# What Differentiates the 1992 and 2002 ISDA Close-Out Valuation Standards? ▴ Question

**Published:** 2025-07-31
**Categories:** Question

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## Concept

The transition from the 1992 to the [2002 ISDA Master Agreement](https://prime.greeks.live/area/2002-isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) represents a fundamental recalibration of the core risk management architecture for the global derivatives market. This evolution was not a matter of minor textual amendments. It was a systemic upgrade to the market’s primary operating system for handling counterparty default, driven by the hard-won lessons of financial crises and the imperative to create a more robust, transparent, and legally defensible [close-out process](https://prime.greeks.live/question/what-constitutes-a-defensible-process-for-documenting-close-out-calculations/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite).

At the heart of this transformation lies the valuation standard applied upon the termination of transactions, a mechanism that functions as the system’s ultimate arbiter of value in moments of extreme stress. Understanding the differentiation between these two standards is to understand a critical shift in the philosophy of financial risk management itself.

The 1992 ISDA framework operated on a principle of qualified subjectivity. Its close-out calculation methodologies, “Market Quotation” and “Loss,” provided the [non-defaulting party](https://prime.greeks.live/area/non-defaulting-party/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) with considerable discretion. Market Quotation involved sourcing quotes from reference market-makers for replacement trades, a process that could become unreliable or impossible in a turbulent or illiquid market. The alternative, “Loss,” allowed the [determining party](https://prime.greeks.live/area/determining-party/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) to calculate its total losses and costs based on a good faith, reasonable determination.

This standard was largely interpreted by courts as a test of rationality, meaning the determination could stand as long as it was not so unreasonable that no sensible party in that position could have arrived at it. This created a wide latitude for the determining party, a flexibility that could also lead to disputes and uncertainty over the defensibility of the final [close-out amount](https://prime.greeks.live/area/close-out-amount/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite).

> The core distinction between the 1992 and 2002 ISDA close-out standards is the deliberate evolution from a subjective test of rationality to a mandated standard of objective commercial reasonableness.

The 2002 ISDA introduced the unified concept of the “Close-Out Amount.” This single, more holistic measure was designed to remedy the ambiguities of its predecessor. The defining characteristic of the 2002 standard is its explicit requirement for [objective commercial reasonableness](https://prime.greeks.live/question/how-does-a-court-objectively-assess-commercial-reasonableness-in-a-derivatives-dispute/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). The determining party must use “[commercially reasonable procedures](https://prime.greeks.live/question/how-do-courts-interpret-commercially-reasonable-procedures-in-close-out-amount-calculations/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) to produce a commercially reasonable result.” This is a dual-pronged obligation that elevates the standard significantly.

The process itself must be sound, and the outcome must be justifiable by external, objective market metrics. This change was a direct response to the market’s need for greater certainty and fairness, reducing the potential for a non-defaulting party to arrive at a self-serving valuation that, while perhaps rational, might not be [commercially reasonable](https://prime.greeks.live/area/commercially-reasonable/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) in the eyes of an independent observer or a court.

This shift reflects a maturation of the derivatives market. It acknowledges that in a systemic crisis, the integrity of the close-out process is paramount. By moving to an objective standard, the 2002 ISDA sought to increase the predictability of outcomes, reduce the likelihood of protracted legal challenges, and ultimately bolster confidence in the enforceability of close-out netting, which is the bedrock of [counterparty risk](https://prime.greeks.live/area/counterparty-risk/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) mitigation in the derivatives world. The differentiation is therefore a story of moving from a framework that relied heavily on the [good faith](https://prime.greeks.live/area/good-faith/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) of the individual participant to one that enforces a market-wide standard of objective conduct.

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## Strategy

The strategic impetus behind the development of the 2002 [ISDA Master Agreement](https://prime.greeks.live/area/isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) was a direct reaction to the structural vulnerabilities exposed in the 1992 framework by a decade of market turbulence and legal scrutiny. The 1990s and early 2000s were punctuated by events that tested the limits of existing financial architecture, revealing that the discretion afforded by the 1992 Agreement could become a liability in times of systemic stress. The strategic objective of the 2002 revisions was to forge a more resilient and predictable mechanism for managing counterparty default, one that would stand up to the pressures of a major market dislocation and the exacting review of judicial systems.

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## Drivers for Evolution Market Crises and Legal Precedents

The financial landscape between 1992 and 2002 was transformative. The 1998 collapse of Long-Term Capital Management (LTCM) was a particularly stark warning. The hedge fund’s failure threatened to trigger a cascade of defaults across its numerous counterparties, highlighting the critical importance of orderly and efficient close-outs. In such a stressed environment, the [1992 ISDA](https://prime.greeks.live/area/1992-isda/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)’s reliance on obtaining “Market Quotations” from a limited number of dealers proved problematic.

When markets are volatile and illiquid, reference dealers may be unwilling or unable to provide quotes for replacement transactions, rendering this valuation method impractical. This forced reliance on the “[Loss](https://prime.greeks.live/area/loss/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)” method, whose subjective nature could lead to significant disputes over the final close-out figures, further exacerbating market instability.

Legal challenges to close-out calculations under the 1992 Agreement also informed the strategic direction of the 2002 revisions. Courts in various jurisdictions were called upon to interpret what constituted a “reasonable” determination of loss in “good faith.” This led to the establishment of the “rationality” standard, often associated with the English Wednesbury test of reasonableness. This standard is relatively low, requiring only that the determining party’s calculation is not one that no reasonable party would make.

While this provided a degree of legal certainty, it also meant that a valuation could be legally sound even if it was commercially aggressive or resulted in a windfall for the non-defaulting party. Market participants recognized that this potential for divergent and disputed valuations posed a systemic risk.

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## The Strategic Shift to Objectivity

The core strategy of the 2002 ISDA was to replace the subjective “rationality” test with a more stringent, objective standard. The introduction of the “Close-Out Amount” was the centerpiece of this strategy. This new definition required the determining party 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/how-do-courts-interpret-commercially-reasonable-procedures-in-close-out-amount-calculations/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite).

This was a deliberate move to align the close-out process with how a neutral, informed third party would assess the situation. The goal was to create a valuation that was not just defensible from the perspective of the determining party, but was demonstrably fair and grounded in observable market realities.

Another key strategic change was the elimination of the “[First Method](https://prime.greeks.live/area/first-method/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)” for payments. The 1992 ISDA allowed parties to choose between the “First Method” (one-way payments) and the “Second Method” ([two-way payments](https://prime.greeks.live/area/two-way-payments/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)). Under the First Method, if the net value of the terminated trades was in favor of the defaulting party, the non-defaulting party was not required to pay that amount. This punitive approach was widely seen as inequitable and was rarely agreed to in practice.

Its existence, however, represented a potential trap for the unwary. The [2002 ISDA](https://prime.greeks.live/area/2002-isda/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) strategically eliminated this option, mandating two-way payments in all circumstances. This ensured that the close-out process was purely compensatory, aiming to restore the non-defaulting party to the economic position it would have been in had the contract been performed, rather than penalizing the defaulter. This move enhanced the perceived fairness and commerciality of the Agreement, making it more attractive to a wider range of market participants.

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## How Does the Valuation Approach Affect Counterparty Risk Assessment?

The shift in valuation standards has profound implications for how financial institutions assess and manage counterparty risk. The 2002 ISDA’s framework provides a clearer and more predictable path to recovery in the event of a default, which can be factored into credit risk models with a higher degree of confidence. The table below outlines the key strategic differences and their implications.

| Provision | 1992 ISDA Standard | 2002 ISDA Standard | Strategic Implication |
| --- | --- | --- | --- |
| Valuation Methodology | Choice between “Market Quotation” (requires dealer quotes) and “Loss” (good faith estimate). | A single “Close-Out Amount” determined by the non-defaulting party. | Simplifies the process and removes ambiguity. The focus shifts from the method of calculation to the reasonableness of the outcome. |
| Legal Standard | “Reasonably determines in good faith,” interpreted by courts as a test of rationality. | “Use commercially reasonable procedures in order to produce a commercially reasonable result.” | Raises the bar for the determining party, requiring an objective, defensible calculation that reduces the likelihood of disputes and potential windfalls. |
| Payment Symmetry | Allowed for election of “First Method” (one-way payments) or “Second Method” (two-way payments). | Mandates two-way payments exclusively. | Enhances fairness and commerciality, ensuring the close-out is compensatory, not punitive. This promotes greater market stability. |
| Consideration of Credit | The “value clean” approach often assumed, ignoring the creditworthiness of the counterparty in replacement cost calculations. | Explicitly allows for the consideration of the counterparty’s creditworthiness and the economic effect of termination rights. | Produces a more realistic and accurate valuation that reflects the true economic loss at the time of termination. |
| Force Majeure | Not included as a specific Termination Event. | Introduces Illegality and Force Majeure as distinct Termination Events with specific valuation rules. | Provides a contractual framework for dealing with external, unforeseen events, preventing them from automatically triggering a default scenario. |

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## Execution

The execution of a close-out under an 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 operational procedure with significant financial consequences. The differences in the execution protocols between the 1992 and 2002 versions are substantial, reflecting the philosophical shift from subjective determination to objective [commercial reasonableness](https://prime.greeks.live/area/commercial-reasonableness/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). A detailed analysis of these protocols reveals how the 2002 Agreement provides a more structured and disciplined framework for calculating the final settlement amount, placing a greater burden of proof on the party making the determination.

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## The 1992 Valuation Protocol Loss and Market Quotation

Under the 1992 ISDA, the non-defaulting party had to execute the close-out valuation by selecting one of two methods, which should have been specified in the Schedule to the Agreement ▴ “[Market Quotation](https://prime.greeks.live/area/market-quotation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)” or “Loss.”

The “Market Quotation” method was a procedurally rigid approach. Its execution required the determining party to obtain quotations from at least three leading dealers in the relevant market (Reference Market-makers) for a transaction that would replace the terminated one. The Settlement Amount would then be based on the arithmetic mean of these quotations. The operational challenges here were significant:

- **Market Accessibility** In a disrupted market, Reference Market-makers might refuse to provide quotes or provide them at commercially unrealistic levels.

- **Basis Risk** The replacement transaction for which quotes were sought had to be on the same material terms as the terminated transaction, which could be difficult for highly customized or exotic derivatives.

- **Timing** The process of soliciting and receiving multiple quotes could be time-consuming, a critical issue in a fast-moving default scenario.

If obtaining a sufficient number of quotes was not possible, or if the parties had selected “Loss” from the outset, the determining party would calculate its total losses and costs (or gains) resulting from the termination. This “Loss” calculation was governed by the standard of being “reasonably determined in good faith.” While this offered flexibility, it also created operational ambiguity. The determining party had to document its methodology, but the legal test was one of rationality.

This meant its calculation would likely be upheld unless it was so flawed that no reasonable party could have reached it. This provided a wide margin for the determining party’s judgment.

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## The 2002 Valuation Protocol the Close-Out Amount

The 2002 ISDA streamlines the execution by introducing a single, comprehensive valuation measure ▴ the “Close-Out Amount.” This is defined as the amount of losses or costs that are or would be incurred in replacing, or providing the economic equivalent of, the material terms of the terminated transactions. The execution of this calculation is governed by a strict, two-part mandate ▴ the determining party must use commercially reasonable procedures to produce a commercially [reasonable result](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).

> The 2002 ISDA’s Close-Out Amount fundamentally alters execution by demanding a valuation that is not only internally logical but also externally justifiable against objective market standards.

This creates a higher operational burden. The determining party must be able to demonstrate that both its process and its final number are objectively reasonable. The procedures might include obtaining quotes from third parties, consulting with internal valuation experts, using sophisticated pricing models, or considering relevant market data. The key is that the chosen procedures must be commercially sound and appropriate for the specific transaction and prevailing market conditions.

The table below breaks down the components of the close-out calculation and how their treatment differs between the two agreements, highlighting the more granular and realistic approach of the 2002 version.

| Calculation Component | 1992 ISDA Execution | 2002 ISDA Execution | Operational Impact |
| --- | --- | --- | --- |
| Core Valuation | Based on either the average of dealer quotes (Market Quotation) or a good faith estimate of loss (Loss). | A holistic calculation of the costs of entering into an economic equivalent of the terminated trades. | The 2002 standard is more flexible in method but stricter in its required outcome, demanding a result that is objectively reasonable. |
| Unpaid Amounts | Calculated and included in the final Settlement Amount. These are amounts that were due and payable before the Early Termination Date. | Treated similarly, calculated and factored into the final Early Termination Amount. | This aspect of the execution remains consistent, ensuring that past-due obligations are settled. |
| Creditworthiness of Counterparty | Generally not considered under the “value clean” interpretation of Market Quotation. The focus was on a risk-free replacement cost. | The definition of Close-Out Amount explicitly allows for the consideration of the credit quality of the determining party when obtaining quotes for a replacement trade. | Leads to a more accurate, real-world valuation. A replacement trade with a highly creditworthy counterparty is more valuable than one with a less creditworthy one. |
| Termination Options | Often ignored in the valuation, assuming the trade would run to its scheduled maturity. | The economic effect of any termination or option rights within the terminated transaction must be included in the valuation. | This captures the true economic value of the contract, as valuable early termination rights are now properly priced into the close-out amount. |
| Legal and Other Costs | Recoverable as part of the “Loss” calculation or under a separate indemnity. | Explicitly included as costs that can be factored into the Close-Out Amount, as well as being covered by an indemnity for expenses. | Provides greater clarity and certainty that the non-defaulting party can recover the full costs associated with the default. |

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## What Are the Steps to Ensure a Defensible Close-Out Calculation?

For a non-defaulting party executing a close-out under the 2002 ISDA, creating a defensible calculation is a critical operational exercise. The following steps represent a robust procedure:

- **Immediate Documentation** From the moment an Event of Default occurs, maintain a detailed record of all actions taken, decisions made, and market data observed.

- **Internal and External Consultation** Engage with internal valuation teams and, where appropriate, seek indicative quotes or market data from external sources. This demonstrates a commercially reasonable procedure.

- **Consideration of All Factors** The valuation should explicitly account for all relevant economic factors, including the cost of replacement, unpaid amounts, the creditworthiness of the parties, and the value of any optionality.

- **Creation of a Valuation Statement** Prepare a detailed statement that explains the methodology used, the data relied upon, and how the final Close-Out Amount was determined. This statement is a key piece of evidence demonstrating the reasonableness of both the procedure and the result.

- **Consistency** Apply valuation methodologies consistently across all terminated transactions with the defaulting counterparty. Any deviation in methodology should be clearly justified by the specific nature of the transaction.

By adhering to such a disciplined process, the determining party can build a strong case that its calculation of the Close-Out Amount meets the high standard of [objective commercial](https://prime.greeks.live/question/how-does-a-court-objectively-assess-commercial-reasonableness-in-a-derivatives-dispute/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) reasonableness required by the 2002 ISDA Master Agreement, thereby minimizing the risk of a successful legal challenge.

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## References

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

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

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

- Fieldfisher. “Close-out Amount differs radically from Market Quotation and Loss.” 20 March 2013.

- Dechert LLP. “ISDA Master Agreement Close-out Provisions ▴ English Courts Highlight a Difference Between the 1992 and 2002 Versions.” 04 May 2018.

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## Reflection

The evolution from the 1992 to the 2002 ISDA valuation standard is a powerful illustration of how [financial market infrastructure](https://prime.greeks.live/area/financial-market-infrastructure/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) adapts and hardens in response to real-world stress. The knowledge of this transition prompts a critical question for any institution ▴ Does our own internal risk management and operational framework exhibit a similar capacity for evolution? The principles of objectivity, transparency, and commercial reasonableness embedded in the 2002 ISDA are not merely legal requirements for derivatives contracts; they are the hallmarks of a superior operational architecture.

Viewing this specific legal evolution as a case study in systemic improvement allows an organization to reflect on its own protocols. Are our internal valuation, risk, and [default management](https://prime.greeks.live/area/default-management/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) procedures built on subjective legacy assumptions, or are they aligned with the modern market’s demand for objective, evidence-based, and defensible standards?

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## Glossary

<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">
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## 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-constitutes-a-defensible-process-for-documenting-close-out-calculations/?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)

## Close-Out Process

A defensible close-out calculation is a systematically documented, objectively reasonable valuation process anchored in the ISDA framework. </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 symmetrical, multi-faceted digital structure, a liquidity aggregation engine, showcases translucent teal and grey panels. This visualizes diverse RFQ channels and market segments, enabling high-fidelity execution for institutional digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/precision-liquidity-aggregation-engine-for-digital-asset-derivatives-trading.jpg)

## Non-Defaulting Party

Meaning ▴ The Non-Defaulting Party designates the entity within a bilateral or multilateral contractual agreement, particularly in digital asset derivatives, that remains in full compliance with its obligations and terms when a counterparty fails to meet its own, thereby triggering a default event. </a><a href="https://prime.greeks.live/area/determining-party/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## 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/close-out-amount/?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)

## Close-Out Amount

Meaning ▴ The Close-Out Amount represents the definitive financial value required to terminate a derivatives contract or position, typically calculated upon a default event or a pre-defined termination trigger. </a><a href="https://prime.greeks.live/question/how-does-a-court-objectively-assess-commercial-reasonableness-in-a-derivatives-dispute/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Objective Commercial Reasonableness

A court objectively assesses commercial reasonableness by forensically examining the valuation process and its outcome against prevailing market standards. </a><a href="https://prime.greeks.live/question/how-do-courts-interpret-commercially-reasonable-procedures-in-close-out-amount-calculations/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A symmetrical, high-tech digital infrastructure depicts an institutional-grade RFQ execution hub. Luminous conduits represent aggregated liquidity for digital asset derivatives, enabling high-fidelity execution and atomic settlement](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-institutional-digital-asset-derivatives-rfq-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/area/commercially-reasonable/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Close-up reveals robust metallic components of an institutional-grade execution management system. Precision-engineered surfaces and central pivot signify high-fidelity execution for digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/institutional-grade-digital-asset-derivatives-rfq-execution-precision-optimizing-market-microstructure-for-best-execution-and-prime-os.jpg)

## 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/counterparty-risk/?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)

## Counterparty Risk

Meaning ▴ Counterparty risk denotes the potential for financial loss stemming from a counterparty's failure to fulfill its contractual obligations in a transaction. </a><a href="https://prime.greeks.live/area/good-faith/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Intersecting digital architecture with glowing conduits symbolizes Principal's operational framework. An RFQ engine ensures high-fidelity execution of Institutional Digital Asset Derivatives, facilitating block trades, multi-leg spreads](https://options.greeks.live/wp-content/uploads/2025/07/principal-digital-asset-derivatives-rfq-engine-high-fidelity-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/isda-master-agreement/?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)

## Isda Master Agreement

Meaning ▴ The ISDA Master Agreement is a standardized contractual framework for privately negotiated over-the-counter (OTC) derivatives transactions, establishing common terms for a wide array of financial instruments. </a><a href="https://prime.greeks.live/area/1992-isda/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Central teal-lit mechanism with radiating pathways embodies a Prime RFQ for institutional digital asset derivatives. It signifies RFQ protocol processing, liquidity aggregation, and high-fidelity execution for multi-leg spread trades, enabling atomic settlement within market microstructure via quantitative analysis](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-core-for-institutional-digital-asset-rfq-protocol-execution-engine.jpg)

## 1992 Isda

Meaning ▴ The 1992 ISDA Master Agreement represents a standardized contractual framework for privately negotiated over-the-counter (OTC) derivative transactions between two counterparties. </a><a href="https://prime.greeks.live/area/loss/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![An abstract visual depicts a central intelligent execution hub, symbolizing the core of a Principal's operational framework. Two intersecting planes represent multi-leg spread strategies and cross-asset liquidity pools, enabling private quotation and aggregated inquiry for institutional digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-rfq-protocol-engine-for-institutional-digital-asset-derivatives.jpg)

## Loss

Meaning ▴ Loss, within the context of institutional digital asset derivatives, signifies a negative variance between an asset's current valuation and its acquisition cost or a predefined benchmark, resulting in a reduction of capital or a negative impact on a portfolio's profit and loss (P&L) statement. </a><a href="https://prime.greeks.live/question/how-do-courts-interpret-commercially-reasonable-procedures-in-close-out-amount-calculations/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sleek, modular institutional grade system with glowing teal conduits represents advanced RFQ protocol pathways. This illustrates high-fidelity execution for digital asset derivatives, facilitating private quotation and efficient liquidity aggregation](https://options.greeks.live/wp-content/uploads/2025/08/institutional-digital-asset-derivatives-ecosystem-powering-high-fidelity-rfq-execution-and-optimal-liquidity-discovery.jpg)

## Commercially Reasonable Result

Courts interpret "commercially reasonable procedures" as an objective, evidence-based standard for valuing derivative close-outs. </a><a href="https://prime.greeks.live/question/how-do-courts-interpret-commercially-reasonable-procedures-in-close-out-amount-calculations/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sleek, light interface, a Principal's Prime RFQ, overlays a dark, intricate market microstructure. This represents institutional-grade digital asset derivatives trading, showcasing high-fidelity execution via RFQ protocols](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-prime-os-execution-system.jpg)

## Reasonable Procedures

Courts interpret "commercially reasonable procedures" as an objective, evidence-based standard for valuing derivative close-outs. </a><a href="https://prime.greeks.live/area/two-way-payments/?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)

## Two-Way Payments

Meaning ▴ Two-way payments represent a financial mechanism enabling bidirectional value transfer between two distinct entities or accounts within a single established channel. </a><a href="https://prime.greeks.live/area/first-method/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A specialized hardware component, showcasing a robust metallic heat sink and intricate circuit board, symbolizes a Prime RFQ dedicated hardware module for institutional digital asset derivatives. It embodies market microstructure enabling high-fidelity execution via RFQ protocols for block trade and multi-leg spread](https://options.greeks.live/wp-content/uploads/2025/08/prime-os-dedicated-hardware-for-institutional-rfq-execution.jpg)

## First Method

Meaning ▴ The "First Method" denotes the default or primary execution algorithm configured within an institutional digital asset trading system, representing a highly optimized, low-latency pathway designed for standard order flow. </a><a href="https://prime.greeks.live/area/2002-isda/?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

Meaning ▴ The 2002 ISDA Master Agreement constitutes a standardized contractual framework, widely adopted within the over-the-counter (OTC) derivatives market, establishing foundational terms for bilateral derivatives transactions. </a><a href="https://prime.greeks.live/area/commercial-reasonableness/?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)

## Commercial Reasonableness

Meaning ▴ Commercial reasonableness refers to the standard by which a transaction or action is judged to be consistent with prevailing market practices, industry norms, and sound business judgment, particularly concerning pricing, terms, and execution methodology. </a><a href="https://prime.greeks.live/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">
![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)

## 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/market-quotation/?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)

## Market Quotation

Meaning ▴ A market quotation represents the current executable bid and ask prices for a specific financial instrument, typically accompanied by the corresponding tradable sizes or market depth at various price levels. </a><a href="https://prime.greeks.live/question/how-do-courts-interpret-commercially-reasonable-procedures-in-close-out-amount-calculations/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A metallic disc intersected by a dark bar, over a teal circuit board. This visualizes Institutional Liquidity Pool access via RFQ Protocol, enabling Block Trade Execution of Digital Asset Options with High-Fidelity Execution](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-principal-operational-framework-market-microstructure-high-fidelity-execution.jpg)

## Reasonable Result

Courts interpret "commercially reasonable procedures" as an objective, evidence-based standard for valuing derivative close-outs. </a><a href="https://prime.greeks.live/question/how-does-a-court-objectively-assess-commercial-reasonableness-in-a-derivatives-dispute/?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)

## Objective Commercial

A court objectively assesses commercial reasonableness by forensically examining the valuation process and its outcome against prevailing market standards. </a><a href="https://prime.greeks.live/area/financial-market-infrastructure/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A macro view reveals the intricate mechanical core of an institutional-grade system, symbolizing the market microstructure of digital asset derivatives trading. Interlocking components and a precision gear suggest high-fidelity execution and algorithmic trading within an RFQ protocol framework, enabling price discovery and liquidity aggregation for multi-leg spreads on a Prime RFQ](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-system-precision-engine.jpg)

## Financial Market Infrastructure

Meaning ▴ Financial Market Infrastructure (FMI) designates the critical systems, rules, and procedures that facilitate the clearing, settlement, and recording of financial transactions, encompassing entities such as central counterparty clearing houses (CCPs), central securities depositories (CSDs), payment systems, and trade repositories. </a><a href="https://prime.greeks.live/area/default-management/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A transparent, multi-faceted component, indicative of an RFQ engine's intricate market microstructure logic, emerges from complex FIX Protocol connectivity. Its sharp edges signify high-fidelity execution and price discovery precision for institutional digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-engine-optimized-for-best-execution.jpg)

## Default Management

Meaning ▴ Default Management refers to the systematic processes and mechanisms implemented by central counterparties (CCPs) or prime brokers to mitigate and resolve situations where a clearing member or counterparty fails to meet its financial obligations, typically involving margin calls or settlement payments, thereby ensuring market stability and integrity within the digital asset derivatives ecosystem. </a>

**Tags:** [Loss](https://options.greeks.live/area/loss/), [Good Faith](https://options.greeks.live/area/good-faith/), [Commercial Reasonableness](https://options.greeks.live/area/commercial-reasonableness/), [Market Quotation](https://options.greeks.live/area/market-quotation/), [Close-Out Amount](https://options.greeks.live/area/close-out-amount/), [Default Management](https://options.greeks.live/area/default-management/)	

## Discover More

- 
### [What Are the Key Differences between the 1992 and 2002 ISDA Close out Calculation Methods?](https://options.greeks.live/question/what-are-the-key-differences-between-the-1992-and-2002-isda-close-out-calculation-methods/)
![Sleek, modular system component in beige and dark blue, featuring precise ports and a vibrant teal indicator. This embodies Prime RFQ architecture enabling high-fidelity execution of digital asset derivatives through bilateral RFQ protocols, ensuring low-latency interconnects, private quotation, institutional-grade liquidity, and atomic settlement.](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-rfq-system-interface-for-digital-asset-derivatives-execution.jpg)

The 2002 ISDA replaces the 1992's optional methods with a single, objectively reasonable "Close-out Amount."

- 
### [What Is the Difference between the 1992 and 2002 Isda Close out Provisions?](https://options.greeks.live/question/what-is-the-difference-between-the-1992-and-2002-isda-close-out-provisions-2/)
![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)

The 2002 ISDA replaced the 1992 version's subjective close-out methods with a single, objectively reasonable valuation protocol.

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

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

- 
### [Can a Determining Party Ever Revise a Close out Amount Calculation Once It Has Been Issued?](https://options.greeks.live/question/can-a-determining-party-ever-revise-a-close-out-amount-calculation-once-it-has-been-issued/)
![Abstractly depicting an Institutional Grade Crypto Derivatives OS component. Its robust structure and metallic interface signify precise Market Microstructure for High-Fidelity Execution of RFQ Protocol and Block Trade orders. The angular teal plane represents a transparent Liquidity Pool driving Price Discovery and Atomic Settlement.](https://options.greeks.live/wp-content/uploads/2025/07/principals-integrated-crypto-derivatives-rfq-protocol-architecture.jpg)

A Determining Party's ability to revise a Close-Out Amount is a conditional protocol, activated only by manifest error or a breach of good faith.

- 
### [Why Was the First Method of Payment Abolished in the 2002 ISDA Agreement?](https://options.greeks.live/question/why-was-the-first-method-of-payment-abolished-in-the-2002-isda-agreement/)
![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. It embodies precise price discovery, multi-leg spread processing, and atomic settlement within a Prime RFQ framework.](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-digital-asset-options-rfq-liquidity-aggregation-interface.jpg)

The First Method was abolished because its "walkaway" clause created systemic risk and was legally unenforceable in bankruptcy.

- 
### [Can a Determining Party Unilaterally Revise a Close out Calculation after It Has Been Issued?](https://options.greeks.live/question/can-a-determining-party-unilaterally-revise-a-close-out-calculation-after-it-has-been-issued/)
![A central processing core with intersecting, transparent structures revealing intricate internal components and blue data flows. This symbolizes an institutional digital asset derivatives platform's Prime RFQ, orchestrating high-fidelity execution, managing aggregated RFQ inquiries, and ensuring atomic settlement within dynamic market microstructure, optimizing capital efficiency.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-trading-system-facilitating-high-fidelity-rfq-protocol-optimization-for-best-execution-and-atomic-settlement.jpg)

A Determining Party cannot unilaterally revise a close-out calculation; the process is designed for binding finality.

- 
### [How Does the Close out Calculation Differ between the 1992 and 2002 Isda Agreements?](https://options.greeks.live/question/how-does-the-close-out-calculation-differ-between-the-1992-and-2002-isda-agreements/)
![A central, dynamic, multi-bladed mechanism visualizes Algorithmic Trading engines and Price Discovery for Digital Asset Derivatives. Flanked by sleek forms signifying Latent Liquidity and Capital Efficiency, it illustrates High-Fidelity Execution via RFQ Protocols within an Institutional Grade framework, minimizing Slippage.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-market-microstructure-rfq-protocol-optimization.jpg)

The 2002 ISDA Agreement replaces the rigid 1992 'Market Quotation/Loss' with a flexible 'Close-out Amount' based on commercial reasonableness.

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

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

- 
### [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.

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                "text": "The shift in valuation standards has profound implications for how financial institutions assess and manage counterparty risk. The 2002 ISDA's framework provides a clearer and more predictable path to recovery in the event of a default, which can be factored into credit risk models with a higher degree of confidence. The table below outlines the key strategic differences and their implications."
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```


---

**Original URL:** https://options.greeks.live/question/what-differentiates-the-1992-and-2002-isda-close-out-valuation-standards/
