Loss - 1992 ISDA Provision

1992 ISDA Master Agreement A Jolly Contrarian owner’s manual™ Resources and navigation Resources Wikitext | Nutshell wikitext | 2002 ISDA wikitext | 2002 vs 1992 Showdown | 2006 ISDA Definitions | 2008 ISDA Navigation Preamble | 1 • (a) (b) (c) | 2 • (a) (b) (c) (d) (e) | 3 • (a) (b) (c) (d) (e) (f) | 4 • (a) (b) (c) (d) (e) | 5 • 5(a) Events of Default: 5(a)(i) Failure to Pay or Deliver 5(a)(ii) Breach of Agreement 5(a)(iii) Credit Support Default 5(a)(iv) Misrepresentation 5(a)(v) Default Under Specified Transaction 5(a)(vi) Cross Default 5(a)(vii) Bankruptcy 5(a)(viii) Merger Without Assumption 5(b) Termination Events: 5(b)(i) Illegality 5(b)(ii) Tax Event 5(b)(iii) Tax Event Upon Merger 5(b)(iv) Credit Event Upon Merger 5(b)(v) Additional Termination Event (c) | 6 • (a) (b) (c) (d) (e) | 7 | 8 • (a) (b) (c) (d) | 9 • (a) (b) (c) (d) (e) (f) (g) | 10 | 11 | 12 • (a) (b) | 13 • (a) (b) (c) (d) | 14 | Index: Click ᐅ to expand: 2002 ISDA 1992 ISDA Definition of Loss in a Nutshell™ Use at your own risk, campers! “Loss” means, with respect to a party and this Agreement or any Terminated Transaction, the Termination Currency Equivalent of the amount that party determines as its total associated loss (or gain, in which case the Loss will be negative), including (without duplication) loss of bargain, cost of funding, and hedge break costs. This may, but doesn’t have to, be by reference to dealer quotations. Loss includes losses (or gains) in respect of payments and deliveries that were due but not made required by the Early Termination Date (without duplication where the First Method or Market Quotation applies). Loss does not include legal fees and expenses per Section 11. A party will determine its Loss as of (or as soon as practicable following) the Early Termination Date. view template Full text of Definition of Loss “Loss” means, with respect to this Agreement or one or more Terminated Transactions, as the case may be, and a party, the Termination Currency Equivalent of an amount that party reasonably determines in good faith to be its total losses and costs (or gain, in which case expressed as a negative number) in connection with this Agreement or that Terminated Transaction or group of Terminated Transactions, as the case may be, including any loss of bargain, cost of funding or, at the election of such party but without duplication, loss or cost incurred as a result of its terminating, liquidating, obtaining or reestablishing any hedge or related trading position (or any gain resulting from any of them). Loss includes losses and costs (or gains) in respect of any payment or delivery required to have been made (assuming satisfaction of each applicable condition precedent) on or before the relevant Early Termination Date and not made, except, so as to avoid duplication, if Section 6(e)(i) (1) or (3) or 6(e)(ii)(2)(A) applies. Loss does not include a party’s legal fees and out-of-pocket expenses referred to under Section 11. A party will determine its Loss as of the relevant Early Termination Date, or, if that is not reasonably practicable, as of the earliest date thereafter as is reasonably practicable. A party may (but need not) determine its Loss by reference to quotations of relevant rates or prices from one or more leading dealers in the relevant markets. view template Related agreements and comparisons Related Agreements Click here for the text of Section Loss in the 2002 ISDA Comparisons Template:Isdadiff Loss Tell me more Sign up for our newsletter — or just get in touch: for ½ a weekly 🍺 you get to consult JC. Ask about it here.

Content and comparisons

Loss no more

Under the 2002 ISDA Loss (and its ugly sister, Market Quotation) was superseded by a markedly superior valuation methodology known as the Close-out Amount.

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Summary

Loss is a means of valuing Transactions following their Early Termination under the 1992 ISDA.

Spoddy point: unlike its alternative Market Quotation, “Loss” includes the “Unpaid Amounts” concept in its definition:

“...Loss includes losses and costs (or gains) in respect of any payment or delivery required to have been made (assuming satisfaction of each applicable condition precedent) on or before the relevant Early Termination Date and not made, except, so as to avoid duplication, if Section 6(e)(i)(1) or (3) [i.e., either version of First Method] or 6(e)(ii)(2)(A) [i.e., Second Method and Market Quotation] applies...”

Note that the green or above a deliberately conjunctive or, so the only situation to which it doesn’t apply is where Second Method and Loss applies. It is truly hard to imagine what must have been going through the head of ISDA’s crack drafting squad™ when it came up with this formulation, if it wasn’t purely to intimidate and ward off ISDA ingénues — it bears the hallmarks of a preoccupied mind: one going through a messy divorce, midlife crisis or religious revelation of some sort — but it bears repeating that there are some intuitions who still prefer the 1992 ISDA.

Duplication? What duplication? Ohhhh — that duplication.

The “except, so as to avoid duplication” coda looks to be a magnificent piece of discombobulation from our old friends in ISDA’s crack drafting squad™ — and in the final analysis, it is, but not for the reasons you think it first — because at first blush there doesn’t seem to be any risk of duplication: the excluded paragraphs all deal exclusively with ISDA Master Agreements where Market Quotation, and not Loss, applies. So this Loss definition seems entirely irrelevant ... until you notice that Settlement Amount used when valuing with Market Quotation — stay with me here — defaults to Loss when, as most assuredly it will, Market Quotation turns out to be a totally impractical means of valuing a Terminated Transaction, since no-one will give you a price for a trade they can’t actually enter.

So, yes it is a piece of massive discombobulation, but for a deeper reason than appears at first — namely, that Market Quotation is waste of space anyway.

Whatever, it is simply magical that ISDA’s crack drafting squad™ saw fit to treat Loss, but not Market Quotation, as being converted into a Termination Currency Equivalent including Unpaid Amounts, especially as Loss is a fallback when Market Quotation fails to work, as inevitably it will.

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General discussion

Discussed in great detail in Lehman Brothers International (Europe) v AG Financial Products, Inc..

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See also

• How to close out an ISDA
• Market Quotation, the alternative means of valuing Transactions when closing out a 1992 ISDA
• Close-out Amount under the 2002 ISDA
• I’m sorry I asked, which is how you will be feeling either way.

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