Second Method - ISDA Provision: Difference between revisions
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*'''{{isdaprov|Second Method}}''': the net [[close-out]] amount is always paid out to the party to whom it is due, regardless whether it is the {{isdaprov|Defaulting Party}} or the {{isdaprov|Non-defaulting party}}. | *'''{{isdaprov|Second Method}}''': the net [[close-out]] amount is always paid out to the party to whom it is due, regardless whether it is the {{isdaprov|Defaulting Party}} or the {{isdaprov|Non-defaulting party}}. | ||
=== | ===Comparison with the {{isdaprov|First Method}}=== | ||
Not generally used, under the {{isdaprov|First Method}}, a payment is only ever made by the {{isdaprov|Defaulting Party}} to the {{isdaprov|Non-defaulting Party}}. Which is a bit rubbish, and plays havoc with capital adequacy calculations. The {{isdaprov|First Method}} is thus a back door to withhold payments due under the {{isdama}} and set those off with other (possible) defaulted payments and is therefore undesirable. | Not generally used, under the {{isdaprov|First Method}}, a payment is only ever made by the {{isdaprov|Defaulting Party}} to the {{isdaprov|Non-defaulting Party}}. Which is a bit rubbish, and plays havoc with capital adequacy calculations. The {{isdaprov|First Method}} is thus a back door to withhold payments due under the {{isdama}} and set those off with other (possible) defaulted payments and is therefore undesirable. | ||
===See also=== | ===See also=== | ||
Revision as of 16:50, 1 February 2016
The Second Method is a method of determining the Termination Payments 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 Defaulting Party. In case of a termination event under the ISDA Master Agreement it is good to have your payment and calculation methods well-defined. The section Payments on Early Termination (ISDA Master Agreement Section 6(e) and Schedule 1(f)) covers this.
- Market Quotation requires at least three arm's length quotations to value the transactions to be terminated, compared to Loss where the Non-defaulting party determines (in "good faith") the losses and costs (minus its gains) in potentially replacing Terminated Transactions.
- Second Method: the net close-out amount is always paid out to the party to whom it is due, regardless whether it is the Defaulting Party or the Non-defaulting party.
Comparison with the First Method
Not generally used, under the 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. The First Method is thus a back door to withhold payments due under the ISDA Master Agreement and set those off with other (possible) defaulted payments and is therefore undesirable.
See also
- General Conditions - the ominous subject of Section 2(a)(iii) and the Metavante case.