement, or lifecycle events of a contractual agreement. </a><a href="https://prime.greeks.live/question/what-are-the-key-differences-in-calculating-the-termination-amount-for-a-force-majeure-event-versus-an-event-of-default/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![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](https://options.greeks.live/wp-content/uploads/2025/07/modular-rfq-protocol-engine-for-digital-asset-derivatives-prime-os.jpg)

## Force Majeure Termination Event

The calculation for an Event of Default is a unilateral risk mitigation tool; for Force Majeure, it is a bilateral, fair-value process. </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">
![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)

## Set-Off Provision

Meaning ▴ A Set-Off Provision is a contractual clause or legal right that permits a party to offset mutual debts or claims owed to and by another party. </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">
![An Institutional Grade RFQ Engine core for Digital Asset Derivatives. This Prime RFQ Intelligence Layer ensures High-Fidelity Execution, driving Optimal Price Discovery and Atomic Settlement for Aggregated Inquiries](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-engine-core-high-fidelity.jpg)

## Master Agreement

Meaning ▴ A Master Agreement is a standardized, foundational legal contract that establishes the overarching terms and conditions governing all future transactions between two parties for specific financial instruments, such as derivatives or foreign exchange. </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">
![Angularly connected segments portray distinct liquidity pools and RFQ protocols. A speckled grey section highlights granular market microstructure and aggregated inquiry complexities for digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-execution-efficiency.jpg)

## Early Termination Date

Meaning ▴ An Early Termination Date refers to a specific, contractually defined point in time, prior to a financial instrument's scheduled maturity, at which the agreement can be concluded. </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">
![A sleek, pointed object, merging light and dark modular components, embodies advanced market microstructure for digital asset derivatives. Its precise form represents high-fidelity execution, price discovery via RFQ protocols, emphasizing capital efficiency, institutional grade alpha generation](https://options.greeks.live/wp-content/uploads/2025/07/institutional-grade-digital-asset-rfq-execution-system-microstructure.jpg)

## Internal Models

Meaning ▴ Within the sophisticated systems architecture of institutional crypto trading and comprehensive risk management, Internal Models are proprietary computational frameworks developed and rigorously maintained by financial firms. </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">
![Dark, pointed instruments intersect, bisected by a luminous stream, against angular planes. This embodies institutional RFQ protocol driving cross-asset execution of digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-best-execution-system-architecture.jpg)

## Market Data

Meaning ▴ Market data in crypto investing refers to the real-time or historical information regarding prices, volumes, order book depth, and other relevant metrics across various digital asset trading venues. </a><a href="https://prime.greeks.live/area/risk-management/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sleek metallic device with a central translucent sphere and dual sharp probes. This symbolizes an institutional-grade intelligence layer, driving high-fidelity execution for digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-platform-precision.jpg)

## Risk Management

Meaning ▴ Risk Management, within the cryptocurrency trading domain, encompasses the comprehensive process of identifying, assessing, monitoring, and mitigating the multifaceted financial, operational, and technological exposures inherent in digital asset markets. </a><a href="https://prime.greeks.live/area/internal-model/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sleek, abstract system interface with a central spherical lens representing real-time Price Discovery and Implied Volatility analysis for institutional Digital Asset Derivatives. Its precise contours signify High-Fidelity Execution and robust RFQ protocol orchestration, managing latent liquidity and minimizing slippage for optimized Alpha Generation](https://options.greeks.live/wp-content/uploads/2025/07/high-fidelity-institutional-digital-asset-derivatives-execution-via-optimized-rfq-protocols-enhancing-market-microstructure.jpg)

## Internal Model

Meaning ▴ An Internal Model defines a proprietary quantitative framework developed and utilized by financial institutions, including those active in crypto investing, to assess and manage various forms of risk, such as market, credit, and operational risk. </a>

**Tags:** [2002 ISDA Master Agreement](https://options.greeks.live/area/2002-isda-master-agreement/), [Objective Standard](https://options.greeks.live/area/objective-standard/), [Valuation Process](https://options.greeks.live/area/valuation-process/), [Market Data](https://options.greeks.live/area/market-data/), [Force Majeure](https://options.greeks.live/area/force-majeure/), [Derivatives Law](https://options.greeks.live/area/derivatives-law/)	

## 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-2/)
![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 2002 ISDA's Close-Out Amount replaces a rigid quoting procedure with a flexible, principles-based valuation standard.

- 
### [What Are the Core Differences between the 1992 and 2002 Isda Close-Out Methodologies?](https://options.greeks.live/question/what-are-the-core-differences-between-the-1992-and-2002-isda-close-out-methodologies/)
![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)

The 2002 ISDA replaces the 1992's subjective 'Loss' with an objective 'Close-Out Amount' based on commercial reasonableness.

- 
### [What Is the Legal Standard for “Commercially Reasonable Procedures” in a Derivatives Close-Out?](https://options.greeks.live/question/what-is-the-legal-standard-for-commercially-reasonable-procedures-in-a-derivatives-close-out/)
![Detailed metallic disc, a Prime RFQ core, displays etched market microstructure. Its central teal dome, an intelligence layer, facilitates price discovery. Protruding rods signify low-latency RFQ protocol data transmission, ensuring high-fidelity execution for digital asset derivatives.](https://options.greeks.live/wp-content/uploads/2025/07/principal-operating-system-intelligence-layer-powering-digital-asset-derivatives-rfq-protocols-for-optimal-execution.jpg)

The legal standard for "commercially reasonable procedures" is an objective duty to employ a fair, verifiable, and market-based process to calculate a derivatives close-out value.

- 
### [Why Was Credit Support Default Added to the 2002 ISDA Agreement?](https://options.greeks.live/question/why-was-credit-support-default-added-to-the-2002-isda-agreement/)
![A sleek, multi-faceted plane represents a Principal's operational framework and Execution Management System. A central glossy black sphere signifies a block trade digital asset derivative, executed with atomic settlement via an RFQ protocol's private quotation. Textured spheres below denote collateral supporting advanced market microstructure for price discovery.](https://options.greeks.live/wp-content/uploads/2025/07/digital-asset-derivatives-rfq-principal-os-high-fidelity-execution.jpg)

The 2002 ISDA's Credit Support Default provision transformed collateral failure into a decisive termination event, hardening the system against counterparty risk.

- 
### [What Is the Main Difference in the Close out Calculation between the 1992 and 2002 ISDA?](https://options.greeks.live/question/what-is-the-main-difference-in-the-close-out-calculation-between-the-1992-and-2002-isda/)
![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. It underscores high-fidelity execution and atomic settlement within a secure Prime RFQ, revealing latent liquidity and capital efficiency.](https://options.greeks.live/wp-content/uploads/2025/07/systemic-framework-for-institutional-digital-asset-derivatives-rfq-price-discovery-and-atomic-settlement.jpg)

The 2002 ISDA replaces the 1992's rigid 'Market Quotation/Loss' with a flexible, 'commercially reasonable' Close-out Amount.

- 
### [What Are the Key Differences between the 1992 and 2002 Isda Agreements?](https://options.greeks.live/question/what-are-the-key-differences-between-the-1992-and-2002-isda-agreements/)
![Brushed metallic and colored modular components represent an institutional-grade Prime RFQ facilitating RFQ protocols for digital asset derivatives. The precise engineering signifies high-fidelity execution, atomic settlement, and capital efficiency within a sophisticated market microstructure for multi-leg spread trading.](https://options.greeks.live/wp-content/uploads/2025/08/institutional-grade-digital-asset-derivatives-rfq-protocol-high-fidelity-execution-system.jpg)

The 2002 ISDA Agreement replaced the 1992 version's subjective "Loss" with an objective "Close-out Amount" for greater legal certainty.

- 
### [What Are the Primary Differences in Valuation between the 1992 and 2002 ISDA Master Agreements?](https://options.greeks.live/question/what-are-the-primary-differences-in-valuation-between-the-1992-and-2002-isda-master-agreements/)
![A precise mechanical instrument with intersecting transparent and opaque hands, representing the intricate market microstructure of institutional digital asset derivatives. This visual metaphor highlights dynamic price discovery and bid-ask spread dynamics within RFQ protocols, emphasizing high-fidelity execution and latent liquidity through a robust Prime RFQ for atomic settlement.](https://options.greeks.live/wp-content/uploads/2025/07/precision-engineering-driving-institutional-digital-asset-derivatives-execution-across-advanced-rfq-protocols-and-prime-brokerage-frameworks.jpg)

The 2002 ISDA replaced the 1992's ambiguous dual valuation methods with a single, objective 'Close-Out Amount' for greater systemic stability.

- 
### [Why Did the ISDA Introduce the Close out Amount in the 2002 Agreement?](https://options.greeks.live/question/why-did-the-isda-introduce-the-close-out-amount-in-the-2002-agreement/)
![A multi-faceted digital asset derivative, precisely calibrated on a sophisticated circular mechanism. This represents a Prime Brokerage's robust RFQ protocol for high-fidelity execution of multi-leg spreads, ensuring optimal price discovery and minimal slippage within complex market microstructure, critical for alpha generation.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-execution-precision-2.jpg)

The 2002 ISDA Agreement replaced flawed valuation methods with Close-Out Amount to ensure a fair, resilient close-out process.

- 
### [How Does the 2002 ISDA Close-Out Amount Calculation Handle Illiquid Transactions?](https://options.greeks.live/question/how-does-the-2002-isda-close-out-amount-calculation-handle-illiquid-transactions/)
![An abstract, multi-component digital infrastructure with a central lens and circuit patterns, embodying an Institutional Digital Asset Derivatives platform. This Prime RFQ enables High-Fidelity Execution via RFQ Protocol, optimizing Market Microstructure for Algorithmic Trading, Price Discovery, and Multi-Leg Spread.](https://options.greeks.live/wp-content/uploads/2025/08/institutional-grade-digital-asset-derivatives-trading-platform-powering-high-fidelity-execution-via-advanced-rfq-protocol-prime-os-intelligence-layer.jpg)

The 2002 ISDA framework provides a robust protocol for calculating termination values for illiquid assets by replacing rigid quotation requirements with a flexible, yet objectively verifiable, standard of commercial reasonableness.

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---

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