Template:Isda 6(e)(i) summ isdaprov

One thing to say: this is one of the main places where the 1992 ISDA and the 2002 ISDA are very different. The 2002 Master Agreement dramatically simplifies and, after 20 odd years of curmudgeonly refusal to accept this, even the Americans now seem to acknowledge, improves the process of closing out an ISDA.

(Want to see how awful the 1992 is? Go here).

First terminate {{{{{1}}}|Transaction}}s...

The effect of Section {{{{{1}}}|6(e)(i)}} is that in closing out an ISDA Master Agreement, first you must terminate all {{{{{1}}}|Transaction}}s to arrive at a {{{{{1}}}|Close-out Amount}} for each one.

The {{{{{1}}}|Close-out Amount}} is the replacement cost for the {{{{{1}}}|Transaction}}, assuming all payments up to the {{{{{1}}}|Early Termination Date}} have been made — but in a closeout scenario, of course, Q.E.D. some of those will not have been made — being the reason you need to close out.

Hence the converse concept of “{{{{{1}}}|Unpaid Amount}}s”, being amounts that should have been paid or delivered under the {{{{{1}}}|Transaction}} on or before the termination date, but weren’t (hence, we presume, why good sir is closing out the ISDA Master Agreement in the first place).

So once you have your theoretical replacement cost for each Transaction, you then have to tot up all the {{{{{1}}}|Unpaid Amount}}s that had fallen due but had not been paid under those {{{{{1}}}|Transaction}}s at the time the {{{{{1}}}|Transaction}}s terminated. These include, obviously, failures by the {{{{{1}}}|Defaulting Party}}, but also amounts the {{{{{1}}}|Non-defaulting Party}} didn’t pay when it relied on the flawed asset provision of Section {{{{{1}}}|2(a)(iii)}} to withhold amounts it would otherwise have been due to pay under the Transaction after the default but before it was terminated.

...then calculate net {{{{{1}}}|Early Termination Amount}}

The close out itself happens under Section {{{{{1}}}|6(e)}} of the ISDA Master Agreement and the recourse is to a net sum. Netting does not happen under the {{{{{1}}}|Transactions}} — on the theory of the game there are no outstanding Transactions at the point of netting; just payables.

Therefore, if your credit support (particularly guarantees or letters of credit) explicitly reference amounts due under specific {{{{{1}}}|Transaction}}s, you may lose any credit support at precisely the point you need it.

That would be a bummer. Further commentary on the Guarantee page.