# What Is the Procedural Impact of Market Disruption on the Timing of a Close out Valuation? ▴ Question

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

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## Concept

When an institution enters into a derivative contract, it is not merely executing a trade; it is engaging with a complex, interconnected financial system governed by a precise set of protocols. The core of this system, for the majority of over-the-counter derivatives, is the [ISDA Master Agreement](https://prime.greeks.live/area/isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). This document functions as the operating system for the transaction, defining the rules of engagement, the flow of payments, and, critically, the protocols for handling system-wide failures.

A [market disruption event](https://prime.greeks.live/area/market-disruption-event/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) represents one of the most severe fault conditions this operating system can encounter. It is an acknowledgment that the foundational assumption of orderly markets ▴ the ability to derive a reliable price from an external source ▴ has been compromised.

The procedural impact of such a disruption on the timing of a [close-out valuation](https://prime.greeks.live/area/close-out-valuation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) is a direct function of this system’s built-in error-handling logic. The primary, immediate consequence is a controlled, sequential postponement of the valuation. The system’s architecture is designed to first seek a resolution through patience, assuming the disruption is temporary. It polls the market, waiting for the resumption of normal operations.

This is a deliberate design choice, privileging the integrity of a market-based price over the immediacy of a calculated one. The timing of the valuation is therefore decoupled from the originally scheduled date and enters a state of suspension, governed by the specific contractual terms that define a “[Disrupted Day](https://prime.greeks.live/area/disrupted-day/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite).”

> A market disruption fundamentally shifts a valuation from a time-certain event to a condition-contingent process.

This suspension, however, is not indefinite. The protocols recognize that a prolonged inability to source a market price is a critical failure that requires an alternative resolution pathway. If the disruption persists beyond a contractually defined period ▴ typically eight consecutive trading days ▴ the system architecture triggers a [fallback mechanism](https://prime.greeks.live/area/fallback-mechanism/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). The responsibility for price determination is escalated and transferred from the public market to a designated entity, the [Calculation Agent](https://prime.greeks.live/area/calculation-agent/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite).

This transfer marks a fundamental shift in the nature of the valuation itself. The process moves from one of passive observation of an external price to one of active determination, where the agent must construct a price based on a hierarchy of approved data sources and methodologies. The timing of the valuation becomes the moment the Calculation Agent, following these protocols, can render a definitive and justifiable figure.

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## What Defines a Disruption Event

A [Market Disruption](https://prime.greeks.live/area/market-disruption/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) Event is a specifically defined term within the 2002 ISDA [Equity Derivatives Definitions](https://prime.greeks.live/area/equity-derivatives-definitions/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) and similar frameworks. It is not a subjective assessment of market volatility; it is the triggering of a precise contractual condition. The event itself is typically characterized by one of three occurrences.

- **Trading Disruption** This signifies a material suspension of or limitation on trading for securities that comprise 20% or more of an index, or for a single share, on the relevant exchange.

- **[Exchange Disruption](https://prime.greeks.live/area/exchange-disruption/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)** This applies when an exchange fails to open for its regular session, announces an early close without sufficient prior notice, or experiences any other event that disrupts the ability to execute transactions or obtain prices.

- **Early Closure** This is a specific instance where the exchange closes before its scheduled closing time, and that closing time is material to the valuation of the transaction.

The determination that one of these events has occurred and is “material” is typically the responsibility of the Calculation Agent. This agent, usually a dealer counterparty, acts as the arbiter, initiating the procedural consequences outlined in the contract. The timing of this determination is critical, as the disruption must typically exist within the one-hour period leading up to the scheduled valuation time for the contract.

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## Strategy

The strategic framework for managing a [close-out valuation during market disruption](https://prime.greeks.live/question/how-does-the-2002-isda-master-agreement-change-the-close-out-valuation-standard/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) is centered on the ISDA Master Agreement’s evolution, specifically the shift from the 1992 Agreement’s methodologies to the 2002 Agreement’s unified “Close-out Amount.” This evolution reflects a systemic adaptation to the realities of market stress, moving from a rigid, quote-dependent process to a more flexible, data-driven architecture. Understanding this strategic shift is paramount for any institution seeking to manage [counterparty risk](https://prime.greeks.live/area/counterparty-risk/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) effectively.

> During market stress, the method of valuation becomes as critical as the valuation itself.

The 1992 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) presented parties with a choice between two primary valuation methods ▴ [Market Quotation](https://prime.greeks.live/area/market-quotation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) and Loss. Market Quotation was architecturally rigid, requiring the determining party to obtain firm quotes for a replacement transaction from at least three leading market makers. Its logic was rooted in obtaining an objective, observable replacement cost. The “Loss” method was more flexible, allowing a party to calculate its total losses and costs, a figure determined in “good faith.” This provided a fallback but introduced a level of subjectivity that could lead to disputes.

The financial crises of the late 1990s and early 2000s exposed the architectural flaws in this binary choice. During severe disruptions, obtaining the required number of quotes for Market Quotation became impractical or impossible, as dealers withdrew from making markets. The result was a procedural dead-end. 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) addressed this by introducing a single, more robust methodology ▴ 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 strategic redesign intended to function effectively even in illiquid or volatile conditions. It replaced the rigid requirement for quotes with a more resilient, multi-layered approach that allows for the use of various information sources, governed by the principle of “[commercial reasonableness](https://prime.greeks.live/area/commercial-reasonableness/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite).”

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## How Do Valuation Methodologies Compare under Stress

The structural differences between the 1992 and [2002 ISDA](https://prime.greeks.live/area/2002-isda/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) valuation frameworks dictate their performance during a market disruption. The 2002 Agreement’s “Close-out Amount” is inherently more resilient, designed to avoid the procedural failures that could paralyze the 1992 Agreement’s “Market Quotation” method.

### Table 1 ▴ Comparison of ISDA Valuation Methodologies

| Feature | 1992 ISDA (Market Quotation) | 1992 ISDA (Loss) | 2002 ISDA (Close-out Amount) |
| --- | --- | --- | --- |
| Primary Input | Firm quotes from reference market-makers for a replacement transaction. | Internal calculation of total losses and costs. | A wide range of information including quotes, relevant market data, and internal models. |
| Procedural Rigidity | High. Requires a specific number of quotes (typically 3-4), which can be impossible to obtain in a disrupted market. | Low. Highly flexible but can be viewed as subjective. | Moderate. Flexible inputs but guided by the objective standard of commercial reasonableness. |
| Governing Standard | Implicitly objective based on obtaining third-party quotes. | “Reasonably determines in good faith.” A standard of rationality. | “Act in good faith and use commercially reasonable procedures to produce a commercially reasonable result.” An objective standard. |
| Failure Mode | Procedural failure if requisite quotes cannot be obtained. The process stalls. | Potential for significant disputes over the reasonableness of the loss calculation. | More resilient to procedural failure; disputes would center on whether procedures and the result were commercially reasonable. |

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## The Strategic Role of the Calculation Agent

Under the ISDA framework, particularly after a disruption has triggered a fallback, the Calculation Agent assumes a position of immense procedural importance. Strategically, the agent’s role is to restore determinacy to an indeterminate situation. The agent is tasked with producing a valuation that is not only mathematically sound but also procedurally defensible. This requires a disciplined adherence to the contractual hierarchy of valuation inputs.

The agent will first attempt to use observable [market data](https://prime.greeks.live/area/market-data/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). If that is unavailable or deemed unreliable due to the disruption, the agent can then progress to using other sources, including sophisticated [internal models](https://prime.greeks.live/area/internal-models/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). The 2002 ISDA framework provides the agent with the necessary flexibility to do this, but it also imposes the discipline of commercial reasonableness.

Every decision, every choice of input, must be justifiable as a [commercially reasonable](https://prime.greeks.live/area/commercially-reasonable/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) step 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 strategic imperative is designed to balance the need for a timely valuation with the need to prevent opportunistic or unfair outcomes, thereby preserving the integrity of the close-out process itself.

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## Execution

Executing a close-out valuation during a market disruption is a high-stakes, time-sensitive procedure that demands analytical rigor and operational precision. The process begins the moment a Disrupted Day is declared, shifting the [valuation timing](https://prime.greeks.live/area/valuation-timing/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) from a fixed schedule to a contingent one. The initial phase is one of monitoring. The determining party must track market conditions, waiting for a Scheduled Trading Day that is not a Disrupted Day.

This waiting period has a hard limit. If eight consecutive Scheduled Trading Days are all Disrupted Days, the eighth day is automatically deemed the [Valuation Date](https://prime.greeks.live/area/valuation-date/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite).

On this deemed Valuation Date, the execution mandate transfers fully to the Calculation Agent. The agent must now construct the Close-out Amount. This is not a matter of guesswork; it is a structured process governed by Section 14 of the 2002 ISDA Master Agreement.

The agent must act in [good faith](https://prime.greeks.live/area/good-faith/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) 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). The execution involves gathering, assessing, and synthesizing information from multiple potential sources to arrive at a single figure representing the economic equivalent of the terminated transactions.

> A commercially reasonable valuation is the output of a commercially reasonable process.

The hierarchy of inputs is critical. The agent should prioritize externally verifiable data where available and reliable. This includes:

- **Third-Party Quotations** The agent can seek firm or indicative quotes from dealers or end-users for replacement transactions. Unlike the old Market Quotation method, there is no minimum number of quotes required. A single quote may suffice if it is commercially reasonable.

- **Relevant Market Data** This is a broad category that includes data points like yield curves, volatilities, funding spreads, and correlations. The agent can use this data to feed into its own valuation models.

- **Internal Information** The agent can use its own internal models and data, provided this information is of the type used in the regular course of its business for valuing similar transactions. This allows an institution to leverage its own sophisticated modeling capabilities, but it must be able to demonstrate that these models are consistent with its normal business practices.

The agent synthesizes these inputs to determine the [replacement cost](https://prime.greeks.live/area/replacement-cost/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), accounting for any unpaid amounts due between the parties. The final figure, the Close-out Amount, must be justifiable not just in its result, but in the procedure used to obtain it. Detailed records must be kept of all data considered, models used, and decisions made. This documentation is vital, as the determination is likely to face scrutiny and potential legal challenges.

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## What Is the Operational Sequence of a Disrupted Valuation

The operational sequence for determining a close-out amount during a prolonged market disruption follows a clear, auditable path. This systematic approach ensures that even in chaotic market conditions, the valuation process remains structured and defensible.

### Table 2 ▴ Execution Workflow for Disrupted Close-Out Valuation

| Phase | Action | Key Consideration | Governing Standard |
| --- | --- | --- | --- |
| 1. Event Trigger & Notification | Calculation Agent identifies a Market Disruption Event (e.g. Exchange Disruption) around the Valuation Time and notifies the counterparty. | Timeliness of notification. Materiality of the disruption. | ISDA Equity Derivatives Definitions (Section 6.3). |
| 2. Valuation Postponement | The Valuation Date is postponed to the next Scheduled Trading Day that is not a Disrupted Day. | Daily monitoring of market status. This continues for up to 8 consecutive days. | ISDA Equity Derivatives Definitions (Section 6.6). |
| 3. Fallback Trigger | If disruption persists for 8 consecutive Scheduled Trading Days, the 8th day is deemed the Valuation Date. | This is an automatic trigger; no further discretion is needed. The valuation must now proceed. | ISDA Equity Derivatives Definitions (Section 6.6(a)(i)). |
| 4. Data Aggregation | Calculation Agent gathers all available information ▴ third-party quotes (if any), market data (spreads, volatilities), and internal model inputs. | The agent must make a good faith effort to consider external sources before relying solely on internal information. | 2002 ISDA Master Agreement (Section 14, “Close-out Amount” definition). |
| 5. Value Determination | Agent synthesizes the data using commercially reasonable procedures to calculate the Close-out Amount. This may involve running internal models. | The procedure itself must be documented and justifiable. How was data weighted? Why was a certain model used? | “Commercially reasonable procedures in order to produce a commercially reasonable result.” |
| 6. Statement & Delivery | Agent prepares and delivers a statement to the counterparty showing the Close-out Amount and the calculations in reasonable detail. | Transparency is key to mitigating dispute risk. The statement should allow the counterparty to understand the basis of the calculation. | 2002 ISDA Master Agreement (Section 6(d)). |

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## How Are Disputes over Timing and Valuation Handled

Disputes are an inherent risk in any disrupted valuation. They typically arise from two sources ▴ a disagreement over whether a Disrupted Day occurred, or a challenge to the commercial reasonableness of the final Close-out Amount. In the first case, the dispute centers on the Calculation Agent’s initial determination. The aggrieved party would need to argue that the market event did not meet the contractual definition of a Trading or Exchange Disruption, or that it was not material.

In the second, more common scenario, the challenge focuses on the valuation itself. The party challenging the calculation bears the burden of showing that the determining party failed to act in a commercially reasonable manner. This is a high bar. The court would assess the procedures used by the agent.

Did they ignore readily available market data? Did they use an internal model that was inconsistent with their usual practices? The focus is on the objectivity and integrity of the process. A valuation that is the product of a well-documented, commercially reasonable procedure is highly defensible, even if the result is unfavorable to one party.

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## References

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

- International Swaps and Derivatives Association. “ISDA Close-out Amount Protocol.” 2009.

- Charles Law PLLC. “The ISDA Master Agreement ▴ Part II ▴ Negotiated Provisions.” Practical Compliance & Risk Management for the Securities Industry, May-June 2012.

- Legale, Salans. “The 2002 ISDA Master Agreement Made Simple.” Global Capital, 6 January 2003.

- International Swaps and Derivatives Association. “2002 ISDA Equity Derivatives Definitions.” 2002.

- Risk.net. “Exchange shutdowns could trigger derivatives unwinds.” 19 March 2020.

- The Jolly Contrarian. “Market Disruption Event – Equity Derivatives Provision.” 7 August 2023.

- Ashurst. “BRRD ▴ valuation of derivatives and contractual stays in financial contracts.” 22 January 2016.

- International Swaps and Derivatives Association. “ISDA Equity Derivatives Committee Market Practice Issues.” 25 June 2007.

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

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## Reflection

The protocols governing market disruptions and close-out valuations are more than mere contractual terms; they are a schematic of the market’s own risk management architecture. They reveal a system designed to privilege order and integrity, first through patience, and then through a structured, delegated authority. Examining the procedural impact of these events on your own portfolio necessitates a deeper question ▴ Is your operational framework built to merely withstand these disruptions, or is it designed to navigate them with analytical precision?

The knowledge of these protocols provides a component of a larger system of intelligence. The true strategic advantage lies in integrating this knowledge into a cohesive operational capability that anticipates, adapts, and executes with clarity when the market’s fundamental assumptions are challenged.

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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/area/market-disruption-event/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Market Disruption Event

Meaning ▴ A Market Disruption Event signifies a severe, atypical breakdown in the orderly functioning of a financial market, characterized by extreme price volatility, a significant withdrawal of liquidity, or critical operational failures across trading infrastructure. </a><a href="https://prime.greeks.live/area/close-out-valuation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Close-Out Valuation

Meaning ▴ Close-Out Valuation refers to the precise calculation of a financial position's or an entire portfolio's worth at a specific point in time, primarily for the purpose of its termination, liquidation, or transfer. </a><a href="https://prime.greeks.live/area/disrupted-day/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Disrupted Day

Meaning ▴ A Disrupted Day signifies a period within a trading session where observed market parameters deviate significantly from established baseline conditions or predictive models, typically characterized by extreme volatility, liquidity dislocations, or order book instability in digital asset derivatives markets. </a><a href="https://prime.greeks.live/area/fallback-mechanism/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Fallback Mechanism

Meaning ▴ A fallback mechanism represents a pre-engineered, automated operational sequence designed to activate upon the detection of a failure or significant degradation in a primary system or process, ensuring the continuity of critical functions and the achievement of predefined objectives within a complex trading architecture. </a><a href="https://prime.greeks.live/area/calculation-agent/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Calculation Agent

Meaning ▴ A Calculation Agent is a designated entity, typically a financial institution, responsible for independently determining specific financial parameters or values within a derivative contract or structured product. </a><a href="https://prime.greeks.live/area/equity-derivatives-definitions/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Equity Derivatives Definitions

Meaning ▴ Equity Derivatives Definitions constitute the precise formal specification of financial instruments whose value is derived from underlying equity assets, encompassing options, futures, swaps, and other structured products. </a><a href="https://prime.greeks.live/area/market-disruption/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Market Disruption

Meaning ▴ Market Disruption defines a sudden, significant deviation from the expected operational equilibrium within a financial market, characterized by an abrupt shift in liquidity, volatility, and price discovery mechanisms. </a><a href="https://prime.greeks.live/area/exchange-disruption/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Intricate metallic mechanisms portray a proprietary matching engine or execution management system. Its robust structure enables algorithmic trading and high-fidelity execution for institutional digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-engine-market-microstructure.jpg)

## Exchange Disruption

Meaning ▴ Exchange Disruption refers to a severe operational anomaly within a digital asset exchange platform, characterized by a fundamental breakdown in its core functionality, such as order matching, data dissemination, or settlement finality, rendering it incapable of reliably processing transactions or maintaining an accurate market state. </a><a href="https://prime.greeks.live/question/how-does-the-2002-isda-master-agreement-change-the-close-out-valuation-standard/?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)

## Close-Out Valuation during Market Disruption

The 2002 ISDA Agreement upgrades close-out valuation from a subjective judgment to a robust, auditable protocol based on objective commercial reason. </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 futuristic apparatus visualizes high-fidelity execution for digital asset derivatives. A transparent sphere represents a private quotation or block trade, balanced on a teal Principal's operational framework, signifying capital efficiency within an RFQ protocol](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-via-prime-os.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/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">
![A polished, dark teal institutional-grade mechanism reveals an internal beige interface, precisely deploying a metallic, arrow-etched component. This signifies high-fidelity execution within an RFQ protocol, enabling atomic settlement and optimized price discovery for institutional digital asset derivatives and multi-leg spreads, ensuring minimal slippage and robust capital efficiency](https://options.greeks.live/wp-content/uploads/2025/08/quantitative-finance-driven-rfq-workflow-for-best-execution-in-digital-assets.jpg)

## 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/market-quotation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A teal-blue disk, symbolizing a liquidity pool for digital asset derivatives, is intersected by a bar. This represents an RFQ protocol or block trade, detailing high-fidelity execution pathways](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-rfq-protocols-high-fidelity-digital-asset-execution.jpg)

## Market Quotation

Meaning ▴ A market quotation represents the current executable bid and ask prices for a specific financial instrument, typically accompanied by the corresponding tradable sizes or market depth at various price levels. </a><a href="https://prime.greeks.live/area/2002-isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A translucent teal dome, brimming with luminous particles, symbolizes a dynamic liquidity pool within an RFQ protocol. Precisely mounted metallic hardware signifies high-fidelity execution and the core intelligence layer for institutional digital asset derivatives, underpinned by granular market microstructure](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-core-intelligence-layer.jpg)

## 2002 Isda 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 execution pathway with an intelligence layer for price discovery, processing market microstructure data. A reflective block trade sphere signifies private quotation within a dark pool](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-engine-precision-execution.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/commercial-reasonableness/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A precision mechanical assembly: black base, intricate metallic components, luminous mint-green ring with dark spherical core. This embodies an institutional Crypto Derivatives OS, its market microstructure enabling high-fidelity execution via RFQ protocols for intelligent liquidity aggregation and optimal price discovery](https://options.greeks.live/wp-content/uploads/2025/08/institutional-crypto-derivatives-rfq-engine-high-fidelity-execution.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/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/internal-models/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A symmetrical, star-shaped Prime RFQ engine with four translucent blades symbolizes multi-leg spread execution and diverse liquidity pools. Its central core represents price discovery for aggregated inquiry, ensuring high-fidelity execution within a secure market microstructure via smart order routing for block trades](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-engine-prime-os-1.jpg)

## Internal Models

Meaning ▴ Internal Models constitute a sophisticated computational framework utilized by financial institutions to quantify and manage various risk exposures, including market, credit, and operational risk, often serving as the foundation for regulatory capital calculations and strategic business decisions. </a><a href="https://prime.greeks.live/area/market-data/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sophisticated mechanical system featuring a translucent, crystalline blade-like component, embodying a Prime RFQ for Digital Asset Derivatives. This visualizes high-fidelity execution of RFQ protocols, demonstrating aggregated inquiry and price discovery within market microstructure](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-system-microstructure-1.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-commercially-reasonable-procedures-in-close-out-amount-calculations/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Transparent conduits and metallic components abstractly depict institutional digital asset derivatives trading. Symbolizing cross-protocol RFQ execution, multi-leg spreads, and high-fidelity atomic settlement across aggregated liquidity pools, it reflects prime brokerage infrastructure](https://options.greeks.live/wp-content/uploads/2025/07/cross-protocol-rfq-execution-digital-asset-derivatives-microstructure-system.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/commercially-reasonable/?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

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/valuation-timing/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A scratched blue sphere, representing market microstructure and liquidity pool for digital asset derivatives, encases a smooth teal sphere, symbolizing a private quotation via RFQ protocol. An institutional-grade structure suggests a Prime RFQ facilitating high-fidelity execution and managing counterparty risk](https://options.greeks.live/wp-content/uploads/2025/07/institutional-rfq-protocols-optimizing-digital-asset-derivative-execution-microstructure.jpg)

## Valuation Timing

Meaning ▴ Valuation Timing refers to the precise synchronization of an asset's calculated fair value with the immediate opportunity for transaction, a critical function in dynamic digital asset markets. </a><a href="https://prime.greeks.live/area/valuation-date/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Precisely engineered metallic components, including a central pivot, symbolize the market microstructure of an institutional digital asset derivatives platform. This mechanism embodies RFQ protocols facilitating high-fidelity execution, atomic settlement, and optimal price discovery for crypto options](https://options.greeks.live/wp-content/uploads/2025/07/high-fidelity-digital-asset-derivatives-rfq-market-microstructure-1.jpg)

## Valuation Date

Meaning ▴ The Valuation Date represents the specific calendar date and precise time at which the fair value of an asset, liability, or an entire portfolio is definitively determined for the purpose of accounting, regulatory reporting, or internal risk management, establishing a verifiable temporal snapshot of all financial positions and obligations within a system. </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 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](https://options.greeks.live/wp-content/uploads/2025/08/precision-engineered-institutional-digital-asset-derivatives-rfq-execution.jpg)

## Commercially Reasonable Procedures

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

## 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/replacement-cost/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Precision instruments, resembling calibration tools, intersect over a central geared mechanism. This metaphor illustrates the intricate market microstructure and price discovery for institutional digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-rfq-execution-engine-microstructure-analytics.jpg)

## Replacement Cost

Meaning ▴ Replacement Cost quantifies the current economic value required to substitute an existing financial contract, typically a derivative, with an identical one at prevailing market prices. </a>

**Tags:** [Market Disruption Event](https://options.greeks.live/area/market-disruption-event/), [Equity Derivatives Definitions](https://options.greeks.live/area/equity-derivatives-definitions/), [Commercial Reasonableness](https://options.greeks.live/area/commercial-reasonableness/), [2002 ISDA](https://options.greeks.live/area/2002-isda/), [Close-Out Valuation](https://options.greeks.live/area/close-out-valuation/), [Market Disruption](https://options.greeks.live/area/market-disruption/)	

## Discover More

- 
### [How Does the 2002 ISDA Close-Out Amount Calculation Handle Illiquid Transactions?](https://options.greeks.live/question/how-does-the-2002-isda-close-out-amount-calculation-handle-illiquid-transactions/)
![An abstract, multi-component digital infrastructure with a central lens and circuit patterns, embodying an Institutional Digital Asset Derivatives platform. This Prime RFQ enables High-Fidelity Execution via RFQ Protocol, optimizing Market Microstructure for Algorithmic Trading, Price Discovery, and Multi-Leg Spread.](https://options.greeks.live/wp-content/uploads/2025/08/institutional-grade-digital-asset-derivatives-trading-platform-powering-high-fidelity-execution-via-advanced-rfq-protocol-prime-os-intelligence-layer.jpg)

The 2002 ISDA framework provides a robust protocol for calculating termination values for illiquid assets by replacing rigid quotation requirements with a flexible, yet objectively verifiable, standard of commercial reasonableness.

- 
### [What Is the Legal Standard for “Commercially Reasonable Procedures” in a Derivatives Close-Out?](https://options.greeks.live/question/what-is-the-legal-standard-for-commercially-reasonable-procedures-in-a-derivatives-close-out/)
![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)

The legal standard for "commercially reasonable procedures" is an objective duty to employ a fair, verifiable, and market-based process to calculate a derivatives close-out value.

- 
### [How Does the 2002 ISDA Close-Out Amount Calculation Differ from the 1992 Methodologies?](https://options.greeks.live/question/how-does-the-2002-isda-close-out-amount-calculation-differ-from-the-1992-methodologies/)
![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)

The 2002 ISDA replaces subjective 1992 valuation methods with an objective, commercially reasonable framework for greater certainty.

- 
### [What Is the Main Difference in the Close out Calculation between the 1992 and 2002 ISDA?](https://options.greeks.live/question/what-is-the-main-difference-in-the-close-out-calculation-between-the-1992-and-2002-isda/)
![A sophisticated metallic mechanism with integrated translucent teal pathways on a dark background. This abstract visualizes the intricate market microstructure of an institutional digital asset derivatives platform, specifically the RFQ engine facilitating private quotation and block trade execution. It underscores high-fidelity execution and atomic settlement within a secure Prime RFQ, revealing latent liquidity and capital efficiency.](https://options.greeks.live/wp-content/uploads/2025/07/systemic-framework-for-institutional-digital-asset-derivatives-rfq-price-discovery-and-atomic-settlement.jpg)

The 2002 ISDA replaces the 1992's rigid 'Market Quotation/Loss' with a flexible, 'commercially reasonable' Close-out Amount.

- 
### [Under What Circumstances Can an Internal Model Be Used for a Close-Out Amount?](https://options.greeks.live/question/under-what-circumstances-can-an-internal-model-be-used-for-a-close-out-amount/)
![A precision-engineered institutional digital asset derivatives execution system cutaway. The teal Prime RFQ casing reveals intricate market microstructure. Bright blue internal elements represent dynamic liquidity pools, enabling high-fidelity execution and efficient RFQ protocols for multi-leg spread strategies.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-prime-os-rfq-protocol-core-engine.jpg)

An internal model can be used for a close-out amount when contractually permitted and commercially reasonable, especially for complex derivatives.

- 
### [How Does the 2002 ISDA Close out Amount Differ from the 1992 Loss Calculation?](https://options.greeks.live/question/how-does-the-2002-isda-close-out-amount-differ-from-the-1992-loss-calculation-2/)
![A translucent institutional-grade platform reveals its RFQ execution engine with radiating intelligence layer pathways. Central price discovery mechanisms and liquidity pool access points are flanked by pre-trade analytics modules for digital asset derivatives and multi-leg spreads, ensuring high-fidelity execution.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-core-platform.jpg)

The 2002 ISDA Close-Out Amount mandates an objective valuation, while the 1992 Loss allows a subjective indemnity calculation.

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

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

- 
### [What Are the Consequences If a Court Finds a Close-Out Calculation Was Not Commercially Reasonable?](https://options.greeks.live/question/what-are-the-consequences-if-a-court-finds-a-close-out-calculation-was-not-commercially-reasonable/)
![Abstract geometric forms in blue and beige represent institutional liquidity pools and market segments. A metallic rod signifies RFQ protocol connectivity for atomic settlement of digital asset derivatives. This visualizes high-fidelity execution and price discovery across diverse trading venues, emphasizing capital efficiency and minimizing slippage.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-market-microstructure-1.jpg)

A non-compliant close-out calculation cedes financial control to the court, which will impose its own objective valuation.

- 
### [What Constitutes a Commercially Reasonable Procedure When Calculating a Close out Amount under the 2002 ISDA?](https://options.greeks.live/question/what-constitutes-a-commercially-reasonable-procedure-when-calculating-a-close-out-amount-under-the-2002-isda/)
![A metallic structural component interlocks with two black, dome-shaped modules, each displaying a green data indicator. This signifies a dynamic RFQ protocol within an institutional Prime RFQ, enabling high-fidelity execution for digital asset derivatives. Internal mechanisms underscore algorithmic trading and pre-trade analytics for capital efficiency and best execution.](https://options.greeks.live/wp-content/uploads/2025/07/modular-rfq-protocol-engine-for-digital-asset-derivatives-prime-os.jpg)

A commercially reasonable procedure for calculating a Close-Out Amount under the 2002 ISDA is an objective, good faith process.

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---

**Original URL:** https://options.greeks.live/question/what-is-the-procedural-impact-of-market-disruption-on-the-timing-of-a-close-out-valuation/
