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| The ''' Second Method''' is a method of determining the {{isdaprov|Termination Payment]]s due upon close out of an ISDA Master Agreement. It requires a payment to be made equal to the net value of the terminated transactions, even if this means a payment ''to'' the {{isdaprov|Defaulting Party}}. In the {{isdaprov|First Method}}, a payment is only ever made by the defaulting [party to the Non-defaulting party. Which is a bit rubbish, and plays havoc with capital adequacy calculations.
| | {{isda92manual|6(e)(i)}} |
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| In case of a termination event under the {{isdama}} it is good to have your payment and calculation methods well-defined. The section {{isdaprov|Payments on Early Termination}} ({{isdama}} Section 6(e) and Schedule 1(f)) covers this.
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| *'''{{isdaprov|Market Quotation}}''' requires at least three arm's length quotations to value the transactions to be terminated, compared to {{isdaprov|Loss}} where the Non-defaulting party determines (in 'good faith') the losses and costs (minus its gains) in potentially replacing {{isdaprov|Terminated Transactions}}.
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| *'''{{isdaprov|Second Method}}''': the net [[close-out]] amount is always paid out to the party to which it is due, regardless whether it is the {{isdaprov|Defaulting Party}} or the {{isdaprov|Non-defaulting party}}. {{isdaprov|First Method}} is a backdoor to withhold payments due under the [[ISDA]] and set those off with other (possible) defaulted payments and is therefore undesirable.
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| {{isdaanatomy}}
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| *{{isdaprov|General Conditions}} - the ominous subject of Section 2(a)(iii) and the [[Metavante]] case.
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1992 ISDA Master Agreement
A Jolly Contrarian owner’s manual™
6(e)(i) in a Nutshell™
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6(e)(i) in all its glory
6(e)(i) Events of Default. If the Early Termination Date results from an Event of Default: —
- (1) First Method and Market Quotation. If the First Method and Market Quotation apply, the Defaulting Party will pay to the Non-defaulting Party the excess, if a positive number, of (A) the sum of the Settlement Amount (determined by the Non-defaulting Party) in respect of the Terminated Transactions and the Termination Currency Equivalent of the Unpaid Amounts owing to the Non-defaulting Party over (B) the Termination Currency Equivalent of the Unpaid Amounts owing to the Defaulting Party.
- (2) First Method and Loss. If the First Method and Loss apply, the Defaulting Party will pay to the Non-defaulting Party, if a positive number, the Non-defaulting Party’s Loss in respect of this Agreement.
- (3) Second Method and Market Quotation. If the Second Method and Market Quotation apply, an amount will be payable equal to (A) the sum of the Settlement Amount (determined by the Non-defaulting Party) in respect of the Terminated Transactions and the Termination Currency Equivalent of the Unpaid Amounts owing to the Non-defaulting Party less (B) the Termination Currency Equivalent of the Unpaid Amounts owing to the Defaulting Party. If that amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of that amount to the Defaulting Party.
- (4) Second Method and Loss. If the Second Method and Loss apply, an amount will be payable equal to the Non-defaulting Party’s Loss in respect of this Agreement. If that amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of that amount to the Defaulting Party.
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Related agreements and comparisons
Resources and Navigation
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Overview
Compare with Close-out Amount under the 2002 ISDA
The 1992 ISDA close-out methodology is hideous. They overhauled whole process of closing out an ISDA, soup to nuts, in the 2002 ISDA, and is now much more straightforward — as far as you could ever say that about ISDA’s crack drafting squad™’s output. But a large part of the fanbase — that part west of Cabo da Roca — sticks with the 1992 ISDA. Odd.
Summary
Template:Isda 6(e)(i) summ
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See also
References