# What Is the Primary Difference between the 1992 and 2002 ISDA Close out Calculations? ▴ Question

**Published:** 2025-08-12
**Categories:** Question

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## Concept

The fundamental distinction between the 1992 and 2002 International Swaps and Derivatives Association (ISDA) Master Agreements resides in the operational mechanics of calculating termination payments. This evolution represents a critical shift in the financial architecture of [counterparty risk](https://prime.greeks.live/area/counterparty-risk/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), moving from a rigidly defined, procedural approach to a more adaptable, principle-based system. Understanding this change is elemental to grasping the modern framework for managing defaults in the vast over-the-counter derivatives market. The core of the matter lies in how a [non-defaulting party](https://prime.greeks.live/question/in-what-scenarios-might-a-non-defaulting-party-strategically-prefer-the-standard-close-out-process-over-aet/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) quantifies its economic position when a counterparty fails, a process that underpins the stability of trillions of dollars in financial contracts.

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 two distinct methodologies for this calculation ▴ “[Market Quotation](https://prime.greeks.live/area/market-quotation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)” and “Loss”. These were not interchangeable options but were selected by the counterparties when initiating their agreement. The choice had profound consequences for how a default would be handled years or even decades later.

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## The 1992 ISDA Calculation Regimes

The architecture of the 1992 Agreement forced participants to pre-select their preferred mechanism for quantifying the financial consequences of an early termination. This choice was enshrined in the schedule to the [Master Agreement](https://prime.greeks.live/question/how-does-the-single-agreement-concept-in-the-isda-master-agreement-facilitate-netting/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), creating two parallel universes for default management.

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## Market Quotation a Prescriptive Process

Market Quotation was a highly structured, formulaic method. It required the non-defaulting party to seek price quotations for a [replacement transaction](https://prime.greeks.live/question/how-can-a-firm-quantify-the-risk-of-a-phased-rollout-versus-a-full-system-replacement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) from a prescribed number of major dealers in the relevant market (typically three to four). The process was an attempt to create an objective, verifiable snapshot of the market at the moment of termination. It operated on the premise that a functioning, liquid market existed, where dealers could and would provide firm quotes for replacing the entirety of the terminated trades.

The methodology was mechanical, relying on averaging the obtained quotes to arrive at a “[Settlement Amount](https://prime.greeks.live/area/settlement-amount/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)”. This approach was favored for its perceived objectivity, removing the non-defaulting party’s own judgment from the calculation to a significant degree. Its weakness, however, was its brittleness. The entire mechanism depended on the willingness and ability of reference dealers to provide quotes, a condition that could evaporate during a systemic market crisis.

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## Loss an Indemnity-Based Calculation

The “Loss” method operated on a different principle entirely. It was conceived as an indemnity, designed to make the non-defaulting party whole. Under this method, the party calculates an amount it “reasonably determines in good faith to be its total losses and costs” in connection with the terminated transactions. This could include the cost of entering into replacement trades, but it could also encompass hedging costs, funding costs, and other economic impacts flowing from the counterparty’s default.

While offering more flexibility than Market Quotation, the [Loss method](https://prime.greeks.live/area/loss-method/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) introduced a greater degree of subjectivity. The key legal standard was that the determination had to be “rational”. This standard, as interpreted by courts, meant the calculation could only be challenged if it was so unreasonable that no reasonable party could have made it, a high bar for any challenger to overcome.

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## The 2002 ISDA a Unified Approach

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) swept away the bifurcated system of Market Quotation and Loss. It replaced them with 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 was a profound architectural change, driven by the lessons learned from market stresses where the 1992 methodologies had proven problematic. The 2002 Agreement abandoned the rigid procedural requirements of Market Quotation and the subjective rationality test of Loss for a new, singular standard.

> The shift from the 1992 dual-method system to the 2002 unified “Close-out Amount” marks a transition from procedural rigidity to objective, commercially reasonable principles in derivatives default management.

The Close-out Amount is defined as the amount of losses or costs that are or would be incurred in replacing, or providing the economic equivalent of, the material terms of the terminated transactions. The [determining party](https://prime.greeks.live/question/can-a-determining-party-revise-its-close-out-amount-calculation-after-submission/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) must act in good faith and 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 standard is the cornerstone of the 2002 Agreement.

It provides flexibility while imposing a higher standard of objectivity than the “rationality” test under the 1992 Loss method. The determining party is not restricted to dealer quotations; it can use a wide array of information, including [internal models](https://prime.greeks.live/question/can-a-firm-use-internal-models-to-calculate-the-close-out-amount-under-the-2002-isda/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), data from electronic platforms, and any other [market data](https://prime.greeks.live/area/market-data/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) it deems relevant, so long as the process and the outcome are commercially reasonable.

This evolution reflects a maturation in the understanding of financial markets. It acknowledges that during a crisis, liquidity may vanish and obtaining firm quotes from multiple dealers might be impossible. The 2002 Agreement empowers the non-defaulting party to use the best available information to arrive at a fair economic value, while holding it to an objective standard of [commercial reasonableness](https://prime.greeks.live/question/how-do-courts-interpret-commercial-reasonableness-under-the-2002-isda/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) that can be scrutinized by a court. The primary difference, therefore, is the replacement of two distinct, procedurally-driven methods with a single, flexible, and objectively-judged principle of commercial reason.

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## Strategy

The strategic implications of the shift from the 1992 ISDA’s dualistic calculation methods to the 2002’s unified “Close-out Amount” are substantial. This was not a minor technical adjustment; it represented a fundamental recalibration of counterparty risk management, altering the strategic calculus for financial institutions in preparing for and executing the termination of derivative portfolios. The change directly impacts legal certainty, operational preparedness, and the allocation of risk during periods of acute market stress. For a financial institution, the choice between operating under a 1992 or 2002 framework defines the very tools and standards it will use to protect itself during a counterparty’s collapse.

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## From Procedural Hurdles to a Defensible Standard

The strategic deficiency of the 1992 Agreement’s Market Quotation method was laid bare during the 2008 financial crisis, particularly following the bankruptcy of [Lehman Brothers](https://prime.greeks.live/question/in-what-ways-did-the-lehman-brothers-default-influence-changes-in-isda-protocols/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). In the ensuing market paralysis, obtaining firm quotes from dealers for replacement trades became a near-impossible task. Credit markets froze, and dealers were unwilling to provide the quotations necessary to satisfy the rigid procedural requirements of the Market Quotation methodology. This left non-defaulting parties in a precarious position, unable to follow the contractually mandated procedure to calculate their termination payments.

Many were forced to fall back on the Loss method, if available, or face protracted legal disputes over the proper valuation. The crisis demonstrated that a system reliant on the stable functioning of the very markets it was designed to protect in a crisis was inherently flawed.

The 2002 Agreement’s “Close-out Amount” provides the strategic antidote to this procedural brittleness. The standard of “commercially reasonable procedures” empowers the non-defaulting party to adapt to prevailing market conditions. If dealer quotes are unavailable, the institution can strategically pivot to other valuation sources. These may include:

- **Internal Models** ▴ Utilizing the same proprietary models used for daily marking-to-market of the portfolio, provided they are robust and well-documented.

- **Market Data** ▴ Referencing observable data points such as yield curves, volatility surfaces, and credit spreads from electronic platforms and data vendors.

- **Indicative Quotes** ▴ Using non-binding or indicative quotes as a data point, even if they do not meet the strict criteria for a firm replacement transaction quote under the old 1992 standard.

- **Actual Replacement Costs** ▴ If a replacement transaction is actually executed, its cost can be a powerful piece of evidence, though it is not the only permissible measure.

This flexibility is a significant strategic advantage. It allows the institution to build a defensible valuation based on the best available information in a disrupted market, rather than being hamstrung by an impossible procedural requirement.

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## The Higher Bar of Commercial Reasonableness

This enhanced flexibility comes with a corresponding increase in responsibility. The “commercially reasonable” standard is more demanding than the “rationality” test of the 1992 Loss method. A rational decision under the 1992 Agreement could be subjective, as long as it was not completely arbitrary. An objectively reasonable determination under the 2002 Agreement requires the non-defaulting party to act as a reasonable market participant would under the circumstances.

This means the entire valuation process is subject to scrutiny. A counterparty challenging a Close-out Amount calculation can probe the methodology, the inputs used, and the judgments made. Therefore, the strategy for a non-defaulting party under a [2002 ISDA](https://prime.greeks.live/area/2002-isda/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) must be one of meticulous documentation and procedural integrity. The goal is to create a comprehensive audit trail that can demonstrate to a court or tribunal that the chosen procedures were commercially reasonable and that they produced a commercially reasonable result.

> The strategic shift to the 2002 ISDA framework moves the focus from fulfilling a rigid procedural checklist to constructing a robust, evidence-based, and legally defensible valuation in real-world market conditions.

The following table illustrates the key strategic differences between the two frameworks:

| Strategic Dimension | 1992 ISDA Master Agreement | 2002 ISDA Master Agreement |
| --- | --- | --- |
| Valuation Flexibility | Low (Market Quotation) to Moderate (Loss). Market Quotation is highly prescriptive. Loss allows for broader inputs but is still an indemnity calculation. | High. Explicitly allows for a wide range of inputs including quotes, market data, and internal models. |
| Resilience to Market Disruption | Low. The Market Quotation method can become inoperable if dealers stop providing quotes. | High. The determining party can adapt its valuation procedure to the prevailing market conditions. |
| Legal Standard for Challenge | Rationality (for Loss). A high threshold for the challenger, who must prove the decision was arbitrary or perverse. | Objectivity. The determining party must demonstrate its process and result were commercially reasonable, a lower and more objective standard to challenge. |
| Operational Burden | Procedural. Focus is on following the prescribed steps (e.g. calling specific dealers). | Evidentiary. Focus is on gathering data and meticulously documenting the entire valuation process and its rationale. |
| Dispute Potential | High, especially when Market Quotation fails. Ambiguity in the Loss calculation can also lead to disputes. | Lowered by flexibility, but shifts the focus of disputes to the “commercial reasonableness” of the actions taken. |

Ultimately, the 2002 ISDA provides a superior strategic framework for risk management. It acknowledges the potential for market failure and equips financial institutions with the tools to manage a counterparty default in a more resilient and commercially sensible manner. The price of this flexibility is the heightened obligation to act and document with objective reasonableness, a strategic trade-off that sophisticated market participants have widely accepted.

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## Execution

The execution of a close-out under the 2002 [ISDA Master Agreement](https://prime.greeks.live/area/isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) is an exercise in disciplined operational procedure and rigorous evidence management. For the non-defaulting party, the objective is to navigate the termination process in a way that is not only swift and efficient but also creates a robust, defensible record of its actions. The “commercially reasonable” standard is not an abstract legal concept; it is a practical benchmark against which every step of the execution process will be measured. A successful execution minimizes financial loss and preempts legal challenges by building a clear and logical case for the final Close-out Amount.

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## An Operational Protocol for Calculating the Close-Out Amount

Upon the occurrence of an Event of Default and the designation of an [Early Termination Date](https://prime.greeks.live/area/early-termination-date/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), the determining party must initiate a well-defined operational workflow. This process should be systematic and documented at every stage.

- 
**Initial Assessment and Triage** ▴ The first step is to assemble a team, typically comprising legal, risk, trading, and operations personnel. This team must immediately identify all transactions governed by the ISDA Master Agreement with the defaulting counterparty. The complexity, liquidity, and materiality of each transaction or group of transactions should be assessed to inform the subsequent valuation strategy.

- 
**Information Gathering Phase** ▴ This is the core of the execution process. The team must cast a wide net to gather all relevant valuation data. The 2002 ISDA explicitly permits using various sources, and a prudent party will explore several in parallel. This includes:

<li>**Requesting Dealer Quotations** ▴ Even if the market is disrupted, requests should be made to relevant dealers for replacement transaction costs. The requests and any responses (including refusals to quote) must be logged.

- **Capturing Electronic Market Data** ▴ Screenshots and data downloads from platforms like Bloomberg, Reuters, or other relevant trading venues should be time-stamped and archived. This provides objective evidence of prevailing rates, spreads, and prices.

- **Running Internal Models** ▴ The institution’s own valuation models should be run to generate a mark-to-market value. The inputs to these models (e.g. yield curves, volatility surfaces) must be sourced from credible, documented places.

- **Consulting Third-Party Valuation Services** ▴ Engaging an independent valuation agent can provide an additional layer of objectivity and support for the final calculation.

</li>
- 
**Selection and Application of Valuation Methodology** ▴ The 2002 Agreement allows for the application of different valuation methods to different transactions. For example, liquid, vanilla interest rate swaps might be valued based on mid-market rates from electronic platforms. A complex, exotic option, however, might be valued using an [internal model](https://prime.greeks.live/question/what-are-the-key-differences-in-netting-treatment-between-standardized-and-internal-model-approaches/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), supported by indicative quotes from specialist dealers.
The key is that the rationale for choosing a specific method for a specific transaction must be documented. The determining party must be able to explain why a chosen method was commercially reasonable under the circumstances.

- 
**Calculation and Statement Preparation** ▴ With the methodologies selected and data gathered, the Close-out Amount for each transaction is calculated. These are then aggregated into a single net amount. A detailed statement should be prepared, outlining the final figure and providing a summary of how it was reached. This statement, along with the notice of the final payment amount, is then delivered to the defaulting party.

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## A Hypothetical Close-Out Calculation

To illustrate the process, consider a simplified portfolio of terminated transactions. The determining party gathers various data points to construct a defensible Close-out Amount.

| Trade ID | Transaction Type | Notional (USD) | Market Data Value | Internal Model Value | Dealer Quote (Avg) | Selected Method | Final Close-out Amount (USD) |
| --- | --- | --- | --- | --- | --- | --- | --- |
| IRS-001 | 5Y Interest Rate Swap | 100,000,000 | +1,250,000 | +1,255,000 | +1,240,000 | Market Data | +1,250,000 |
| FXO-002 | 3M EUR/USD Call Option | 50,000,000 | +450,000 | +465,000 | +440,000 | Internal Model | +465,000 |
| CDS-003 | 5Y Credit Default Swap | 25,000,000 | -800,000 | -810,000 | N/A (No quotes) | Internal Model | -810,000 |
| SWPT-004 | 10Y Swaption | 75,000,000 | -2,100,000 | -2,150,000 | -2,050,000 | Dealer Quote (Avg) | -2,050,000 |
| Total | | | | | | Net Close-out Amount | -1,145,000 |

In this example, the determining party selected the most appropriate valuation method for each type of trade based on available data, documenting its rationale for each choice. The final net amount of -$1,145,000 represents a payment due from the determining party to the defaulting party’s estate.

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## Evidentiary Integrity the Bedrock of Execution

The entire execution process rests on the quality of the evidentiary record. The determining party must operate under the assumption that its calculation will be challenged and must prepare a file that can withstand intense scrutiny. This involves creating a contemporaneous record of every decision and data point.

> A successful execution under the 2002 ISDA is defined by a meticulously documented, transparent, and methodologically sound valuation process that proves commercial reasonableness at every step.

An effective documentation package should include:

- **Communication Logs** ▴ Records of all emails and phone calls made to request quotes, including the time, date, person contacted, and the substance of the conversation.

- **Data Archives** ▴ Time-stamped copies of all market data, platform screens, and model inputs used in the calculation.

- **Methodology Memoranda** ▴ Internal notes explaining the rationale for selecting specific valuation methods for different types of transactions.

- **Model Validation** ▴ Documentation supporting the integrity and appropriateness of any internal models used in the process.

This disciplined approach to execution transforms the calculation of the Close-out Amount from a simple arithmetic exercise into the construction of a robust legal and financial defense. It is the operational embodiment of the “commercially reasonable” principle and the ultimate tool for managing risk in a derivatives portfolio.

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## References

- Flavell, Antony. “Swaps and Other Derivatives.” John Wiley & Sons, 2002.

- Hudson, Alastair. “The Law of Finance.” Sweet & Maxwell, 2nd ed. 2013.

- International Swaps and Derivatives Association. “User’s Guide to the 2002 ISDA Master Agreement.” 2003.

- Firth, Daniel. “Derivatives ▴ Law and Practice.” Sweet & Maxwell, 2017.

- Mengle, David C. “The ISDA Master Agreement ▴ A Practical Guide.” Palgrave Macmillan, 2010.

- Henderson, Schuyler K. “Henderson on Derivatives.” LexisNexis, 2nd ed. 2012.

- “Lehman Brothers International (Europe) v Lehman Brothers Finance SA EWCA Civ 188.” Court of Appeal of England and Wales.

- “Fondazione Enasarco v Lehman Brothers Finance S.A. and Anthracite Rated Investments (Cayman) Limited EWHC 1307 (Ch).” High Court of Justice of England and Wales.

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## Reflection

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## Calibrating the Risk Machinery

The progression from the 1992 to the 2002 ISDA framework is more than a historical footnote in contract law; it is a lesson in systemic resilience. It compels a critical examination of the internal machinery that governs counterparty risk within any financial institution. The core question that emerges is whether the existing operational protocols are merely designed to function during periods of market calm, or if they possess the inherent flexibility and robustness to perform under extreme duress. The “commercially reasonable” standard is not just a legal term; it is an organizational challenge.

How does one’s own operational framework measure up to this standard? Is the process for data gathering, valuation, and documentation an automated, fire-drill-tested procedure, or is it an ad-hoc reaction to a crisis? The 2002 Agreement provides the flexible toolkit, but the responsibility for building the engine, for ensuring the inputs are sound and the outputs are defensible, rests entirely with the institution.

The knowledge gained from understanding this evolution is a component in a larger system of intelligence, one that links contractual terms to operational readiness and strategic advantage. The ultimate edge lies in having a system so well-architected that its reasonableness becomes self-evident, even in the midst of market chaos.

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## Glossary

<a href="https://prime.greeks.live/question/in-what-scenarios-might-a-non-defaulting-party-strategically-prefer-the-standard-close-out-process-over-aet/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Non-Defaulting Party

Preferring standard close-out is a strategic decision to exert manual control over valuation and timing in complex market or legal environments. </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 complex, multi-layered electronic component with a central connector and fine metallic probes. This represents a critical Prime RFQ module for institutional digital asset derivatives trading, enabling high-fidelity execution of RFQ protocols, price discovery, and atomic settlement for multi-leg spreads with minimal latency](https://options.greeks.live/wp-content/uploads/2025/08/institutional-digital-asset-rfq-engine-driving-best-execution-and-liquidity.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/1992-isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A dual-toned cylindrical component features a central transparent aperture revealing intricate metallic wiring. This signifies a core RFQ processing unit for Digital Asset Derivatives, enabling rapid Price Discovery and High-Fidelity Execution](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-engine-core-best-execution-prime-os.jpg)

## 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">
![A precise, multi-layered disk embodies a dynamic Volatility Surface or deep Liquidity Pool for Digital Asset Derivatives. Dual metallic probes symbolize Algorithmic Trading and RFQ protocol inquiries, driving Price Discovery and High-Fidelity Execution of Multi-Leg Spreads within a Principal's operational framework](https://options.greeks.live/wp-content/uploads/2025/07/institutional-grade-rfq-protocol-mechanism-for-digital-asset-derivatives-price-discovery-and-high-fidelity-execution-via-prime-os.jpg)

## Market Quotation

Meaning ▴ A market quotation represents the current executable bid and ask prices for a specific financial instrument, typically accompanied by the corresponding tradable sizes or market depth at various price levels. </a><a href="https://prime.greeks.live/question/how-does-the-single-agreement-concept-in-the-isda-master-agreement-facilitate-netting/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![An exposed institutional digital asset derivatives engine reveals its market microstructure. The polished disc represents a liquidity pool for price discovery](https://options.greeks.live/wp-content/uploads/2025/07/high-fidelity-digital-asset-derivatives-rfq-execution-system.jpg)

## Master Agreement

The "Single Agreement" concept legally fuses all individual derivative trades into one contract, enabling a single net settlement upon default. </a><a href="https://prime.greeks.live/question/how-can-a-firm-quantify-the-risk-of-a-phased-rollout-versus-a-full-system-replacement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A beige, triangular device with a dark, reflective display and dual front apertures. This specialized hardware facilitates institutional RFQ protocols for digital asset derivatives, enabling high-fidelity execution, market microstructure analysis, optimal price discovery, capital efficiency, block trades, and portfolio margin](https://options.greeks.live/wp-content/uploads/2025/08/institutional-digital-asset-derivatives-rfq-terminal-for-high-fidelity-execution-and-precise-market-microstructure-analysis.jpg)

## Replacement Transaction

A firm quantifies transition risk by modeling the expected monetary value of failure points for both phased and full replacement scenarios. </a><a href="https://prime.greeks.live/area/settlement-amount/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A precise optical sensor within an institutional-grade execution management system, representing a Prime RFQ intelligence layer. This enables high-fidelity execution and price discovery for digital asset derivatives via RFQ protocols, ensuring atomic settlement within market microstructure](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-high-fidelity-institutional-digital-asset-rfq-execution-system-lens.jpg)

## Settlement Amount

Meaning ▴ The Settlement Amount represents the definitive, agreed-upon monetary value exchanged between counterparties to discharge all financial obligations arising from a completed transaction, particularly within the domain of institutional digital asset derivatives. </a><a href="https://prime.greeks.live/area/loss-method/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A metallic, modular trading interface with black and grey circular elements, signifying distinct market microstructure components and liquidity pools. A precise, blue-cored probe diagonally integrates, representing an advanced RFQ engine for granular price discovery and atomic settlement of multi-leg spread strategies in institutional digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/08/institutional-digital-asset-derivatives-rfq-protocol-system-facilitating-high-fidelity-execution-price-discovery.jpg)

## Loss Method

Meaning ▴ The Loss Method defines a pre-established framework for allocating and distributing financial deficits among participants within a structured financial system, typically activated following a default event or during periods of significant market stress. </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">
![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)

## 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 precision internal mechanism for 'Institutional Digital Asset Derivatives' 'Prime RFQ'. White casing holds dark blue 'algorithmic trading' logic and a teal 'multi-leg spread' module](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-rfq-engine-high-fidelity-execution-liquidity-aggregation.jpg)

## Close-Out Amount

Meaning ▴ The Close-Out Amount represents the definitive financial value required to terminate a derivatives contract or position, typically calculated upon a default event or a pre-defined termination trigger. </a><a href="https://prime.greeks.live/area/commercially-reasonable/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A complex core mechanism with two structured arms illustrates a Principal Crypto Derivatives OS executing RFQ protocols. This system enables price discovery and high-fidelity execution for institutional digital asset derivatives block trades, optimizing market microstructure and capital efficiency via private quotations](https://options.greeks.live/wp-content/uploads/2025/07/high-fidelity-digital-asset-derivatives-rfq-execution-protocol-system.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/question/can-a-determining-party-revise-its-close-out-amount-calculation-after-submission/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A robust, dark metallic platform, indicative of an institutional-grade execution management system. Its precise, machined components suggest high-fidelity execution for digital asset derivatives via RFQ protocols](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-platform-high-fidelity-price-discovery-and-atomic-settlement-infrastructure.jpg)

## Determining Party

A Determining Party cannot unilaterally revise a submitted Close-Out Amount; corrections require mutual agreement or court adjudication. </a><a href="https://prime.greeks.live/question/can-a-firm-use-internal-models-to-calculate-the-close-out-amount-under-the-2002-isda/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Sleek metallic system component with intersecting translucent fins, symbolizing multi-leg spread execution for institutional grade digital asset derivatives. It enables high-fidelity execution and price discovery via RFQ protocols, optimizing market microstructure and gamma exposure for capital efficiency](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-trading-system-rfq-protocols.jpg)

## Internal Models

A firm may use internal models to calculate the 2002 ISDA Close-Out Amount if third-party data is unavailable or unreliable. </a><a href="https://prime.greeks.live/area/market-data/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A 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)

## Market Data

Meaning ▴ Market Data comprises the real-time or historical pricing and trading information for financial instruments, encompassing bid and ask quotes, last trade prices, cumulative volume, and order book depth. </a><a href="https://prime.greeks.live/question/how-do-courts-interpret-commercial-reasonableness-under-the-2002-isda/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sleek device showcases a rotating translucent teal disc, symbolizing dynamic price discovery and volatility surface visualization within an RFQ protocol. Its numerical display suggests a quantitative pricing engine facilitating algorithmic execution for digital asset derivatives, optimizing market microstructure through an intelligence layer](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-for-digital-asset-rfq-execution-system-with-smart-liquidity-routing.jpg)

## Commercial Reasonableness

Courts interpret commercial reasonableness under the 2002 ISDA as an objective standard requiring a verifiable process and a market-based result. </a><a href="https://prime.greeks.live/question/in-what-ways-did-the-lehman-brothers-default-influence-changes-in-isda-protocols/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Sleek, domed institutional-grade interface with glowing green and blue indicators highlights active RFQ protocols and price discovery. This signifies high-fidelity execution within a Prime RFQ for digital asset derivatives, ensuring real-time liquidity and capital efficiency](https://options.greeks.live/wp-content/uploads/2025/08/institutional-digital-asset-derivatives-rfq-prime-os-execution-interface.jpg)

## Lehman Brothers

The Lehman default forced a systemic re-architecture of ISDA protocols, shifting from a bilateral trust model to a centralized, collateral-driven 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">
![Abstract dual-cone object reflects RFQ Protocol dynamism. It signifies robust Liquidity Aggregation, High-Fidelity Execution, and Principal-to-Principal negotiation](https://options.greeks.live/wp-content/uploads/2025/08/institutional-grade-rfq-execution-framework-for-digital-asset-derivatives-optimal-liquidity-aggregation-and-atomic-settlement.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/isda-master-agreement/?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)

## 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/early-termination-date/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Visualizes the core mechanism of an institutional-grade RFQ protocol engine, highlighting its market microstructure precision. Metallic components suggest high-fidelity execution for digital asset derivatives, enabling private quotation and block trade processing](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-engine-core-1.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/question/what-are-the-key-differences-in-netting-treatment-between-standardized-and-internal-model-approaches/?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)

## Internal Model

The key difference is that standardized approaches use prescribed rules to recognize netting within rigid asset class silos, whereas internal models use a firm's own approved system to recognize netting holistically across an entire portfolio. </a>

**Tags:** [1992 ISDA Master Agreement](https://options.greeks.live/area/1992-isda-master-agreement/), [Counterparty Risk](https://options.greeks.live/area/counterparty-risk/), [Settlement Amount](https://options.greeks.live/area/settlement-amount/), [Lehman Brothers Bankruptcy](https://options.greeks.live/area/lehman-brothers-bankruptcy/), [ISDA Master Agreement](https://options.greeks.live/area/isda-master-agreement/), [Financial Derivatives Law](https://options.greeks.live/area/financial-derivatives-law/)	

## Discover More

- 
### [Can a Party Unilaterally Revise Its Close out Amount Calculation after It Has Been Submitted?](https://options.greeks.live/question/can-a-party-unilaterally-revise-its-close-out-amount-calculation-after-it-has-been-submitted/)
![A multi-layered, circular device with a central concentric lens. It symbolizes an RFQ engine for precision price discovery and high-fidelity execution. This robust system enables institutional digital asset derivatives trading, reflecting advanced market microstructure, volatility surface analysis, Principal's operational framework, and efficient options trading.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-engine-for-precision-execution.jpg)

A party cannot unilaterally revise a submitted close-out amount; the calculation creates a binding obligation alterable only by mutual consent or court order.

- 
### [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.

- 
### [What Constitutes a Commercially Reasonable Procedure under the 2002 ISDA Master Agreement?](https://options.greeks.live/question/what-constitutes-a-commercially-reasonable-procedure-under-the-2002-isda-master-agreement-2/)
![A multi-faceted crystalline structure, featuring sharp angles and translucent blue and clear elements, rests on a metallic base. This embodies Institutional Digital Asset Derivatives and precise RFQ protocols, enabling High-Fidelity Execution. Light interaction depicts Price Discovery within complex Market Microstructure, leveraging a Prime RFQ Intelligence Layer for Multi-Leg Spread optimization and Capital Efficiency.](https://options.greeks.live/wp-content/uploads/2025/07/high-fidelity-digital-asset-derivatives-rfq-market-microstructure.jpg)

A commercially reasonable procedure is an objectively verifiable valuation protocol, central to the 2002 ISDA's risk-mitigation architecture.

- 
### [How Does the 2002 ISDA Standard Affect Valuation in Illiquid Markets?](https://options.greeks.live/question/how-does-the-2002-isda-standard-affect-valuation-in-illiquid-markets/)
![A vibrant blue digital asset, encircled by a sleek metallic ring representing an RFQ protocol, emerges from a reflective Prime RFQ surface. This visualizes sophisticated market microstructure and high-fidelity execution within an institutional liquidity pool, ensuring optimal price discovery and capital efficiency.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-high-fidelity-execution-framework.jpg)

The 2002 ISDA standard replaces rigid valuation rules with a flexible, yet objective, framework for determining a derivative's value.

- 
### [What Is the Difference between the 1992 and 2002 Isda Close out Provisions?](https://options.greeks.live/question/what-is-the-difference-between-the-1992-and-2002-isda-close-out-provisions-2/)
![A translucent teal dome, brimming with luminous particles, symbolizes a dynamic liquidity pool within an RFQ protocol. Precisely mounted metallic hardware signifies high-fidelity execution and the core intelligence layer for institutional digital asset derivatives, underpinned by granular market microstructure.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-core-intelligence-layer.jpg)

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

- 
### [What Constitutes a Commercially Reasonable Procedure for Calculating a Close-Out Amount?](https://options.greeks.live/question/what-constitutes-a-commercially-reasonable-procedure-for-calculating-a-close-out-amount/)
![Detailed metallic disc, a Prime RFQ core, displays etched market microstructure. Its central teal dome, an intelligence layer, facilitates price discovery. Protruding rods signify low-latency RFQ protocol data transmission, ensuring high-fidelity execution for digital asset derivatives.](https://options.greeks.live/wp-content/uploads/2025/07/principal-operating-system-intelligence-layer-powering-digital-asset-derivatives-rfq-protocols-for-optimal-execution.jpg)

A commercially reasonable procedure is an objective, evidence-based method for valuing terminated derivatives to restore economic equivalence.

- 
### [In What Scenarios Might a Firm Prefer a 1992 ISDA over the More Protective 2002 Version?](https://options.greeks.live/question/in-what-scenarios-might-a-firm-prefer-a-1992-isda-over-the-more-protective-2002-version/)
![Precisely bisected, layered spheres symbolize a Principal's RFQ operational framework. They reveal institutional market microstructure, deep liquidity pools, and multi-leg spread complexity, enabling high-fidelity execution and atomic settlement for digital asset derivatives via an advanced Prime RFQ.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-microstructure-core.jpg)

A firm may prefer the 1992 ISDA to leverage its subjective close-out mechanics as a tool for strategic advantage in specific counterparty relationships.

- 
### [What Is the Difference between the 1992 and 2002 Isda Close-Out Standards?](https://options.greeks.live/question/what-is-the-difference-between-the-1992-and-2002-isda-close-out-standards/)
![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. This depicts market microstructure dynamics and capital efficiency within a secure prime brokerage environment.](https://options.greeks.live/wp-content/uploads/2025/07/rfq-protocols-for-institutional-digital-asset-derivatives-prime-os-execution.jpg)

The 2002 ISDA replaces the 1992 version's subjective close-out options with a single, objectively reasonable standard.

- 
### [Can a Firm Legally Challenge a Close-Out Amount That It Believes Was Not Calculated in a Commercially Reasonable Manner?](https://options.greeks.live/question/can-a-firm-legally-challenge-a-close-out-amount-that-it-believes-was-not-calculated-in-a-commercially-reasonable-manner/)
![Intersecting sleek components of a Crypto Derivatives OS symbolize RFQ Protocol for Institutional Grade Digital Asset Derivatives. Luminous internal segments represent dynamic Liquidity Pool management and Market Microstructure insights, facilitating High-Fidelity Execution for Block Trade strategies within a Prime Brokerage framework.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-high-fidelity-engine.jpg)

A firm can legally challenge a close-out amount by demonstrating the calculation failed the objective standard of commercial reasonableness.

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---

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