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

**Published:** 2025-07-30
**Categories:** Question

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## Concept

An institutional-grade understanding of the over-the-counter derivatives market begins with its core operating system, the International Swaps and Derivatives Association (ISDA) [Master Agreement](https://prime.greeks.live/question/how-does-the-isda-master-agreement-facilitate-both-netting-types/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). Viewing this document as a static legal template is a fundamental miscalculation. The [ISDA Master Agreement](https://prime.greeks.live/area/isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) is a dynamic risk management architecture, periodically upgraded to reflect the lessons learned from systemic stresses and to enhance the stability of the global financial system.

The evolution from the 1992 to the 2002 version represents a critical architectural shift in how the market processes its most severe failure state ▴ counterparty default. This was a direct response to the market turmoil of the late 1990s, which exposed certain protocols in the 1992 framework as suboptimal under duress.

The primary design goal of the 2002 update was to introduce greater clarity, objectivity, and predictability into the close-out process. This is the sequence of actions that allows a [non-defaulting party](https://prime.greeks.live/area/non-defaulting-party/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) to terminate all outstanding transactions with a defaulted counterparty and calculate a single net payment due to or from that counterparty. The 1992 architecture provided optionality in this process, which, while flexible, created ambiguity and potential for disputes.

The 2002 version replaced this optionality with a single, more robust standard. This change was a deliberate engineering choice to fortify the market’s foundations against future crises, ensuring that the process of unwinding complex derivatives portfolios in a default scenario is governed by a more precise and defensible protocol.

> The transition from the 1992 to the 2002 ISDA framework marks a pivotal redesign of the market’s core risk protocols, moving from flexible but ambiguous standards to a more rigid, objective, and resilient architecture for managing counterparty default.

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## What Was the Core Architectural Flaw in the 1992 Close-Out System

The [1992 ISDA Master Agreement](https://prime.greeks.live/area/1992-isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) presented the non-defaulting party with two distinct methodologies 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.” This choice, while appearing to offer optionality, was the source of significant operational friction. The Market Quotation method required the non-defaulting party to obtain quotes from multiple market makers for replacement trades. This process proved cumbersome and often impractical in distressed market conditions where liquidity evaporates and obtaining firm quotes is difficult, if not impossible. The mechanism was too rigid for the very scenarios it was designed to solve.

The alternative, the “Loss” method, was more flexible. It allowed the non-defaulting party to calculate its total losses and costs resulting from the termination in [good faith](https://prime.greeks.live/area/good-faith/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). This flexibility came at a price. The standard for this calculation was subjective, resting on what the party “reasonably determines in good faith.” English courts interpreted this through the lens of the “Wednesbury unreasonableness” test, a standard of rationality that is notoriously difficult to challenge.

A determination could only be overturned if it was one that no reasonable non-defaulting party could have reached. This subjectivity created uncertainty and a high potential for disputes over the final close-out figure, undermining the goal of a swift and clean termination.

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## The 2002 ISDA’s System Upgrade

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) decommissioned the dual “Market Quotation” and “Loss” methodologies. It replaced them with a single, consolidated calculation standard known as the “[Close-out Amount](https://prime.greeks.live/area/close-out-amount/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite).” This was a fundamental system upgrade. The definition of Close-out Amount was engineered to balance the flexibility needed to operate in a crisis with the objectivity required for legal defensibility. It is defined as the amount of losses or costs that would be incurred, or gains that would be realized, in replacing the economic equivalent of the terminated transactions.

Crucially, the 2002 Agreement imposed a new, stricter standard on the party performing the calculation. The determining party must “act in good faith and 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) in order 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 introduces a dual obligation ▴ the process must be sound, and the outcome must be defensible from an objective, commercial standpoint. This shift from the subjective “rationality” test of the 1992 “Loss” method to an objective “commercial reasonableness” standard is the single most important evolution in the close-out architecture. It provides a clearer, more robust framework that reduces ambiguity and enhances legal certainty for all market participants.

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## Strategy

The strategic imperatives driving the migration from the 1992 to the 2002 ISDA close-out standards are rooted in [risk management](https://prime.greeks.live/area/risk-management/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) and legal certainty. The choice between the two frameworks is a strategic decision about how a financial institution wishes to manage [counterparty risk](https://prime.greeks.live/area/counterparty-risk/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) and the potential for disputes during a market crisis. The 2002 version is engineered to minimize ambiguity, providing a more predictable and robust protocol for the termination of derivatives contracts. This section dissects the strategic rationale behind the key architectural changes.

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## Consolidating the Calculation Protocol

The most significant strategic decision embedded in the [2002 ISDA](https://prime.greeks.live/area/2002-isda/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) was the replacement of the elective “Market Quotation” and “Loss” methods with the mandatory “Close-out Amount.” This was a direct response to the weaknesses observed during periods of market stress. The “Market Quotation” method, while theoretically sound, often failed in practice when liquidity was scarce. The “Loss” method, while more practical, was criticized for its subjectivity. The strategy behind the “Close-out Amount” was to synthesize the best attributes of both while mitigating their weaknesses.

The table below provides a strategic comparison of these close-out methodologies.

| Feature | 1992 ISDA Market Quotation | 1992 ISDA Loss | 2002 ISDA Close-out Amount |
| --- | --- | --- | --- |
| Calculation Basis | Based on obtaining actual quotes for replacement transactions from reference market makers. | Based on the non-defaulting party’s own determination of its total losses and costs. | Based on gains, losses, and costs of replacing or providing the economic equivalent of the terminated trades. |
| Operational Burden | High. Can be impractical or impossible in illiquid or volatile markets. | Low. Provides significant flexibility to the calculating party. | Moderate. Requires a defensible process but allows for flexibility in methodology. |
| Standard of Review | Objective. Based on verifiable market quotes. | Subjective. Based on a “good faith reasonable determination,” interpreted as a rationality test. | Objective. Requires “commercially reasonable procedures” to produce a “commercially reasonable result.” |
| Potential for Disputes | Low, assuming quotes can be obtained. Disputes could arise over the selection of market makers. | High. The subjective nature of the calculation is a common source of litigation. | Lower. The objective standard provides a clearer basis for review and reduces ambiguity. |

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## How Does the Shift in Legal Standards Impact Strategy

The shift from the “Wednesbury” test of rationality for “Loss” under the 1992 agreement to the objective standard of “[commercial reasonableness](https://prime.greeks.live/area/commercial-reasonableness/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)” for “Close-out Amount” under the 2002 agreement is a critical strategic enhancement. It fundamentally alters the legal risk profile of a close-out. Under the 1992 framework, a non-defaulting party had significant latitude, and its calculation was difficult to challenge successfully. This created an imbalance of power and potential for unfair outcomes.

The 2002 standard imposes a stricter, two-part duty on the calculating party. First, the procedures used must be [commercially reasonable](https://prime.greeks.live/area/commercially-reasonable/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). This means the party must be able to demonstrate that it followed a sound and logical process, considering relevant information available at the time. Second, the final result must be commercially reasonable.

This provides an external, objective benchmark. A court can assess whether the final calculated amount aligns with what other market participants would consider reasonable under the circumstances. This dual requirement provides greater protection for the defaulting party and increases the incentive for the non-defaulting party to perform a fair and transparent valuation. Strategically, this reduces the likelihood of protracted and costly litigation following a default.

> The 2002 ISDA’s mandate for commercial reasonableness in both procedure and result transforms the close-out calculation from a subjective determination into a defensible, objective valuation process.

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## Eliminating Unilateral Payment Structures

The [1992 ISDA](https://prime.greeks.live/area/1992-isda/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) allowed parties to choose between the “[First Method](https://prime.greeks.live/area/first-method/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)” and the “Second Method” for payments. Under the First Method, if an Event of Default occurred, the non-defaulting party was not required to make a payment to the defaulting party, even if the net value of the terminated transactions was in the defaulting party’s favor. This one-way payment provision was highly punitive and was widely criticized as creating a potential windfall for the non-defaulting party.

The “Second Method” required a two-way payment, meaning the net amount was paid to the party to whom it was owed, regardless of who was in default. Recognizing the inherent unfairness of the First Method, the market overwhelmingly adopted the Second Method. The 2002 ISDA codified this market practice by eliminating the First Method entirely.

All close-outs under the 2002 ISDA operate on a two-way payment basis. This strategic decision reinforces the principle that the purpose of a close-out is to crystallize the economic value of the terminated trades, not to penalize the defaulting party beyond its actual net liability.

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## Introducing New Risk Management Protocols

The 2002 ISDA introduced a “[Force Majeure](https://prime.greeks.live/area/force-majeure/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)” Termination Event. This was a strategic addition designed to address situations where performance becomes impossible or impracticable due to events beyond a party’s control, such as natural disasters or political turmoil that are not covered by the Illegality event. The absence of such a provision in the 1992 agreement created uncertainty. The inclusion of a Force Majeure clause provides a clear, contractually defined pathway for terminating transactions in such circumstances.

When a termination is due to Force Majeure, the 2002 ISDA stipulates that the Close-out Amount must be determined using mid-market valuations, ensuring a more neutral valuation process. This represents a more sophisticated risk management architecture, providing the market with a tool to handle a wider range of potential disruption scenarios.

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## Execution

Executing a [close-out under](https://prime.greeks.live/question/can-a-determining-party-still-face-legal-challenges-over-its-close-out-amount-calculation-under-the-2002-isda/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) an ISDA Master Agreement is a precise operational procedure with significant financial and legal consequences. The procedural differences between the 1992 and 2002 versions are substantial. The 2002 Agreement’s “Close-out Amount” protocol demands a more rigorous and documented process from the non-defaulting party. This section provides a detailed analysis of the execution mechanics, focusing on the practical steps and considerations involved in applying these standards.

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## The Close-Out Amount Calculation in Practice

The execution of a close-out under the 2002 ISDA requires the [determining party](https://prime.greeks.live/area/determining-party/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) to calculate the “Close-out Amount.” This is not a single, prescribed formula but a set of principles that guide the valuation. The core objective is to determine the economic equivalent of the terminated transactions. The 2002 ISDA provides a non-exhaustive list of factors and methods the calculating party can use. This flexibility is critical for handling the wide variety of derivatives products and market conditions.

The operational steps for the determining party include:

- **Documenting the Process** ▴ The requirement for “commercially reasonable procedures” means that the entire decision-making process should be documented. This includes the information considered, the valuation methods chosen, any quotes obtained, and the rationale for the final determination.

- **Valuation Inputs** ▴ The calculation can incorporate a range of information, including:

<li>Quotes from third-party dealers for replacement transactions.

- Relevant market data from pricing services, exchanges, and other available sources.

- Information from internal models, provided they are consistent with models used for other business purposes.

</li>
- **Considering All Costs** ▴ The calculation should include not only the replacement value of the primary transactions but also the costs associated with unwinding any related hedges. This ensures a more complete picture of the economic impact of the termination.

- **Assessing Option Rights** ▴ The value of any embedded options within the terminated trades must also be factored into the calculation.

> The execution of a close-out under the 2002 ISDA framework is a valuation exercise that prioritizes documented, defensible, and commercially reasonable methodologies over a single rigid formula.

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## Comparative Analysis of Default and Termination Provisions

The 2002 ISDA also refined the triggers for termination. The [Events of Default](https://prime.greeks.live/area/events-of-default/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) and [Termination Events](https://prime.greeks.live/area/termination-events/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) were updated to reflect market developments and to provide clearer, and in some cases, stricter, conditions. These changes have a direct impact on the execution of a close-out, as they determine when the right to terminate arises.

The following table outlines some of the key differences in these provisions.

| Provision | 1992 ISDA Master Agreement | 2002 ISDA Master Agreement |
| --- | --- | --- |
| Grace Periods | Generally provides for longer grace periods (e.g. three business days for a failure to pay). | Reduces grace periods (e.g. one business day for a failure to pay after notice is given), allowing for faster action. |
| Specified Transaction | The definition is narrower, covering a more limited set of derivatives transactions. | The definition is expanded to cover a broader range of financial transactions, such as securities lending and repo agreements. This provides wider cross-default protection. |
| Force Majeure | No specific Force Majeure Termination Event is included. | Introduces a Force Majeure Termination Event, providing a mechanism to terminate in the event of external circumstances preventing performance. |
| Set-Off | Does not include a standard set-off provision. Parties often had to negotiate and add this in the Schedule. | Includes a standard set-off provision (Section 6(f)), allowing the non-defaulting party to set off amounts owed to it against the termination payment. |

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## What Are the Practical Implications for the Determining Party

For the party tasked with executing the close-out, the 2002 ISDA imposes a higher standard of care. The move to an objective “commercial reasonableness” standard means that the party’s actions will be judged against an external benchmark. This has several practical consequences:

- **Need for Expertise** ▴ The determining party must have access to personnel with the expertise to perform complex valuations and to understand the nuances of different markets and products.

- **Robust Internal Processes** ▴ Firms need to have well-defined and documented internal procedures for handling defaults and calculating close-out amounts. These procedures are essential to demonstrate that a “commercially reasonable” process was followed.

- **Contemporaneous Records** ▴ It is vital to create and maintain detailed records at the time the calculation is made. These records will be the primary evidence used to defend the calculation if it is later challenged.

- **Avoiding Windfalls** ▴ The structure of the 2002 ISDA is designed to prevent the non-defaulting party from realizing an immediate windfall. The calculation should reflect a fair market value, not an opportunistic one. Any attempt to inflate losses or ignore gains will likely fail the “commercially reasonable result” test.

Ultimately, the execution of a close-out under the 2002 framework is a more disciplined and rigorous process. It demands a level of procedural diligence and valuation objectivity that was not explicitly required by the 1992 version. This enhanced rigor is the price of greater legal certainty and market stability.

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## References

- “ISDA Master Agreement Close-out Provisions ▴ English Courts Highlight a Difference Between the 1992 and 2002 Versions.” _Cadwalader, Wickersham & Taft LLP_, 4 May 2018.

- Law, Charles. “The ISDA Master Agreement ▴ Part II ▴ Negotiated Provisions.” _Charles Law PLLC_.

- “ISDA Comparison.” _The Jolly Contrarian_, 24 September 2020.

- “Understanding the ISDA Master Agreements.” _International Swaps and Derivatives Association_, 16 October 2018.

- “Close-out Amount – ISDA Provision.” _The Jolly Contrarian_, 14 August 2024.

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## Reflection

The evolution from the 1992 to the 2002 ISDA Master Agreement reflects a deep learning process within the global financial market. The architectural upgrades to the close-out protocol were not academic exercises; they were forged in the crucible of real-world market crises. The system was re-engineered to be more resilient, transparent, and predictable under stress. Contemplating these changes prompts a critical question for any institution operating in the derivatives space ▴ does our current operational framework fully align with the risk management principles embedded in the modern standard?

The choice of an ISDA framework is more than a legal formality. It is a declaration of an institution’s philosophy on risk, fairness, and its role within the intricate system of global finance. A superior operational edge is built on a foundation of such deliberate architectural choices.

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## Glossary

<a href="https://prime.greeks.live/area/isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Isda Master Agreement

Meaning ▴ The ISDA Master Agreement 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/question/how-does-the-isda-master-agreement-facilitate-both-netting-types/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Master Agreement

The ISDA Master Agreement provides a dual-protocol framework for netting, optimizing cash flow efficiency while preserving capital upon counterparty default. </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/1992-isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## 1992 Isda Master Agreement

Meaning ▴ The 1992 ISDA Master Agreement is a standardized bilateral contract document published by the International Swaps and Derivatives Association, serving as the primary legal framework for over-the-counter derivative transactions between two parties. </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/good-faith/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## 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/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/close-out-amount/?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)

## 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-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 large, smooth sphere, a textured metallic sphere, and a smaller, swirling sphere rest on an angular, dark, reflective surface. This visualizes a principal liquidity pool, complex structured product, and dynamic volatility surface, representing high-fidelity execution within an institutional digital asset derivatives market microstructure](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-optimized-market-microstructure-precision.jpg)

## Commercially Reasonable Procedures

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

## 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/area/counterparty-risk/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A precisely engineered system features layered grey and beige plates, representing distinct liquidity pools or market segments, connected by a central dark blue RFQ protocol hub. Transparent teal bars, symbolizing multi-leg options spreads or algorithmic trading pathways, intersect through this core, facilitating price discovery and high-fidelity execution of digital asset derivatives via an institutional-grade Prime RFQ](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-engine-facilitating-high-fidelity-multi-leg-options-spread-execution-best-price-discovery-and-latent-liquidity-access-for-prime-brokerage.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/risk-management/?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)

## Risk Management

Meaning ▴ Risk Management is the systematic process of identifying, assessing, and mitigating potential financial exposures and operational vulnerabilities within an institutional trading framework. </a><a href="https://prime.greeks.live/area/2002-isda/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A precise mechanical instrument with intersecting transparent and opaque hands, representing the intricate market microstructure of institutional digital asset derivatives. This visual metaphor highlights dynamic price discovery and bid-ask spread dynamics within RFQ protocols, emphasizing high-fidelity execution and latent liquidity through a robust Prime RFQ for atomic settlement](https://options.greeks.live/wp-content/uploads/2025/07/precision-engineering-driving-institutional-digital-asset-derivatives-execution-across-advanced-rfq-protocols-and-prime-brokerage-frameworks.jpg)

## 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">
![A sophisticated proprietary system module featuring precision-engineered components, symbolizing an institutional-grade Prime RFQ for digital asset derivatives. Its intricate design represents market microstructure analysis, RFQ protocol integration, and high-fidelity execution capabilities, optimizing liquidity aggregation and price discovery for block trades within a multi-leg spread environment](https://options.greeks.live/wp-content/uploads/2025/07/institutional-grade-proprietary-architecture-driving-high-fidelity-digital-asset-derivatives-execution-via-rfq-protocols-and-optimized-market-microstructure-dynamics.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/area/commercially-reasonable/?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)

## 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/first-method/?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)

## 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/1992-isda/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![The abstract image visualizes a central Crypto Derivatives OS hub, precisely managing institutional trading workflows. Sharp, intersecting planes represent RFQ protocols extending to liquidity pools for options trading, ensuring high-fidelity execution and atomic settlement](https://options.greeks.live/wp-content/uploads/2025/07/rfq-protocols-for-institutional-digital-asset-derivatives-prime-os-execution.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/force-majeure/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sleek, futuristic apparatus featuring a central spherical processing unit flanked by dual reflective surfaces and illuminated data conduits. This system visually represents an advanced RFQ protocol engine facilitating high-fidelity execution and liquidity aggregation for institutional digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-digital-asset-options-rfq-liquidity-aggregation-interface.jpg)

## 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/question/can-a-determining-party-still-face-legal-challenges-over-its-close-out-amount-calculation-under-the-2002-isda/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![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)

## Close-Out Under

A Determining Party faces legal challenges over its 2002 ISDA close-out calculation due to the required objective commercial reasonableness. </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 central control knob on a metallic platform, bisected by sharp reflective lines, embodies an institutional RFQ protocol. This depicts intricate market microstructure, enabling high-fidelity execution, precise price discovery for multi-leg options, and robust Prime RFQ deployment, optimizing latent liquidity across digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/08/institutional-rfq-digital-asset-derivatives-execution-engine-core-microstructure.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/termination-events/?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)

## Termination Events

Meaning ▴ Termination Events define specific conditions within a contractual agreement, typically a derivatives master agreement, that trigger the early cessation of obligations between counterparties. </a><a href="https://prime.greeks.live/area/events-of-default/?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)

## Events of Default

Meaning ▴ Events of Default are precisely defined contractual conditions or breaches that, upon occurrence, grant the non-defaulting party specific rights, typically including the right to terminate an agreement, accelerate obligations, or demand collateral. </a>

**Tags:** [Non-Defaulting Party](https://options.greeks.live/area/non-defaulting-party/), [Events of Default](https://options.greeks.live/area/events-of-default/), [Good Faith](https://options.greeks.live/area/good-faith/), [Derivatives Law](https://options.greeks.live/area/derivatives-law/), [Market Quotation](https://options.greeks.live/area/market-quotation/), [Counterparty Risk](https://options.greeks.live/area/counterparty-risk/)	

## Discover More

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

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

- 
### [What Are the Primary Legal and Operational Risks of Not Migrating from the 1992 Isda Framework?](https://options.greeks.live/question/what-are-the-primary-legal-and-operational-risks-of-not-migrating-from-the-1992-isda-framework/)
![Geometric planes, light and dark, interlock around a central hexagonal core. This abstract visualization depicts an institutional-grade RFQ protocol engine, optimizing market microstructure for price discovery and high-fidelity execution of digital asset derivatives including Bitcoin options and multi-leg spreads within a Prime RFQ framework, ensuring atomic settlement.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-engine-architecture.jpg)

Failure to migrate from the 1992 ISDA framework embeds legacy legal and operational vulnerabilities into an institution's risk architecture.

- 
### [How Does Market Volatility Affect the Determination of a Commercially Reasonable Close-Out Amount?](https://options.greeks.live/question/how-does-market-volatility-affect-the-determination-of-a-commercially-reasonable-close-out-amount/)
![Intersecting abstract geometric planes depict institutional grade RFQ protocols and market microstructure. Speckled surfaces reflect complex order book dynamics and implied volatility, while smooth planes represent high-fidelity execution channels and private quotation systems for digital asset derivatives within a Prime RFQ.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-rfq-protocols-digital-asset-microstructure-execution.jpg)

Market volatility stress-tests the objective reasonableness of a close-out by degrading the quality of valuation data.

- 
### [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 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.

- 
### [What Are the Primary Drivers for Adopting the 2002 Isda over the 1992 Version?](https://options.greeks.live/question/what-are-the-primary-drivers-for-adopting-the-2002-isda-over-the-1992-version/)
![A focused view of a robust, beige cylindrical component with a dark blue internal aperture, symbolizing a high-fidelity execution channel. This element represents the core of an RFQ protocol system, enabling bespoke liquidity for Bitcoin Options and Ethereum Futures, minimizing slippage and information leakage.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-grade-digital-asset-derivatives-rfq-engine-core-precision-component.jpg)

The 2002 ISDA provides a superior risk architecture through a more flexible and robust close-out 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.

- 
### [How Did the 2008 Financial Crisis Influence the Interpretation of ISDA Close-Out Provisions?](https://options.greeks.live/question/how-did-the-2008-financial-crisis-influence-the-interpretation-of-isda-close-out-provisions/)
![A multi-faceted crystalline star, symbolizing the intricate Prime RFQ architecture, rests on a reflective dark surface. Its sharp angles represent precise algorithmic trading for institutional digital asset derivatives, enabling high-fidelity execution and price discovery. This encapsulates RFQ protocols, multi-leg spread optimization, capital efficiency, and market microstructure dynamics.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocols-high-fidelity-execution-market-microstructure-optimization-for-prime-os-alpha-generation.jpg)

The 2008 crisis shifted ISDA close-out interpretation from contractual certainty to a system focused on commercially reasonable valuations.

- 
### [How Does the 1992 ISDA Agreement Differ from the 2002 Version in a Default?](https://options.greeks.live/question/how-does-the-1992-isda-agreement-differ-from-the-2002-version-in-a-default/)
![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 Agreement provides a more robust and predictable default framework through a single, objective close-out valuation method.

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---

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