# Why Was the "First Method" or One-Way Payment System Removed in the 2002 ISDA Master Agreement? ▴ Question

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

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## Concept

The operational architecture of the over-the-counter derivatives market underwent a foundational upgrade with 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). A central element of this recalibration was the decommissioning of the “First Method” for calculating termination payments. To comprehend the logic driving this evolution, one must first view the [ISDA Master Agreement](https://prime.greeks.live/area/isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) as a single, integrated contract designed to govern all transactions between two counterparties.

Its primary function is to create a predictable, enforceable, and stable system for managing [counterparty credit risk](https://prime.greeks.live/area/counterparty-credit-risk/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). The 1992 iteration of the agreement presented a choice in its termination payment mechanics, a choice that fundamentally altered the risk equation upon a default event.

The First Method, often termed a “[walkaway clause](https://prime.greeks.live/area/walkaway-clause/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite),” permitted a [non-defaulting party](https://prime.greeks.live/area/non-defaulting-party/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) to terminate its obligations and make no further payments to the defaulting party, even if the non-defaulting party was “out-of-the-money” on the net value of all transactions. This meant if Counterparty A defaulted, and Counterparty B owed a net amount to A across their portfolio, Counterparty B could, under the First Method, simply walk away, retaining that amount as a windfall. This approach created a punitive asymmetry. Its existence was a direct contradiction to the core objective of the ISDA framework, which is to precisely quantify and settle the net economic value of a terminated portfolio, thereby preventing systemic shocks.

> The First Method allowed a non-defaulting party to withhold payments owed to a defaulting counterparty, creating a punitive and asymmetric outcome upon termination.

The alternative, the “Second Method,” mandated a full [two-way payment](https://prime.greeks.live/area/two-way-payment/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). Under this system, the net value of the [terminated transactions](https://prime.greeks.live/question/in-what-ways-can-the-valuation-of-terminated-derivatives-be-disputed-during-a-default/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) is calculated, and whoever owes money pays it, regardless of which party defaulted. If the non-defaulting party is out-of-the-money, it must pay the net amount to the defaulting party’s estate. This mechanism preserves the true economic reality of the trading relationship at the moment of termination.

The [2002 ISDA](https://prime.greeks.live/area/2002-isda/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) [Master Agreement](https://prime.greeks.live/area/master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) eliminated the choice entirely, making the two-way payment approach the universal standard. This decision was a direct consequence of the market’s maturation and a systemic recognition that the stability of the network depends on the equitable and predictable settlement of all obligations.

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## The Single Agreement Principle

The ISDA Master Agreement’s structural integrity rests on the “[single agreement](https://prime.greeks.live/area/single-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)” concept, as articulated in Section 1(c) of the document. This clause stipulates that the Master Agreement and all subsequent transaction confirmations constitute a single, unified legal contract. This architecture is the bedrock of [close-out netting](https://prime.greeks.live/area/close-out-netting/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite).

Without it, each transaction could be treated as a separate contract, allowing an insolvent firm’s administrator to “cherry-pick” ▴ demanding payment on profitable contracts while simultaneously defaulting on unprofitable ones. Such a scenario would shatter the risk-mitigating function of derivatives portfolios.

The [First Method](https://prime.greeks.live/area/first-method/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) acted as a corrosive agent on this principle. By allowing a non-defaulting party to ignore its net payment obligations, it partially negated the “single agreement” concept in practice. It suggested that under specific circumstances ▴ a counterparty’s default ▴ the unified portfolio could be fractured to the benefit of one party. The removal of the First Method was a powerful reaffirmation of the single agreement’s sanctity, ensuring that the portfolio is always treated as an indivisible whole for the purposes of termination and settlement.

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## Strategy

The strategic decision to remove the First Method from the 2002 ISDA Master Agreement was driven by a convergence of regulatory pressure, the pursuit of market stability, and a sophisticated understanding of commercial fairness. The framework of the 1992 agreement, by offering this choice, created a structural vulnerability that was ultimately deemed unacceptable by both regulators and market participants seeking a more robust and predictable financial architecture.

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## Regulatory Imperatives and Capital Adequacy

A primary catalyst for the change was the stance of banking regulators, particularly in the United States. For [regulatory capital](https://prime.greeks.live/area/regulatory-capital/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) purposes, financial institutions are permitted to calculate their credit exposure to a counterparty on a net basis, provided a legally robust bilateral netting agreement is in place. This is a significant benefit, as netting dramatically reduces the reported [credit risk](https://prime.greeks.live/area/credit-risk/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), which in turn lowers the amount of regulatory capital a bank must hold against its derivatives portfolio. A lower capital requirement enhances a bank’s return on equity and frees up capital for other activities.

The First Method jeopardized this treatment. Regulators took the position that the “walkaway” nature of the clause undermined the legal certainty of netting. Because the non-defaulting party could avoid payment, the ultimate settlement amount was not a true reflection of the net [mark-to-market value](https://prime.greeks.live/question/can-a-firm-be-profitable-on-a-mark-to-market-basis-and-still-fail-due-to-margin-calls/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) of the portfolio. Consequently, institutions that elected the First Method were often required to report their exposures on a gross basis.

This eliminated the capital efficiency benefit of the ISDA Master Agreement, making the First Method a costly and operationally burdensome choice. The 2002 Agreement’s standardization on a two-way payment system aligned the legal framework with regulatory expectations, ensuring the capital benefits of netting were universally available and legally sound.

> Eliminating the First Method was essential for aligning the ISDA framework with regulatory capital requirements that favor true, enforceable bilateral netting.

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## What Was the Impact on Market Stability and Systemic Risk?

The First Method introduced a degree of moral hazard and potential for systemic contagion. It created a “winner-takes-all” scenario in the event of a default, which could have destabilizing effects during periods of market stress. Consider a scenario where a major financial institution defaults. Its counterparties would immediately assess their net positions.

- **Counterparties in-the-money** ▴ Those owed money by the defaulting firm would initiate close-out procedures to claim their net value.

- **Counterparties out-of-the-money** ▴ Those who owed money to the defaulting firm and had elected the First Method could simply walk away, withholding payments that would otherwise flow to the defaulting firm’s creditors.

This withholding of payments exacerbates the financial distress of the defaulting entity, making it harder for its administrators to recover value for its creditors, which could include other banks, pension funds, and corporations. This cascade of amplified losses could increase the risk of further defaults across the system. The [Second Method](https://prime.greeks.live/area/second-method/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), by ensuring that all out-of-the-money counterparties pay their net obligations into the bankruptcy estate, provides a more orderly and equitable distribution of assets, thereby dampening systemic shocks. The 2002 ISDA’s adoption of a mandatory two-way payment system was a strategic move to build a more resilient market infrastructure.

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## Fairness and the Evolution of Commercial Practice

Over time, market consensus grew that the First Method was commercially unreasonable and inequitable. A derivative contract is a tool for managing price risk, and its value at any given time is a function of market movements. A default is a credit event, separate from the mark-to-market value of the underlying transactions. The First Method conflated these two distinct events, allowing a credit event (the default) to extinguish a legitimate market-based debt.

This was viewed as a punitive measure that went beyond the simple compensation for losses incurred due to the default. The Second Method, in contrast, cleanly separates the two. It first establishes the net mark-to-market value of the terminated portfolio and then handles that amount as a claim in the default proceedings. This is a more logical and commercially sound approach.

The table below illustrates the strategic shift in philosophy between the two approaches.

### Philosophical Shift In Termination Payment Systems

| Attribute | First Method (1992 ISDA Option) | Second Method / 2002 ISDA Standard |
| --- | --- | --- |
| Core Principle | Punitive. The defaulting party forfeits its positive net equity. | Equitable. The net economic value of the portfolio is preserved and settled. |
| Risk Focus | Maximizes the outcome for the non-defaulting party. | Preserves the stability and predictability of the overall market system. |
| Treatment of Default | Used as a trigger to extinguish a payment obligation. | Used as a trigger to crystallize and settle a net payment obligation. |
| Commercial Logic | Provides a windfall to the non-defaulting party if it is out-of-the-money. | Reflects the true economic bargain between the parties at termination. |

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## Execution

The transition from the optionality of the 1992 ISDA to the standardized approach of the 2002 ISDA represented a significant evolution in the operational execution of derivatives close-outs. The introduction of the “[Close-Out Amount](https://prime.greeks.live/area/close-out-amount/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)” as a unified calculation methodology was central to this shift. This new definition replaced the bifurcated “Market Quotation” and “Loss” measures from the 1992 agreement, providing a more flexible and [commercially reasonable](https://prime.greeks.live/area/commercially-reasonable/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) standard for determining the final settlement amount.

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## How Is the Close-Out Amount Calculated?

The Close-Out Amount is defined as the amount of losses or costs that the [determining party](https://prime.greeks.live/area/determining-party/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) (typically the non-defaulting party) incurs, or the gains it realizes, in replacing or providing the economic equivalent of the material terms of the terminated transactions. The 2002 ISDA requires the determining party to use “commercially reasonable procedures to produce a commercially reasonable result.” This is a principles-based standard that grants a degree of discretion while binding the calculating party to standards of good faith and rational market practice.

The calculation process involves several key steps:

- **Identification of Terminated Transactions** ▴ All transactions governed by the single ISDA Master Agreement are identified for termination.

- **Valuation Date** ▴ An Early Termination Date is designated, which serves as the “as of” date for all valuations.

- **Economic Equivalent Assessment** ▴ The determining party must assess the cost of entering into replacement trades that would replicate the future cash flows of the terminated transactions. This can be done by:

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

- Using internal pricing models, provided they are consistent with models used for internal accounting and risk management purposes.

- Considering any other information that, in its commercially reasonable judgment, is relevant.

</li>
- **Inclusion of Costs and Gains** ▴ The calculation must also include any reasonable costs associated with liquidating or re-establishing hedges related to the terminated portfolio. It must also account for the value of any option rights embedded within the terminated trades.

- **Aggregation and Netting** ▴ The gains, losses, and costs for all terminated transactions are aggregated into a single net number. This final figure is the Close-Out Amount. If it is a positive number, it is owed to the determining party. If it is a negative number, its absolute value is owed to the other party.

> The Close-Out Amount under the 2002 ISDA is a unified and principles-based metric designed to reflect the true economic cost of replacing a terminated derivatives portfolio.

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## Quantitative Comparison of Termination Scenarios

To understand the profound difference in execution, consider a simple portfolio between Counterparty A and Counterparty B. Counterparty A enters bankruptcy, triggering an Event of Default.

**Portfolio at Termination Date** ▴ 

- **Transaction 1 (Interest Rate Swap)** ▴ Mark-to-market value is +$10 million from B’s perspective (B is in-the-money).

- **Transaction 2 (FX Forward)** ▴ Mark-to-market value is -$15 million from B’s perspective (B is out-of-the-money).

The net value of the portfolio from B’s perspective is -$5 million. This means Counterparty B owes a net amount of $5 million to Counterparty A.

The following table demonstrates the divergent outcomes based on the governing agreement and elected method.

### Execution of Close-Out Under Different ISDA Frameworks

| Framework | Governing Principle | Calculation Steps | Payment Outcome |
| --- | --- | --- | --- |
| 1992 ISDA with First Method | One-Way “Walkaway” Payment | 1. Net the transactions ▴ +$10M – $15M = -$5M. 2. Non-Defaulting Party (B) is the net payer. 3. First Method applies ▴ B is not required to pay. | Counterparty B pays nothing to Counterparty A. A’s estate does not receive the $5 million it is economically owed. |
| 1992 ISDA with Second Method | Two-Way Payment | 1. Net the transactions ▴ +$10M – $15M = -$5M. 2. Non-Defaulting Party (B) is the net payer. 3. Second Method applies ▴ B must pay its net obligation. | Counterparty B pays $5 million to Counterparty A’s estate. |
| 2002 ISDA (Mandatory) | Two-Way Payment via Close-Out Amount | 1. Calculate Close-Out Amount, which equals the net MTM of -$5M. 2. The amount is negative, so it is owed by the determining party (B). 3. Two-way payment is mandatory. | Counterparty B pays $5 million to Counterparty A’s estate. |

This quantitative example makes the operational and financial impact clear. The First Method creates a $5 million windfall for Counterparty B and an equivalent loss for Counterparty A’s creditors. The 2002 ISDA framework prevents this, ensuring the execution of the close-out aligns with the actual economic position of the portfolio, thereby promoting a more stable and equitable resolution.

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## References

- International Swaps and Derivatives Association. “2002 ISDA Master Agreement.” ISDA, 2002.

- International Swaps and Derivatives Association. “1992 ISDA Master Agreement.” ISDA, 1992.

- Flanagan, Michael D. “Derivatives Laws and Regulations Close-out Under the 1992 and 2002 ISDA Master Agreements 2025.” _International Comparative Legal Guides_, 2024.

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

- Linklaters. “Section 2(a)(iii) ISDA® Master Agreement ▴ Court of Appeal judgment on four appeals.” _Linklaters Client Publication_, 16 Apr. 2012.

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## Reflection

The architectural shift from the 1992 to the 2002 ISDA Master Agreement is a case study in the maturation of a market. The elimination of the First Method was a deliberate design choice, moving the system from a punitive, asymmetric model to one grounded in the principles of economic equity and systemic stability. This evolution compels us to examine our own risk management frameworks. Are our protocols designed merely to win a zero-sum game upon a counterparty’s failure, or are they engineered to contribute to the stability and predictability of the entire system in which we operate?

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## What Does This Mean for Modern Risk Systems?

Understanding this history is foundational. It informs how we model counterparty credit risk, how we structure legal agreements, and how we build operational procedures for default management. The principles embedded in the 2002 ISDA ▴ the sanctity of the single agreement and the fairness of two-way payments ▴ are now the bedrock of the global derivatives market.

A truly robust operational framework internalizes not just the rules themselves, but the strategic logic that drove their creation. The ultimate advantage lies in designing systems that are not only compliant but are also architecturally aligned with the stable, efficient, and equitable market the industry has collectively worked to build.

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## Glossary

<a href="https://prime.greeks.live/area/2002-isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## 2002 Isda Master Agreement

Meaning ▴ The 2002 ISDA Master Agreement is the foundational legal document published by the International Swaps and Derivatives Association, designed to standardize the contractual terms for privately negotiated (Over-the-Counter) derivatives transactions between two counterparties globally. </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">
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## Isda Master Agreement

Meaning ▴ The ISDA Master Agreement, while originating in traditional finance, serves as a crucial foundational legal framework for institutional participants engaging in over-the-counter (OTC) crypto derivatives trading and complex RFQ crypto transactions. </a><a href="https://prime.greeks.live/area/counterparty-credit-risk/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Counterparty Credit Risk

Meaning ▴ Counterparty Credit Risk, in the context of crypto investing and derivatives trading, denotes the potential for financial loss arising from a counterparty's failure to fulfill its contractual obligations in a transaction. </a><a href="https://prime.greeks.live/area/non-defaulting-party/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Non-Defaulting Party

Meaning ▴ A Non-Defaulting Party refers to the participant in a financial contract, such as a derivatives agreement or lending facility within the crypto ecosystem, that has fully adhered to its obligations while the other party has failed to do so. </a><a href="https://prime.greeks.live/area/walkaway-clause/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Walkaway Clause

Meaning ▴ A Walkaway Clause, also known as a limited two-way payment provision, is a contractual term permitting a non-defaulting party in a derivatives or financing agreement to terminate the contract upon a counterparty's default. </a><a href="https://prime.greeks.live/question/in-what-ways-can-the-valuation-of-terminated-derivatives-be-disputed-during-a-default/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Terminated Transactions

Disputing a terminated derivative's value involves a forensic audit of the close-out process and its commercial reasonableness. </a><a href="https://prime.greeks.live/area/two-way-payment/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Two-Way Payment

Meaning ▴ A Two-Way Payment refers to a transactional model where value can flow bidirectionally between two parties or entities. </a><a href="https://prime.greeks.live/area/master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Master Agreement

Meaning ▴ A Master Agreement is a standardized, foundational legal contract that establishes the overarching terms and conditions governing all future transactions between two parties for specific financial instruments, such as derivatives or foreign exchange. </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">
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## 2002 Isda

Meaning ▴ The 2002 ISDA, or the 2002 ISDA Master Agreement, represents the prevailing global standard contractual framework developed by the International Swaps and Derivatives Association for documenting over-the-counter (OTC) derivatives transactions between two parties. </a><a href="https://prime.greeks.live/area/close-out-netting/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A dark blue sphere and teal-hued circular elements on a segmented surface, bisected by a diagonal line. This visualizes institutional block trade aggregation, algorithmic price discovery, and high-fidelity execution within a Principal's Prime RFQ, optimizing capital efficiency and mitigating counterparty risk for digital asset derivatives and multi-leg spreads](https://options.greeks.live/wp-content/uploads/2025/07/market-microstructure-driven-institutional-digital-asset-derivatives-rfq.jpg)

## Close-Out Netting

Meaning ▴ Close-out netting is a legally enforceable contractual provision that, upon the occurrence of a default event by one counterparty, immediately terminates all outstanding transactions between the parties and converts all reciprocal obligations into a single, net payment or receipt. </a><a href="https://prime.greeks.live/area/single-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Precision-engineered institutional grade components, representing prime brokerage infrastructure, intersect via a translucent teal bar embodying a high-fidelity execution RFQ protocol. This depicts seamless liquidity aggregation and atomic settlement for digital asset derivatives, reflecting complex market microstructure and efficient price discovery](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-prime-os-core.jpg)

## Single Agreement

Meaning ▴ A Single Agreement is a master legal contract that consolidates multiple transactions and the overall relationship between two parties into one comprehensive document. </a><a href="https://prime.greeks.live/area/first-method/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A 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](https://options.greeks.live/wp-content/uploads/2025/07/modular-rfq-protocol-engine-for-digital-asset-derivatives-prime-os.jpg)

## First Method

Meaning ▴ The "First Method" refers to a specific approach within the context of trade allocation and execution in financial markets, where the earliest submitted orders from clients are prioritized for execution against available market liquidity. </a><a href="https://prime.greeks.live/area/regulatory-capital/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Interlocked, precision-engineered spheres reveal complex internal gears, illustrating the intricate market microstructure and algorithmic trading of an institutional grade Crypto Derivatives OS. This visualizes high-fidelity execution for digital asset derivatives, embodying RFQ protocols and capital efficiency](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-prime-os-rfq-execution-system.jpg)

## Regulatory Capital

Meaning ▴ Regulatory Capital, within the expanding landscape of crypto investing, refers to the minimum amount of financial resources that regulated entities, including those actively engaged in digital asset activities, are legally compelled to maintain. </a><a href="https://prime.greeks.live/area/credit-risk/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Two precision-engineered nodes, possibly representing a Private Quotation or RFQ mechanism, connect via a transparent conduit against a striped Market Microstructure backdrop. This visualizes High-Fidelity Execution pathways for Institutional Grade Digital Asset Derivatives, enabling Atomic Settlement and Capital Efficiency within a Dark Pool environment, optimizing Price Discovery](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-system-nodes.jpg)

## Credit Risk

Meaning ▴ Credit Risk, within the expansive landscape of crypto investing and related financial services, refers to the potential for financial loss stemming from a borrower or counterparty's inability or unwillingness to meet their contractual obligations. </a><a href="https://prime.greeks.live/question/can-a-firm-be-profitable-on-a-mark-to-market-basis-and-still-fail-due-to-margin-calls/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A diagonal metallic framework supports two dark circular elements with blue rims, connected by a central oval interface. This represents an institutional-grade RFQ protocol for digital asset derivatives, facilitating block trade execution, high-fidelity execution, dark liquidity, and atomic settlement on a Prime RFQ](https://options.greeks.live/wp-content/uploads/2025/07/optimized-institutional-digital-asset-derivatives-trading-system-rfq-protocols-and-atomic-settlement.jpg)

## Mark-To-Market Value

A firm's mark-to-market profitability is an illusion of solvency without an architecture for immediate liquidity access. </a><a href="https://prime.greeks.live/area/second-method/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A central blue structural hub, emblematic of a robust Prime RFQ, extends four metallic and illuminated green arms. These represent diverse liquidity streams and multi-leg spread strategies for high-fidelity digital asset derivatives execution, leveraging advanced RFQ protocols for optimal price discovery](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-prime-os-rfq-execution-platform.jpg)

## Second Method

Meaning ▴ The "Second Method" refers to an alternative or supplementary approach utilized for computation, valuation, or process execution, distinct from a primary method. </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">
![Abstract spheres and a translucent flow visualize institutional digital asset derivatives market microstructure. It depicts robust RFQ protocol execution, high-fidelity data flow, and seamless liquidity aggregation](https://options.greeks.live/wp-content/uploads/2025/07/precision-market-microstructure-for-institutional-digital-asset-derivatives-leveraging-rfq-protocols-and-atomic-settlement-across-prime-os.jpg)

## Commercially Reasonable

Meaning ▴ "Commercially Reasonable" is a legal and business standard requiring parties to a contract to act in a practical, prudent, and sensible manner, consistent with prevailing industry practices and good faith. </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">
![Two reflective, disc-like structures, one tilted, one flat, symbolize the Market Microstructure of Digital Asset Derivatives. This metaphor encapsulates RFQ Protocols and High-Fidelity Execution within a Liquidity Pool for Price Discovery, vital for a Principal's Operational Framework ensuring Atomic Settlement](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-high-fidelity-execution-liquidity-aggregation-optimizing-market-microstructure-principal-trading-best-execution-atomic-settlement.jpg)

## Close-Out Amount

Meaning ▴ The Close-Out Amount represents the aggregated net sum due between two parties upon the early termination or default of a master agreement, encompassing all outstanding obligations across multiple transactions. </a><a href="https://prime.greeks.live/area/determining-party/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Two distinct ovular components, beige and teal, slightly separated, reveal intricate internal gears. This visualizes an Institutional Digital Asset Derivatives engine, emphasizing automated RFQ execution, complex market microstructure, and high-fidelity execution within a Principal's Prime RFQ for optimal price discovery and block trade capital efficiency](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-automated-rfq-execution-microstructure-revealing-principal-prime-os-intelligence-layer-for-high-fidelity-execution-and-capital-efficiency.jpg)

## Determining Party

Meaning ▴ In the precise terminology of complex crypto financial instruments, particularly institutional options or structured products, the Determining Party is the pre-designated entity, whether an on-chain oracle or an agreed-upon off-chain agent, explicitly responsible for definitively calculating and announcing specific parameters, values, or conditions that critically influence the payoff, settlement, or lifecycle events of a contractual agreement. </a>

**Tags:** [2002 ISDA](https://options.greeks.live/area/2002-isda/), [Master Agreement](https://options.greeks.live/area/master-agreement/), [Derivatives Law](https://options.greeks.live/area/derivatives-law/), [Credit Risk](https://options.greeks.live/area/credit-risk/), [Single Agreement](https://options.greeks.live/area/single-agreement/), [Non-Defaulting Party](https://options.greeks.live/area/non-defaulting-party/)	

## Discover More

- 
### [What Strategic Considerations Should Inform the Choice between Using a 1992 or 2002 ISDA Master Agreement Today?](https://options.greeks.live/question/what-strategic-considerations-should-inform-the-choice-between-using-a-1992-or-2002-isda-master-agreement-today/)
![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 provides a superior risk architecture through objective close-out protocols and integrated set-off capabilities.

- 
### [What Are the Primary Legal Protections for Netting Agreements during a Counterparty’s Bankruptcy?](https://options.greeks.live/question/what-are-the-primary-legal-protections-for-netting-agreements-during-a-counterpartys-bankruptcy/)
![A symmetrical, angular mechanism with illuminated internal components against a dark background, abstractly representing a high-fidelity execution engine for institutional digital asset derivatives. This visualizes the market microstructure and algorithmic trading precision essential for RFQ protocols, multi-leg spread strategies, and atomic settlement within a Principal OS framework, ensuring capital efficiency.](https://options.greeks.live/wp-content/uploads/2025/07/precision-execution-engine-for-institutional-digital-asset-derivatives-rfq.jpg)

The primary legal protections for netting agreements are statutory safe harbors that exempt them from the automatic stay in bankruptcy.

- 
### [How Did the Lehman Brothers Bankruptcy Influence the Interpretation of the 2002 ISDA Agreement?](https://options.greeks.live/question/how-did-the-lehman-brothers-bankruptcy-influence-the-interpretation-of-the-2002-isda-agreement/)
![A central illuminated hub with four light beams forming an 'X' against dark geometric planes. This embodies a Prime RFQ orchestrating multi-leg spread execution, aggregating RFQ liquidity across diverse venues for optimal price discovery and high-fidelity execution of institutional digital asset derivatives.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-engine-orchestrating-high-fidelity-execution-and-optimal-price-discovery.jpg)

The Lehman bankruptcy forced a crucial shift in interpreting the 2002 ISDA Agreement from legal theory to operational reality.

- 
### [How Does the 2002 ISDA Framework Mitigate Systemic Risk during a Counterparty Default?](https://options.greeks.live/question/how-does-the-2002-isda-framework-mitigate-systemic-risk-during-a-counterparty-default/)
![Abstract spheres and a sharp disc depict an Institutional Digital Asset Derivatives ecosystem. A central Principal's Operational Framework interacts with a Liquidity Pool via RFQ Protocol for High-Fidelity Execution. A distinct Crypto Derivatives OS component signifies Aggregated Liquidity and Price Discovery in Market Microstructure.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-framework.jpg)

The 2002 ISDA Framework mitigates systemic risk by contractually netting all trades into a single, terminable agreement.

- 
### [How Does the Automatic Early Termination Provision Impact Close-Out Procedures in a Default Scenario?](https://options.greeks.live/question/how-does-the-automatic-early-termination-provision-impact-close-out-procedures-in-a-default-scenario/)
![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 Automatic Early Termination provision crystallizes portfolio value upon default, preempting insolvency stays to enforce close-out netting.

- 
### [What Are the Key Differences between the 1992 and 2002 Isda Close-Out Protocols?](https://options.greeks.live/question/what-are-the-key-differences-between-the-1992-and-2002-isda-close-out-protocols/)
![A segmented circular structure depicts an institutional digital asset derivatives platform. Distinct dark and light quadrants illustrate liquidity segmentation and dark pool integration. A central element signifies atomic settlement and price discovery within an RFQ protocol, ensuring high-fidelity execution and capital efficiency.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-liquidity-aggregation-protocols.jpg)

The 2002 ISDA protocol mandates a single, objective "Close-out Amount," replacing the 1992 version's subjective and varied options.

- 
### [What Are the Primary Differences in Collateral Rights between the 1992 and 2002 ISDA Forms?](https://options.greeks.live/question/what-are-the-primary-differences-in-collateral-rights-between-the-1992-and-2002-isda-forms/)
![Two off-white elliptical components separated by a dark, central mechanism. This embodies an RFQ protocol for institutional digital asset derivatives, enabling price discovery for block trades, ensuring high-fidelity execution and capital efficiency within a Prime RFQ for dark liquidity.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-engine-4.jpg)

The 2002 ISDA enhances collateral rights via a flexible "Close-out Amount" and mandatory two-way payments for greater valuation certainty.

- 
### [How Did the 2002 ISDA Close out Amount Calculation Differ from Prior Methods?](https://options.greeks.live/question/how-did-the-2002-isda-close-out-amount-calculation-differ-from-prior-methods/)
![Abstract geometric forms in muted beige, grey, and teal represent the intricate market microstructure of institutional digital asset derivatives. Sharp angles and depth symbolize high-fidelity execution and price discovery within RFQ protocols, highlighting capital efficiency and real-time risk management for multi-leg spreads on a Prime RFQ platform.](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-optimized-rfq-execution-for-digital-asset-derivatives.jpg)

The 2002 ISDA Close-out Amount replaced rigid valuation mechanics with a flexible, commercially reasonable standard.

- 
### [How Does the 2002 ISDA’S Close-Out Amount Calculation Differ from the 1992 Version’s Loss Method?](https://options.greeks.live/question/how-does-the-2002-isdas-close-out-amount-calculation-differ-from-the-1992-versions-loss-method/)
![Abstract geometric forms converge at a central point, symbolizing institutional digital asset derivatives trading. This depicts RFQ protocol aggregation and price discovery across diverse liquidity pools, ensuring high-fidelity execution. The structure reflects a robust Prime RFQ optimizing capital efficiency for multi-leg spreads.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-rfq-execution-microstructure-core-liquidity-hub.jpg)

The 2002 ISDA's Close-Out Amount mandates an objective, commercially reasonable process using diverse inputs, replacing the 1992's subjective Loss calculation.

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        {
            "@type": "Question",
            "name": "What Was The Impact On Market Stability And Systemic Risk?",
            "acceptedAnswer": {
                "@type": "Answer",
                "text": "The First Method introduced a degree of moral hazard and potential for systemic contagion. It created a \"winner-takes-all\" scenario in the event of a default, which could have destabilizing effects during periods of market stress. Consider a scenario where a major financial institution defaults. Its counterparties would immediately assess their net positions."
            }
        },
        {
            "@type": "Question",
            "name": "How Is The Close-Out Amount Calculated?",
            "acceptedAnswer": {
                "@type": "Answer",
                "text": "The Close-Out Amount is defined as the amount of losses or costs that the determining party (typically the non-defaulting party) incurs, or the gains it realizes, in replacing or providing the economic equivalent of the material terms of the terminated transactions. The 2002 ISDA requires the determining party to use \"commercially reasonable procedures to produce a commercially reasonable result.\" This is a principles-based standard that grants a degree of discretion while binding the calculating party to standards of good faith and rational market practice."
            }
        },
        {
            "@type": "Question",
            "name": "What Does This Mean For Modern Risk Systems?",
            "acceptedAnswer": {
                "@type": "Answer",
                "text": "Understanding this history is foundational. It informs how we model counterparty credit risk, how we structure legal agreements, and how we build operational procedures for default management. The principles embedded in the 2002 ISDA\u2014the sanctity of the single agreement and the fairness of two-way payments\u2014are now the bedrock of the global derivatives market. A truly robust operational framework internalizes not just the rules themselves, but the strategic logic that drove their creation. The ultimate advantage lies in designing systems that are not only compliant but are also architecturally aligned with the stable, efficient, and equitable market the industry has collectively worked to build."
            }
        }
    ]
}
```


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**Original URL:** https://options.greeks.live/question/why-was-the-first-method-or-one-way-payment-system-removed-in-the-2002-isda-master-agreement/
