# What Is the Difference between the 1992 and 2002 Isda Close out Standards? ▴ Question

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

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## Concept

The transition from the 1992 to the 2002 International Swaps and Derivatives Association (ISDA) [Master Agreement](https://prime.greeks.live/area/master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) represents a critical evolution in the architecture of over-the-counter (OTC) derivatives markets. This was a systemic upgrade, driven by the hard lessons learned from market crises of the late 1990s. The core of this evolution lies in the close-out mechanism, the contractual process for terminating transactions and calculating a final net payment when a default or other [termination event](https://prime.greeks.live/area/termination-event/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) occurs.

Understanding the distinction between the two standards is fundamental to grasping the modern framework of [counterparty risk management](https://prime.greeks.live/area/counterparty-risk-management/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). The 1992 Agreement provided a flexible but sometimes ambiguous framework, while the 2002 Agreement installed a more rigid, objective, and operationally demanding system designed to produce a predictable and commercially defensible outcome in times of market stress.

At the heart of the 1992 framework were two primary methods for calculating the termination payment ▴ “[Market Quotation](https://prime.greeks.live/area/market-quotation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)” and “Loss”. Market Quotation was intended to be an objective measure, based on obtaining quotes from reference market-makers for replacement trades. The Loss method was more subjective, allowing the [non-defaulting party](https://prime.greeks.live/area/non-defaulting-party/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) to determine in good faith its total losses and costs resulting from the termination. The 2002 Agreement retired this dualism.

It introduced a single, unified concept ▴ the “[Close-Out Amount](https://prime.greeks.live/area/close-out-amount/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite).” This concept was engineered to provide greater flexibility than the rigid Market Quotation method, which proved difficult to implement during periods of market illiquidity, while imposing a higher standard of objectivity than the Loss calculation. The shift to the Close-Out Amount reflects a foundational change in philosophy, moving the entire process toward a standard of demonstrable commercial reasonableness that could be scrutinized and validated by an objective third party.

> The 2002 ISDA Master Agreement replaced the subjective valuation methods of its 1992 predecessor with a single, objective standard for calculating termination payments.

This structural change was a direct response to the systemic need for greater legal certainty and predictability in the close-out process. The earlier framework, with its elective methods, could lead to disputes over which valuation was appropriate and how it was conducted. The 2002 Agreement’s single standard, while more operationally intensive, was designed to minimize such disputes by establishing a clearer, more robust process. It compels the calculating party to adhere to a procedure that is transparent and grounded in market realities, thereby strengthening the enforceability of close-out netting, which is the bedrock of risk mitigation in the global derivatives market.

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## Strategy

The strategic redesign of the close-out mechanism in 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) introduced several critical changes that reshaped [counterparty risk](https://prime.greeks.live/area/counterparty-risk/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) management. These changes were not merely technical adjustments; they represented a new strategic direction for the derivatives market, emphasizing objectivity, fairness, and operational robustness over the more subjective and flexible standards of the 1992 version.

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## The Evolution from Subjective to Objective Valuation

The most significant strategic shift is the standard for calculating the termination payment. The 1992 Agreement required the non-[defaulting party](https://prime.greeks.live/area/defaulting-party/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) to determine its “Loss” or “Market Quotation” amount by acting in a manner that was, in essence, rational. English courts interpreted this as the “Wednesbury test of reasonableness,” meaning the determination could only be challenged if it was so irrational that no reasonable non-defaulting party would have made it. This created a high bar for any challenge, granting considerable discretion to the calculating party.

The 2002 Agreement dismantled this subjective safe harbor. It introduced a two-pronged test for calculating the “Close-Out Amount”. The determining party must use “[commercially reasonable](https://prime.greeks.live/area/commercially-reasonable/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) procedures in order to produce a commercially reasonable result.” This is an [objective standard](https://prime.greeks.live/area/objective-standard/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). The process itself must be defensible, and the final number must be justifiable based on prevailing market conditions.

This change significantly raises the burden of proof on the calculating party, requiring a transparent and well-documented valuation process that can withstand external scrutiny. It strategically shifts risk from the defaulting party to the non-defaulting party, which now bears the responsibility of proving its calculations are objectively reasonable.

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## Standardizing the Payment Flow Two Way Payments

The 1992 Agreement contained a structural choice that had profound implications for fairness. Parties could select either the “[First Method](https://prime.greeks.live/area/first-method/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)” or the “Second Method” for payment calculation. The First Method, often called a one-way payment, allowed a non-defaulting party to collect its net gains but did not require it to pay its net losses to a defaulting party. This was widely viewed as punitive.

The Second Method mandated a [two-way payment](https://prime.greeks.live/area/two-way-payment/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), where a net sum was owed to the party that was “in the money,” regardless of which party had defaulted. Over time, the market overwhelmingly rejected the First Method. The 2002 Agreement codified this market consensus by eliminating the choice entirely. It provides only for a two-way payment system via the Close-Out Amount, establishing a more equitable and predictable standard that prevents a non-defaulting party from reaping a windfall at the expense of a defaulting party’s other creditors.

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## What New Termination Events Were Introduced?

The 1992 Agreement’s termination events were primarily focused on credit-related defaults and illegality. The market turmoil of the late 1990s and the events of September 11, 2001, exposed a gap in this framework. There was no clear mechanism for terminating contracts when performance became impossible or impractical due to external events that were not the fault of either party. The 2002 Agreement addressed this by introducing a “[Force Majeure](https://prime.greeks.live/area/force-majeure/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)” Termination Event.

This provision allows either party to terminate transactions if an event beyond their control prevents performance. It provides a more orderly exit from contracts than relying on default provisions, which may not be applicable in such circumstances. This addition made the agreement more resilient to a wider range of market disruptions.

> By integrating a Force Majeure clause, the 2002 Agreement provided a crucial mechanism for managing events that disrupt markets beyond the control of the contracting parties.

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## Integrating Set off Provisions

Another strategic enhancement in the 2002 Agreement was the inclusion of a standardized [set-off provision](https://prime.greeks.live/area/set-off-provision/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). Set-off allows a non-defaulting party to reduce the amount it owes on close-out by any other amounts owed to it by the defaulting party outside of the [ISDA Master Agreement](https://prime.greeks.live/area/isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). While parties could add a set-off clause to the Schedule of the 1992 Agreement, it was not part of the main body of the contract.

The 2002 Agreement integrated a broad set-off right directly into Section 6(f). This strengthened the legal basis for set-off, providing greater certainty and reducing the potential for legal challenges, particularly in cross-border insolvency proceedings.

### Table 1 ▴ Comparative Analysis of Close-Out Mechanics

| Feature | 1992 ISDA Master Agreement | 2002 ISDA Master Agreement |
| --- | --- | --- |
| Valuation Method | Choice between “Market Quotation” (quotes from dealers) and “Loss” (good faith estimate of costs). | Single “Close-Out Amount” method. |
| Valuation Standard | Subjective “rationality” test (“Wednesbury reasonableness”). | Objective “commercially reasonable” standard for both procedure and result. |
| Payment Flow | Choice between “First Method” (one-way payment) and “Second Method” (two-way payment). | Mandatory two-way payment. |
| Key Termination Events | Primarily credit-based Events of Default and Illegality. | Adds “Force Majeure” as a Termination Event. |
| Set-Off Provision | Optional; had to be added to the Schedule to be effective. | Included as a standard provision in Section 6(f). |

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## Execution

The execution of a close-out under the [2002 ISDA](https://prime.greeks.live/area/2002-isda/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) Master Agreement is an operationally intensive process that demands precision, documentation, and a deep understanding of market mechanics. The shift to an objective standard of commercial reasonableness transformed the close-out calculation from a largely internal assessment into a defensible, auditable procedure. For the non-defaulting party, now known as the “[Determining Party](https://prime.greeks.live/area/determining-party/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite),” this imposes a significant procedural burden, but also provides a clear roadmap for arriving at a robust and enforceable final payment amount.

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## The Calculation of the Close out Amount

Executing the calculation of the Close-Out Amount is a multi-stage process. The Determining Party must, as of the [Early Termination Date](https://prime.greeks.live/area/early-termination-date/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) or as soon as reasonably practicable thereafter, determine the value of all [terminated transactions](https://prime.greeks.live/question/how-does-t1-settlement-affect-fx-and-cross-currency-transactions/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). The 2002 Agreement grants flexibility in how this is done; the party may consider quotations from third parties, relevant market data, or information from internal models. The critical constraint is that whatever procedures are used, they must be commercially reasonable.

This means the Determining Party must be able to provide a clear rationale for its chosen valuation methodology. For example, if it uses a model, it must be prepared to explain the model’s inputs and assumptions and why that model is appropriate for the specific transactions and prevailing market conditions. If it relies on dealer quotes, it should obtain them from entities active in the relevant market. The process is designed to approximate the economic cost of replacing the terminated transactions in the current market.

This calculation must be performed for every single terminated transaction, after which the gains and losses are aggregated into a single net figure. This figure is then combined with any unpaid amounts due under the agreement to arrive at the final Close-Out Amount.

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## How Does the Objective Standard Affect Legal Risk?

The introduction of the objective “commercially reasonable” standard has significant consequences for legal risk and operational procedure. While the 1992 Agreement’s subjective standard made challenges difficult, the 2002 Agreement’s objective standard invites scrutiny. A defaulting party can now challenge a close-out calculation on the grounds that the procedures were flawed or that the result was inconsistent with market reality. This means the Determining Party must build a robust evidentiary record to support its calculation.

This heightened legal risk compels firms to adopt more rigorous internal governance around their close-out procedures. The process can no longer be an ad-hoc exercise. It must be systematic and well-documented.

Every decision, from the choice of valuation inputs to the selection of a valuation model, must be justifiable. This has led many firms to develop detailed internal playbooks for handling ISDA close-outs, specifying the sources of data to be used, the models to be applied, and the internal approvals required before a final Close-Out Amount is communicated to the counterparty.

> A Determining Party under the 2002 Agreement must operate with the expectation that its close-out calculations may be subject to legal challenge and discovery.

### Table 2 ▴ Procedural Checklist for 2002 ISDA Close-Out Calculation

| Step | Action | Key Consideration |
| --- | --- | --- |
| 1. Designate Early Termination Date | Issue a notice specifying the Event of Default or Termination Event and designating an Early Termination Date. | Timeliness is critical. The notice must be delivered in accordance with the terms of the Agreement. |
| 2. Identify Terminated Transactions | Compile a complete list of all transactions governed by the Master Agreement that are being terminated. | Accuracy is paramount to ensure all exposures are captured. |
| 3. Develop Valuation Methodology | Determine the most commercially reasonable method to value the transactions (e.g. dealer quotes, internal models, market data). | Document the rationale for the chosen methodology. Why is it commercially reasonable in these specific circumstances? |
| 4. Gather Valuation Inputs | Collect all necessary data, such as quotes from active market-makers, relevant yield curves, volatility surfaces, or other market data. | Ensure data is from credible, independent sources where possible and is contemporaneous with the Early Termination Date. |
| 5. Calculate Individual Transaction Values | Apply the methodology to each transaction to determine its replacement cost (positive or negative). | Maintain a detailed audit trail of all calculations, inputs, and assumptions. |
| 6. Aggregate and Determine Net Amount | Sum the values of all terminated transactions to arrive at a single net gain or loss. | The aggregation should be a straightforward mathematical exercise. |
| 7. Account for Unpaid Amounts | Incorporate any amounts that were due and payable before the Early Termination Date but remained unpaid. | This includes scheduled payments that have passed their due date. |
| 8. Deliver Close-Out Statement | Provide the counterparty with a statement showing in reasonable detail how the Close-Out Amount was calculated. | Transparency at this stage can help mitigate disputes. |

- **Documentation** ▴ The execution of a close-out under the 2002 framework lives and dies by its documentation. The Determining Party must create a comprehensive record of its valuation process, including the data sources consulted, the models used, the quotes received, and the rationale for any judgments made. This record is the primary defense in the event of a dispute.

- **Consistency** ▴ The chosen valuation methodology must be applied consistently across all terminated transactions. Cherry-picking different methods for different trades to achieve a more favorable outcome would fail the “commercially reasonable procedures” test.

- **Objectivity** ▴ The process must be grounded in objective, observable market facts wherever possible. While models and expert judgment may be necessary for illiquid or complex products, their use must be justifiable and benchmarked against available market information.

- **[Good Faith](https://prime.greeks.live/area/good-faith/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)** ▴ Overarching the entire process is the continuing duty to act in good faith. This means the Determining Party cannot manipulate the calculation to inflate its claim or penalize the defaulting party. The objective is to produce a fair and accurate measure of the economic loss.

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## References

- Faegre Drinker Biddle & Reath LLP. “ISDA Master Agreement Close-out Provisions ▴ English Courts Highlight a Difference Between the 1992 and 2002 Versions.” 4 May 2018.

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

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

- International Swaps and Derivatives Association. “Understanding the ISDA Master Agreements.” ISDA Conference Material, 16 Oct. 2018.

- PricewaterhouseCoopers. “The ISDA Master Agreements.” PwC Legal, Date unknown.

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## Reflection

The architectural evolution from the 1992 to the 2002 ISDA Master Agreement is a case study in how financial market infrastructure adapts to stress. The changes were not cosmetic; they were a fundamental reinforcement of the system’s foundations, designed to replace ambiguity with objectivity. For any institution operating in the derivatives space, understanding this evolution is a prerequisite for effective [risk management](https://prime.greeks.live/area/risk-management/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). The framework you operate within dictates the tools you have at your disposal during a crisis.

Does your firm’s internal playbook for counterparty default reflect the procedural rigor demanded by the 2002 Agreement? Is the process for valuation sufficiently robust and documented to withstand the objective scrutiny it now invites? The knowledge gained here is a component in a larger system of operational intelligence. The ultimate strategic advantage lies in ensuring your internal framework is as robust and resilient as the market architecture it depends upon.

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## Glossary

<a href="https://prime.greeks.live/area/termination-event/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Termination Event

Meaning ▴ A Termination Event denotes a pre-specified condition or set of criteria, contractually defined or algorithmically encoded, whose verified occurrence mandates the immediate cessation or unwinding of a financial agreement, especially prevalent within institutional digital asset derivatives. </a><a href="https://prime.greeks.live/area/master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Master Agreement

Meaning ▴ The Master Agreement is a foundational legal contract establishing a comprehensive framework for all subsequent transactions between two parties. </a><a href="https://prime.greeks.live/area/counterparty-risk-management/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Counterparty Risk Management

Meaning ▴ Counterparty Risk Management refers to the systematic process of identifying, assessing, monitoring, and mitigating the credit risk arising from a counterparty's potential failure to fulfill its contractual obligations. </a><a href="https://prime.greeks.live/area/non-defaulting-party/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Non-Defaulting Party

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

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

Meaning ▴ A Defaulting Party refers to any participant within a financial agreement, particularly in the context of institutional digital asset derivatives, that fails to fulfill its contractual obligations. </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">
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## 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/objective-standard/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Objective Standard

Meaning ▴ An Objective Standard denotes a quantifiable, verifiable metric or criterion established independently of subjective judgment, utilized for consistent evaluation of system performance, operational compliance, or market state. </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">
![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)

## First Method

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

## Two-Way Payment

Meaning ▴ A Two-Way Payment mechanism defines a bilateral financial flow capability where both parties in an agreement possess the systemic capacity to initiate or receive value transfers. </a><a href="https://prime.greeks.live/area/force-majeure/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![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)

## Force Majeure

Meaning ▴ Force Majeure designates a contractual clause excusing parties from fulfilling their obligations due to extraordinary events beyond their reasonable control, such as natural disasters, acts of war, or government prohibitions, which render performance impossible or commercially impracticable. </a><a href="https://prime.greeks.live/area/isda-master-agreement/?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)

## 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/set-off-provision/?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)

## Set-Off Provision

Meaning ▴ A Set-Off Provision constitutes a contractual or statutory right allowing a party to net mutual debts or claims owed to and by another party, thereby reducing the aggregate gross exposure to a single net amount. </a><a href="https://prime.greeks.live/area/determining-party/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A metallic disc, reminiscent of a sophisticated market interface, features two precise pointers radiating from a glowing central hub. This visualizes RFQ protocols driving price discovery within institutional digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocols-price-discovery.jpg)

## 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/2002-isda/?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)

## 2002 Isda

Meaning ▴ The 2002 ISDA Master Agreement constitutes a standardized contractual framework, widely adopted within the over-the-counter (OTC) derivatives market, establishing foundational terms for bilateral derivatives transactions. </a><a href="https://prime.greeks.live/question/how-does-t1-settlement-affect-fx-and-cross-currency-transactions/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A robust metallic framework supports a teal half-sphere, symbolizing an institutional grade digital asset derivative or block trade processed within a Prime RFQ environment. This abstract view highlights the intricate market microstructure and high-fidelity execution of an RFQ protocol, ensuring capital efficiency and minimizing slippage through precise system interaction](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-digital-asset-derivatives-rfq-protocol-execution-engine.jpg)

## Terminated Transactions

T+1 settlement compresses the post-trade timeline, demanding a strategic re-architecture of FX and cross-currency operations. </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">
![An abstract digital interface features a dark circular screen with two luminous dots, one teal and one grey, symbolizing active and pending private quotation statuses within an RFQ protocol. Below, sharp parallel lines in black, beige, and grey delineate distinct liquidity pools and execution pathways for multi-leg spread strategies, reflecting market microstructure and high-fidelity execution for institutional grade digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/08/institutional-digital-asset-derivatives-rfq-protocol-displaying-multi-leg-execution-status-and-optimal-liquidity-pathways.jpg)

## 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/good-faith/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sophisticated, multi-layered trading interface, embodying an Execution Management System EMS, showcases institutional-grade digital asset derivatives execution. Its sleek design implies high-fidelity execution and low-latency processing for RFQ protocols, enabling price discovery and managing multi-leg spreads with capital efficiency across diverse liquidity pools](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-trading-platform-market-microstructure.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/risk-management/?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)

## 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>

**Tags:** [Force Majeure Termination Event](https://options.greeks.live/area/force-majeure-termination-event/), [Set-Off Provision](https://options.greeks.live/area/set-off-provision/), [Good Faith](https://options.greeks.live/area/good-faith/), [Derivatives Law](https://options.greeks.live/area/derivatives-law/), [Defaulting Party](https://options.greeks.live/area/defaulting-party/), [Early Termination](https://options.greeks.live/area/early-termination/)	

## Discover More

- 
### [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.

- 
### [What Differentiates the 1992 and 2002 ISDA Close-Out Valuation Standards?](https://options.greeks.live/question/what-differentiates-the-1992-and-2002-isda-close-out-valuation-standards/)
![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)

The 2002 ISDA standard mandates an objectively commercial and reasonable close-out valuation, replacing the 1992's subjective standard.

- 
### [How Does the ISDA Master Agreement Govern the Close-Out Process?](https://options.greeks.live/question/how-does-the-isda-master-agreement-govern-the-close-out-process/)
![A precise teal instrument, symbolizing high-fidelity execution and price discovery, intersects angular market microstructure elements. These structured planes represent a Principal's operational framework for digital asset derivatives, resting upon a reflective liquidity pool for aggregated inquiry via RFQ protocols.](https://options.greeks.live/wp-content/uploads/2025/07/precision-engineered-institutional-digital-asset-derivatives-trading-platform-underpinning-rfq-protocol-liquidity-aggregation-and-high-fidelity-execution.jpg)

The ISDA Master Agreement provides a rules-based protocol to terminate derivative transactions upon default, netting values into one payment.

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

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

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

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

- 
### [What Are the Practical Implications of the Close-Out Amount for a Derivatives Trading Desk?](https://options.greeks.live/question/what-are-the-practical-implications-of-the-close-out-amount-for-a-derivatives-trading-desk/)
![Sharp, intersecting elements, two light, two teal, on a reflective disc, centered by a precise mechanism. This visualizes institutional liquidity convergence for multi-leg options strategies in digital asset derivatives. It embodies high-fidelity execution via RFQ protocol within a Principal's operational framework, leveraging algorithmic trading engines for capital efficiency.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-block-trade-execution.jpg)

The close-out amount is a defensible, calculated value that crystallizes a portfolio's worth upon contract termination.

- 
### [How Does the Waiting Period in the 2002 Isda Agreement Function?](https://options.greeks.live/question/how-does-the-waiting-period-in-the-2002-isda-agreement-function/)
![A sophisticated, illuminated device representing an Institutional Grade Prime RFQ for Digital Asset Derivatives. Its glowing interface indicates active RFQ protocol execution, displaying high-fidelity execution status and price discovery for block trades. The design suggests robust market microstructure and capital efficiency.](https://options.greeks.live/wp-content/uploads/2025/07/principal-rfq-engine-for-digital-asset-derivatives-best-execution-1.jpg)

The 2002 ISDA Waiting Period is a systemic buffer, providing a brief, defined window to cure payment failures before default can be declared.

- 
### [What Constitutes a Commercially Reasonable Procedure under the 2002 ISDA?](https://options.greeks.live/question/what-constitutes-a-commercially-reasonable-procedure-under-the-2002-isda/)
![A crystalline droplet, representing a block trade or liquidity pool, rests precisely on an advanced Crypto Derivatives OS platform. Its internal shimmering particles signify aggregated order flow and implied volatility data, demonstrating high-fidelity execution and capital efficiency within market microstructure, facilitating private quotation via RFQ protocols.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-prime-os-rfq-protocol-best-execution.jpg)

A commercially reasonable procedure under the 2002 ISDA is an objective, defensible process for valuing a terminated derivative.

- 
### [What New Termination Events Were Introduced in the 2002 Isda Master Agreement and Why?](https://options.greeks.live/question/what-new-termination-events-were-introduced-in-the-2002-isda-master-agreement-and-why/)
![Robust institutional Prime RFQ core connects to a precise RFQ protocol engine. Multi-leg spread execution blades propel a digital asset derivative target, optimizing price discovery. This system ensures high-fidelity execution within complex market microstructure, managing latent liquidity and counterparty risk effectively.](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-rfq-proto-insti-digital-asset-derivs-hi-fi-exec-capital-effi-risk-mgmt.jpg)

The 2002 ISDA Agreement introduced a Force Majeure Termination Event, creating a more resilient protocol for managing systemic risk.

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    "potentialAction": {
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```

```json
{
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    "@type": "FAQPage",
    "mainEntity": [
        {
            "@type": "Question",
            "name": "What New Termination Events Were Introduced?",
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                "@type": "Answer",
                "text": "The 1992 Agreement's termination events were primarily focused on credit-related defaults and illegality. The market turmoil of the late 1990s and the events of September 11, 2001, exposed a gap in this framework. There was no clear mechanism for terminating contracts when performance became impossible or impractical due to external events that were not the fault of either party. The 2002 Agreement addressed this by introducing a \"Force Majeure\" Termination Event. This provision allows either party to terminate transactions if an event beyond their control prevents performance. It provides a more orderly exit from contracts than relying on default provisions, which may not be applicable in such circumstances. This addition made the agreement more resilient to a wider range of market disruptions."
            }
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            "name": "How Does The Objective Standard Affect Legal Risk?",
            "acceptedAnswer": {
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                "text": "The introduction of the objective \"commercially reasonable\" standard has significant consequences for legal risk and operational procedure. While the 1992 Agreement's subjective standard made challenges difficult, the 2002 Agreement's objective standard invites scrutiny. A defaulting party can now challenge a close-out calculation on the grounds that the procedures were flawed or that the result was inconsistent with market reality. This means the Determining Party must build a robust evidentiary record to support its calculation."
            }
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    ]
}
```


---

**Original URL:** https://options.greeks.live/question/what-is-the-difference-between-the-1992-and-2002-isda-close-out-standards-2/
