# What Constitutes a Commercially Reasonable Procedure under the 2002 ISDA Master Agreement? ▴ Question

**Published:** 2025-08-01
**Categories:** Question

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## Concept

The notion of a “[commercially reasonable procedure](https://prime.greeks.live/question/what-constitutes-a-commercially-reasonable-procedure-in-a-close-out-scenario/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)” within the architecture of the [2002 ISDA Master Agreement](https://prime.greeks.live/area/2002-isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) is the central governor of its close-out mechanism. It functions as a binding operational protocol designed to ensure that the termination of derivatives transactions unfolds based on observable, objective economic reality. This standard dictates the process for calculating the final settlement amount, known as the Close-out Amount, when a default or other termination event occurs.

Its existence is a structural acknowledgment that in moments of counterparty failure, a disciplined, transparent, and [defensible valuation process](https://prime.greeks.live/question/what-role-do-internal-valuation-models-play-in-a-defensible-close-out-calculation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) is paramount to preserving the integrity of the system and preventing punitive outcomes. The standard is a direct reflection of the market’s evolution, demanding a higher degree of procedural and analytical rigor from the calculating party.

At its core, the requirement for commercial reasonableness is a shift from a subjective to an objective framework. The preceding 1992 ISDA Master Agreement operated on a standard that could be interpreted as more deferential to the determining party’s internal judgment. The 2002 Agreement elevates this requirement significantly. Legal precedent, particularly in cases like [Lehman Brothers Special Financing](https://prime.greeks.live/question/how-did-the-lehman-brothers-bankruptcy-influence-the-adoption-of-the-2002-isda-close-out-amount-protocol/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) Inc. v [National Power Corporation](https://prime.greeks.live/question/how-do-national-safe-harbor-provisions-protect-financial-contracts/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), has solidified the interpretation that “commercially reasonable” imposes a standard of objective reasonableness.

This means the [determining party](https://prime.greeks.live/area/determining-party/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), typically the non-defaulting entity, must not only act in [good faith](https://prime.greeks.live/area/good-faith/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) but must also employ valuation procedures that an independent, rational market participant would consider appropriate and sound under the circumstances. The process must be defensible, transparent, and grounded in verifiable data.

> A commercially reasonable procedure is a valuation process that is not merely rational but objectively sound and defensible to an external observer.

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## The Architectural Purpose of the Standard

The inclusion of this stringent standard serves a critical architectural function within the derivatives market. It provides a predictable and equitable mechanism for collapsing complex, multi-transaction relationships in a crisis. Without it, the party with the right to calculate the [close-out amount](https://prime.greeks.live/area/close-out-amount/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) could potentially use arbitrary or self-serving valuation methods, leading to inflated or deflated settlement figures that do not reflect the true economic loss or gain.

This could introduce systemic instability, as counterparties would face unpredictable and potentially catastrophic losses upon a default. The standard, therefore, acts as a crucial brake on moral hazard and ensures that the close-out process, while often contentious, is tethered to established market principles.

The framework grants the determining party considerable flexibility in the choice of [valuation inputs](https://prime.greeks.live/area/valuation-inputs/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). It explicitly allows for the use of third-party quotations, [relevant market](https://prime.greeks.live/question/how-does-the-proliferation-of-last-look-affect-overall-price-discovery-and-market-stability-in-the-fx-market/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) data, and even information from internal sources, such as proprietary pricing models. This flexibility is a pragmatic recognition that in stressed or illiquid markets, obtaining multiple firm quotes for a replacement transaction may be impossible. However, this flexibility is bounded by the overarching mandate of objective reasonableness.

The choice of which inputs to use, and in what combination, must itself be a [commercially reasonable](https://prime.greeks.live/area/commercially-reasonable/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) decision. For instance, relying solely on an [internal model](https://prime.greeks.live/area/internal-model/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) when credible third-party data is readily available could be challenged as a violation of the standard if the internal model produces a result that significantly deviates from the observable market. The procedure is a system of checks and balances, providing operational latitude while demanding rigorous justification for the path taken.

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## Strategy

For the institutional participant tasked with calculating a Close-out Amount ▴ the Determining Party ▴ the “commercially reasonable” standard is not a passive legal constraint but an active strategic framework. The strategy revolves around constructing a [valuation process](https://prime.greeks.live/question/what-is-the-role-of-expert-determination-in-resolving-complex-derivatives-valuation-disputes/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) that is not only compliant but also robust enough to withstand intense scrutiny and potential legal challenge. This requires a deliberate and documented approach to every stage of the close-out, from the timing of the termination to the selection of valuation inputs. The primary strategic objective is to produce a final settlement figure that is unimpeachable because the procedure used to derive it was transparent, logical, and grounded in objective criteria.

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## How Does the Determining Party Balance Flexibility and Objectivity?

The 2002 [ISDA Master Agreement](https://prime.greeks.live/area/isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) grants the Determining Party significant latitude in how it arrives at the Close-out Amount, a stark contrast to the more prescriptive “[Market Quotation](https://prime.greeks.live/area/market-quotation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)” method in the 1992 version. The strategy lies in how this latitude is managed. The Determining Party must weigh the use of different valuation sources, each with its own strategic implications.

- **Third-Party Quotations** ▴ Seeking quotes for replacement transactions from other market makers is often considered the gold standard for objectivity. The strategic benefit is that it provides a clear, externally validated data point. However, in a systemic crisis or for highly bespoke transactions, obtaining multiple, [firm quotes](https://prime.greeks.live/area/firm-quotes/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) may be impractical or impossible. A strategy reliant solely on this method could fail in a disrupted market.

- **Relevant [Market Data](https://prime.greeks.live/area/market-data/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)** ▴ This involves using observable inputs (e.g. yield curves, volatility surfaces, credit spreads) from sources like Bloomberg, Reuters, or other data vendors and feeding them into a valuation model. The strategy here is to ground the valuation in widely accepted market parameters, making the process transparent and replicable. This approach is robust, provided the models themselves are standard and the data is from credible sources.

- **Internal Sources** ▴ The agreement permits the use of [internal models](https://prime.greeks.live/area/internal-models/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) and data, particularly if they are used in the regular course of business for valuing similar transactions. The strategic advantage is speed and the ability to value complex or illiquid products for which external data is scarce. The risk, however, is the perception of bias. A strategy employing internal models must be supported by rigorous documentation, back-testing data, and a clear rationale for why external sources were not used or were deemed unreliable.

The optimal strategy often involves a hybrid approach. The Determining Party might use internal models but calibrate them to any available external data points. It might solicit indicative quotes from dealers to sense-check the output of its own models.

The key is to create a mosaic of information that, when viewed in its entirety, points to a logical and [defensible valuation](https://prime.greeks.live/area/defensible-valuation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). The entire process must be meticulously documented, creating an audit trail that explains why certain decisions were made and why specific data sources were chosen over others.

> A successful valuation strategy under the 2002 ISDA Agreement prioritizes the creation of a defensible audit trail over the selection of any single valuation method.

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## Comparison of 1992 and 2002 ISDA Close-Out Methodologies

Understanding the strategic shift requires a direct comparison of the valuation frameworks in the 1992 and 2002 agreements. The 2002 framework was designed to overcome the rigidities of the 1992 version, which often proved unworkable in stressed market conditions.

| Feature | 1992 ISDA Master Agreement | 2002 ISDA Master Agreement |
| --- | --- | --- |
| Primary Calculation Method | Market Quotation (requires obtaining quotes from at least three reference market makers) or Loss (a broader measure of total losses and costs). | Close-out Amount (a single, unified concept). |
| Governing Standard | Good faith and a “rational” decision process. This was interpreted by courts as a more subjective standard. | Good faith and “commercially reasonable procedures” to produce a “commercially reasonable result.” This is an objective standard. |
| Flexibility of Inputs | Market Quotation was rigid. If quotes were not available, the party had to revert to the Loss method, which was often viewed as more contentious. | Highly flexible. Allows the use of quotes, market data, and internal models in any combination deemed commercially reasonable. |
| Burden of Proof | A challenging party had to prove the calculation was irrational or made in bad faith. | The Determining Party has a greater burden to demonstrate that its procedures were objectively reasonable. The focus is on the process. |
| Strategic Implication | The strategy was often dictated by the prescriptive nature of the Market Quotation method. | The strategy requires active decision-making, documentation, and justification to build a robust and defensible valuation process. |

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## Execution

The execution of a close-out valuation under the 2002 ISDA [Master Agreement](https://prime.greeks.live/question/what-are-the-key-differences-between-a-prime-brokerage-agreement-and-an-isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) is a precise, multi-stage operational procedure. It demands a systematic approach to information gathering, model application, and documentation. For the Determining Party, executing this process correctly is not merely a matter of compliance; it is a critical exercise in [risk management](https://prime.greeks.live/area/risk-management/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite).

A flawed execution can lead to protracted legal disputes, reputational damage, and significant financial adjustments. The entire process must be conducted as if it will eventually be presented as evidence in a court of law, because it very well might be.

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## The Operational Playbook for Valuation

A firm’s internal playbook for executing a close-out should be a detailed, step-by-step guide that ensures consistency and adherence to the objective standard. This operational plan forms the backbone of a defensible valuation.

- **Initiation and Team Assembly** ▴ Upon an [Early Termination Date](https://prime.greeks.live/area/early-termination-date/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) being designated, a dedicated team should be assembled. This team typically includes personnel from legal, risk management, the relevant trading desk, and operations. The first action is to formally log the event and establish a clear timeline and set of responsibilities.

- **Information Gathering Protocol** ▴ The team must systematically gather all relevant valuation information as of the [Early Termination](https://prime.greeks.live/area/early-termination/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) Date. This involves a documented sweep for:

<li>**External Quotes** ▴ Formally requesting quotes for replacement transactions from a pre-approved list of dealers. All communications, including the timing of requests and responses (or non-responses), must be logged.

- **Market Data Capture** ▴ Taking a snapshot of all relevant market data points from primary vendor sources (e.g. composite feeds from Bloomberg or Refinitiv). This includes interest rate curves, FX rates, volatility surfaces, credit default swap spreads, and any other inputs required for valuation.

- **Internal Model State** ▴ Freezing the version of the internal pricing model used and documenting all its configuration settings and inputs. This ensures the valuation can be replicated later.

</li>
- **[Valuation Hierarchy](https://prime.greeks.live/area/valuation-hierarchy/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) Application** ▴ The team must apply a pre-defined valuation hierarchy. For example, the policy may state that if three or more firm quotes are available from approved dealers, their average will be the primary valuation. If not, the process moves to a model-based valuation using the captured market data. If market data is unreliable or unavailable (e.g. for a highly illiquid product), the process may allow for the use of internal models with clear justification. This hierarchy must be commercially reasonable itself.

- **Calculation and Internal Verification** ▴ The Close-out Amount for each terminated transaction is calculated according to the established protocol. A separate individual or group, such as a product control or independent valuation team, should then verify the calculation. This four-eyes check is a critical control.

- **Aggregation and Final Amount** ▴ All individual Close-out Amounts are aggregated, and any [unpaid amounts](https://prime.greeks.live/area/unpaid-amounts/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) are factored in to determine the final Early Termination Amount owed by one party to the other, as per the formula in Section 6(e) of the agreement.

- **Creation of the Close-Out Dossier** ▴ All evidence must be compiled into a single dossier. This includes emails, recorded phone calls, screenshots of market data, model outputs, meeting minutes, and a summary memorandum explaining the process followed and the justifications for key decisions. This dossier is the primary defense against any future challenge.

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## What Documentation Is Required to Substantiate a Valuation?

The evidentiary record is the most critical output of the execution phase. A valuation may be economically sound, but without a clear and contemporaneous record of how it was produced, it is vulnerable to attack. The documentation must tell a complete story.

| Document Category | Content and Purpose | Example Artifacts |
| --- | --- | --- |
| Procedural Record | Chronicles the actions taken by the Determining Party. It establishes the timeline and demonstrates a systematic, controlled process. | Meeting minutes, task logs, internal policy and procedure manuals, a final summary memorandum detailing the steps taken. |
| Market Evidence | Contains all external data used to ground the valuation in objective reality. This is the core evidence of commercial reasonableness. | Emails requesting quotes, screenshots of dealer runs, time-stamped data from Bloomberg/Refinitiv, reports from valuation agents. |
| Model and Analytical Evidence | Justifies any model-based calculations. It provides transparency into the internal methodologies used. | Model validation reports, back-testing results, documentation of model inputs and assumptions, source code or clear algorithmic descriptions. |
| Decision Justification | Explains the ‘why’ behind key judgments, such as the decision to exclude an outlier quote or to rely on an internal model. | A formal memo explaining why certain market data was deemed unreliable, or why a specific set of dealers was chosen for quotations. |

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## References

- Lehman Brothers Special Financing Inc. v National Power Corporation & Anor EWHC 487 (Comm).

- International Capital Market Association. “Derivatives Laws and Regulations Close-out Under the 1992 and 2002 ISDA Master Agreements 2025.” ICLG.com, 2024.

- International Swaps and Derivatives Association. 2002 ISDA Master Agreement. ISDA, 2002. Filed with the U.S. Securities and Exchange Commission.

- Freshfields Bruckhaus Deringer LLP. “2002 ISDA® Master Agreement ▴ close-out amount.” Thomson Reuters Practical Law, 3 May 2018.

- International Swaps and Derivatives Association. “ISDA Close-out Amount Protocol.” ISDA.org, 27 February 2009.

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## Reflection

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## Integrating the Standard into Your Operational DNA

The analysis of “[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)” ultimately moves beyond legal interpretation and into the realm of institutional integrity. Viewing this standard as a mere compliance hurdle is a strategic error. Instead, consider it a diagnostic tool for assessing the robustness of your firm’s entire risk management and valuation architecture. How would your procedures stand up to the scrutiny applied in the Lehman v.

NPC case? Is your documentation a contemporaneous record of a disciplined process, or is it an after-the-fact justification?

The capacity to execute a defensible close-out is a reflection of your firm’s operational DNA. It speaks to the quality of your models, the clarity of your internal policies, the discipline of your record-keeping, and the culture of accountability within your teams. Building a superior operational framework is not an abstract goal; it is a tangible advantage that manifests in moments of market stress.

The knowledge and procedures discussed here are components of a larger system of intelligence. The ultimate question is how you integrate them into your own framework to build a more resilient and effective operational platform.

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## Glossary

<a href="https://prime.greeks.live/question/what-constitutes-a-commercially-reasonable-procedure-in-a-close-out-scenario/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Commercially Reasonable Procedure

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

## 2002 Isda Master Agreement

Meaning ▴ The 2002 ISDA Master Agreement represents a standardized bilateral contractual framework for over-the-counter (OTC) derivatives transactions. </a><a href="https://prime.greeks.live/question/what-role-do-internal-valuation-models-play-in-a-defensible-close-out-calculation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Defensible Valuation Process

Internal valuation models are the core system for translating market data into a defensible close-out figure under ISDA protocols. </a><a href="https://prime.greeks.live/question/how-did-the-lehman-brothers-bankruptcy-influence-the-adoption-of-the-2002-isda-close-out-amount-protocol/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Lehman Brothers Special Financing

The Lehman bankruptcy catalyzed the adoption of the 2002 ISDA Protocol by proving the systemic risk of subjective, crisis-unfit valuations. </a><a href="https://prime.greeks.live/question/how-do-national-safe-harbor-provisions-protect-financial-contracts/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A modular component, resembling an RFQ gateway, with multiple connection points, intersects a high-fidelity execution pathway. This pathway extends towards a deep, optimized liquidity pool, illustrating robust market microstructure for institutional digital asset derivatives trading and atomic settlement](https://options.greeks.live/wp-content/uploads/2025/07/rfq-protocol-layer-connecting-institutional-digital-asset-liquidity-pools.jpg)

## National Power Corporation

National safe harbor provisions exempt qualified financial contracts from the automatic stay in bankruptcy, preserving systemic stability. </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">
![Angular metallic structures precisely intersect translucent teal planes against a dark backdrop. This embodies an institutional-grade Digital Asset Derivatives platform's market microstructure, signifying high-fidelity execution via RFQ protocols](https://options.greeks.live/wp-content/uploads/2025/07/digital-asset-derivatives-rfq-high-fidelity-execution-system-architecture.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/area/good-faith/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sharp diagonal beam symbolizes an RFQ protocol for institutional digital asset derivatives, piercing latent liquidity pools for price discovery. Central orbs represent atomic settlement and the Principal's core trading engine, ensuring best execution and alpha generation within market microstructure](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-rfq-protocol-for-institutional-digital-asset-derivatives-best-execution.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/area/close-out-amount/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Intersecting translucent planes with central metallic nodes symbolize a robust Institutional RFQ framework for Digital Asset Derivatives. This architecture facilitates multi-leg spread execution, optimizing price discovery and capital efficiency within market microstructure](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-execution-framework.jpg)

## Close-Out Amount

Meaning ▴ The Close-Out Amount represents the definitive financial value required to terminate a derivatives contract or position, typically calculated upon a default event or a pre-defined termination trigger. </a><a href="https://prime.greeks.live/area/valuation-inputs/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A central core represents a Prime RFQ engine, facilitating high-fidelity execution. Transparent, layered structures denote aggregated liquidity pools and multi-leg spread strategies](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-rfq-engine-for-institutional-digital-asset-derivatives-execution.jpg)

## Valuation Inputs

Meaning ▴ Valuation Inputs represent the granular data points and parameters essential for determining the fair market value of financial instruments, particularly digital asset derivatives. </a><a href="https://prime.greeks.live/question/how-does-the-proliferation-of-last-look-affect-overall-price-discovery-and-market-stability-in-the-fx-market/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sleek, futuristic apparatus featuring a central spherical processing unit flanked by dual reflective surfaces and illuminated data conduits. This system visually represents an advanced RFQ protocol engine facilitating high-fidelity execution and liquidity aggregation for institutional digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-digital-asset-options-rfq-liquidity-aggregation-interface.jpg)

## Relevant Market

Last look re-architects FX execution by granting liquidity providers a risk-management option that reshapes price discovery and market stability. </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 device with central lens, symbolizing Prime RFQ Intelligence Layer for institutional digital asset derivatives. Facilitates RFQ protocol optimization, driving price discovery for Bitcoin options and Ethereum futures](https://options.greeks.live/wp-content/uploads/2025/07/high-fidelity-institutional-rfq-protocol-engine-for-digital-asset-derivatives-options-trading.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/area/internal-model/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![The image displays a central circular mechanism, representing the core of an RFQ engine, surrounded by concentric layers signifying market microstructure and liquidity pool aggregation. A diagonal element intersects, symbolizing direct high-fidelity execution pathways for digital asset derivatives, optimized for capital efficiency and best execution through a Prime RFQ architecture](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-architecture-powering-institutional-digital-asset-derivatives-high-fidelity-execution-via-optimized-rfq-protocols.jpg)

## Internal Model

Meaning ▴ An Internal Model is a proprietary computational construct within an institutional system designed to quantify specific market dynamics, risk exposures, or counterparty behaviors based on an organization's unique data, assumptions, and strategic objectives. </a><a href="https://prime.greeks.live/question/what-is-the-role-of-expert-determination-in-resolving-complex-derivatives-valuation-disputes/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Abstract visualization of an institutional-grade digital asset derivatives execution engine. Its segmented core and reflective arcs depict advanced RFQ protocols, real-time price discovery, and dynamic market microstructure, optimizing high-fidelity execution and capital efficiency for block trades within a Principal's framework](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-engine-interface.jpg)

## Valuation Process

Expert determination is a contractually-defined protocol for resolving derivatives valuation disputes through binding, specialized technical analysis. </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 robust institutional framework composed of interlocked grey structures, featuring a central dark execution channel housing luminous blue crystalline elements representing deep liquidity and aggregated inquiry. A translucent teal prism symbolizes dynamic digital asset derivatives and the volatility surface, showcasing precise price discovery within a high-fidelity execution environment, powered by the Prime RFQ](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-intelligence-layer.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/market-quotation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Modular circuit panels, two with teal traces, converge around a central metallic anchor. This symbolizes core architecture for institutional digital asset derivatives, representing a Principal's Prime RFQ framework, enabling high-fidelity execution and RFQ protocols](https://options.greeks.live/wp-content/uploads/2025/08/institutional-digital-asset-derivatives-rfq-protocol-engine-prime-os.jpg)

## Market Quotation

Meaning ▴ A market quotation represents the current executable bid and ask prices for a specific financial instrument, typically accompanied by the corresponding tradable sizes or market depth at various price levels. </a><a href="https://prime.greeks.live/area/firm-quotes/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sophisticated system's core component, representing an Execution Management System, drives a precise, luminous RFQ protocol beam. This beam navigates between balanced spheres symbolizing counterparties and intricate market microstructure, facilitating institutional digital asset derivatives trading, optimizing price discovery, and ensuring high-fidelity execution within a prime brokerage framework](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-execution-engine-10.jpg)

## Firm Quotes

Meaning ▴ A Firm Quote represents a committed, executable price and size at which a market participant is obligated to trade for a specified duration. </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">
![A luminous digital asset core, symbolizing price discovery, rests on a dark liquidity pool. Surrounding metallic infrastructure signifies Prime RFQ and high-fidelity execution](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-core-high-fidelity-execution-engine-for-principal-trading.jpg)

## Market Data

Meaning ▴ Market Data comprises the real-time or historical pricing and trading information for financial instruments, encompassing bid and ask quotes, last trade prices, cumulative volume, and order book depth. </a><a href="https://prime.greeks.live/area/internal-models/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A multi-layered, sectioned sphere reveals core institutional digital asset derivatives architecture. Translucent layers depict dynamic RFQ liquidity pools and multi-leg spread execution](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-market-microstructure-1.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/defensible-valuation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A central RFQ aggregation engine radiates segments, symbolizing distinct liquidity pools and market makers. This depicts multi-dealer RFQ protocol orchestration for high-fidelity price discovery in digital asset derivatives, highlighting diverse counterparty risk profiles and algorithmic pricing grids](https://options.greeks.live/wp-content/uploads/2025/07/centralized-digital-asset-rfq-orchestration-for-multi-venue-liquidity-aggregation-and-high-fidelity-execution-across-diverse-counterparties.jpg)

## Defensible Valuation

Meaning ▴ Defensible Valuation refers to a valuation methodology rigorously constructed to withstand scrutiny from auditors, regulators, and sophisticated counterparties, characterized by transparent inputs, validated models, and verifiable data trails. </a><a href="https://prime.greeks.live/question/what-are-the-key-differences-between-a-prime-brokerage-agreement-and-an-isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![The image features layered structural elements, representing diverse liquidity pools and market segments within a Principal's operational framework. A sharp, reflective plane intersects, symbolizing high-fidelity execution and price discovery via private quotation protocols for institutional digital asset derivatives, emphasizing atomic settlement nodes](https://options.greeks.live/wp-content/uploads/2025/07/systemic-interplay-for-institutional-digital-asset-derivatives-execution-via-advanced-rfq-protocols.jpg)

## Master Agreement

A Prime Brokerage Agreement is a centralized service contract; an ISDA Master Agreement is a standardized bilateral derivatives protocol. </a><a href="https://prime.greeks.live/area/risk-management/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Central axis, transparent geometric planes, coiled core. Visualizes institutional RFQ protocol for digital asset derivatives, enabling high-fidelity execution of multi-leg options spreads and price discovery](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-execution-engine-2.jpg)

## Risk Management

Meaning ▴ Risk Management is the systematic process of identifying, assessing, and mitigating potential financial exposures and operational vulnerabilities within an institutional trading framework. </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">
![Metallic, reflective components depict high-fidelity execution within market microstructure. A central circular element symbolizes an institutional digital asset derivative, like a Bitcoin option, processed via RFQ protocol](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-high-fidelity-execution.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/early-termination/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A dark, institutional grade metallic interface displays glowing green smart order routing pathways. A central Prime RFQ node, with latent liquidity indicators, facilitates high-fidelity execution of digital asset derivatives through RFQ protocols and private quotation](https://options.greeks.live/wp-content/uploads/2025/08/prime-os-institutional-digital-asset-derivatives-rfq-liquidity-node.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/valuation-hierarchy/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Abstract geometric forms depict a sophisticated Principal's operational framework for institutional digital asset derivatives. Sharp lines and a control sphere symbolize high-fidelity execution, algorithmic precision, and private quotation within an advanced RFQ protocol](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-architecture-for-optimized-digital-asset-derivatives-rfq-protocols.jpg)

## Valuation Hierarchy

Meaning ▴ The Valuation Hierarchy defines a structured, prioritized sequence of methodologies and data sources utilized to determine the fair value of digital assets within an institutional framework. </a><a href="https://prime.greeks.live/area/unpaid-amounts/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sophisticated institutional digital asset derivatives platform unveils its core market microstructure. Intricate circuitry powers a central blue spherical RFQ protocol engine on a polished circular surface](https://options.greeks.live/wp-content/uploads/2025/08/institutional-digital-asset-derivatives-prime-os-unveiling-rfq-protocol-engine-market-microstructure-for-optimal-price-discovery-and-high-fidelity-execution.jpg)

## Unpaid Amounts

Meaning ▴ Unpaid Amounts refer to financial obligations within a digital asset derivatives framework that have matured or been triggered by specific protocol conditions but remain unsettled on the Prime Operating System's ledger. </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">
![Sleek, futuristic metallic components showcase a dark, reflective dome encircled by a textured ring, representing a Volatility Surface for Digital Asset Derivatives. This Prime RFQ architecture enables High-Fidelity Execution and Private Quotation via RFQ Protocols for Block Trade liquidity](https://options.greeks.live/wp-content/uploads/2025/07/advanced-institutional-digital-asset-derivatives-platform-architecture-for-high-fidelity-rfq-protocol-execution-and-price-discovery.jpg)

## Commercially Reasonable Procedures

Courts interpret "commercially reasonable procedures" as an objective, evidence-based standard for valuing derivative close-outs. </a>

**Tags:** [Lehman V NPC](https://options.greeks.live/area/lehman-v-npc/), [Derivatives Termination](https://options.greeks.live/area/derivatives-termination/), [Determining Party](https://options.greeks.live/area/determining-party/), [Market Quotation](https://options.greeks.live/area/market-quotation/), [Unpaid Amounts](https://options.greeks.live/area/unpaid-amounts/), [Good Faith](https://options.greeks.live/area/good-faith/)	

## Discover More

- 
### [How Does the 2002 ISDA Master Agreement Change the Standard for Valuation?](https://options.greeks.live/question/how-does-the-2002-isda-master-agreement-change-the-standard-for-valuation/)
![A diagonal composition contrasts a blue intelligence layer, symbolizing market microstructure and volatility surface, with a metallic, precision-engineered execution engine. This depicts high-fidelity execution for institutional digital asset derivatives via RFQ protocols, ensuring atomic settlement.](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-rfq-for-institutional-digital-asset-derivatives-execution.jpg)

The 2002 ISDA Master Agreement replaced rigid valuation mechanics with a flexible, commercially reasonable 'Close-out Amount' standard.

- 
### [In What Ways Does the Close out Amount Provision Affect a Firm’s Internal Valuation and Risk Management Systems?](https://options.greeks.live/question/in-what-ways-does-the-close-out-amount-provision-affect-a-firms-internal-valuation-and-risk-management-systems/)
![A central metallic bar, representing an RFQ block trade, pivots through translucent geometric planes symbolizing dynamic liquidity pools and multi-leg spread strategies. This illustrates a Principal's operational framework for high-fidelity execution and atomic settlement within a sophisticated Crypto Derivatives OS, optimizing private quotation workflows.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-execution-facilitating-high-fidelity-price-discovery-and-optimal-capital-efficiency-within-advanced-market-microstructure.jpg)

The Close-Out Amount provision forces a firm's systems to pivot from dynamic valuation to a static, evidence-based replacement cost protocol.

- 
### [How Does the Close-Out Amount Differ from the Previous Loss Calculation?](https://options.greeks.live/question/how-does-the-close-out-amount-differ-from-the-previous-loss-calculation/)
![A focused view of a robust, beige cylindrical component with a dark blue internal aperture, symbolizing a high-fidelity execution channel. This element represents the core of an RFQ protocol system, enabling bespoke liquidity for Bitcoin Options and Ethereum Futures, minimizing slippage and information leakage.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-grade-digital-asset-derivatives-rfq-engine-core-precision-component.jpg)

The Close-out Amount is a market-based replacement cost, while Loss is a party's good-faith assessment of its own damages.

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

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

- 
### [What Are the Primary Legal Risks When Determining a Derivatives Close out Amount?](https://options.greeks.live/question/what-are-the-primary-legal-risks-when-determining-a-derivatives-close-out-amount/)
![A central star-like form with sharp, metallic spikes intersects four teal planes, on black. This signifies an RFQ Protocol's precise Price Discovery and Liquidity Aggregation, enabling Algorithmic Execution for Multi-Leg Spread strategies, mitigating Counterparty Risk, and optimizing Capital Efficiency for institutional Digital Asset Derivatives.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-price-discovery-and-execution.jpg)

Determining a derivatives close-out amount is a legally fraught valuation of replacement costs, governed by a "commercially reasonable" standard.

- 
### [What Constitutes a Commercially Reasonable Procedure in a Close-Out Scenario?](https://options.greeks.live/question/what-constitutes-a-commercially-reasonable-procedure-in-a-close-out-scenario/)
![Glowing teal conduit symbolizes high-fidelity execution pathways and real-time market microstructure data flow for digital asset derivatives. Smooth grey spheres represent aggregated liquidity pools and robust counterparty risk management within a Prime RFQ, enabling optimal price discovery.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-market-microstructure-prime-os.jpg)

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

- 
### [Why Might a Firm Still Choose to Use the 1992 ISDA Framework despite the 2002 Updates?](https://options.greeks.live/question/why-might-a-firm-still-choose-to-use-the-1992-isda-framework-despite-the-2002-updates/)
![A sharp, multi-faceted crystal prism, embodying price discovery and high-fidelity execution, rests on a structured, fan-like base. This depicts dynamic liquidity pools and intricate market microstructure for institutional digital asset derivatives via RFQ protocols, powered by an intelligence layer for private quotation.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-price-discovery-execution.jpg)

A firm's use of the 1992 ISDA is a calculated choice prioritizing the deep legal certainty of established precedent over newer mechanics.

- 
### [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.

- 
### [What Are the Key Components of a Defensible Close-Out Amount Calculation?](https://options.greeks.live/question/what-are-the-key-components-of-a-defensible-close-out-amount-calculation/)
![A meticulously engineered mechanism showcases a blue and grey striped block, representing a structured digital asset derivative, precisely engaged by a metallic tool. This setup illustrates high-fidelity execution within a controlled RFQ environment, optimizing block trade settlement and managing counterparty risk through robust market microstructure. It highlights a Prime RFQ intelligence layer.](https://options.greeks.live/wp-content/uploads/2025/08/precision-engineered-institutional-digital-asset-derivatives-rfq-execution.jpg)

A defensible close-out amount is the auditable, system-driven calculation of the economic cost to replace a terminated derivative.

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---

**Original URL:** https://options.greeks.live/question/what-constitutes-a-commercially-reasonable-procedure-under-the-2002-isda-master-agreement-2/
