Second Method - ISDA Provision: Difference between revisions

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===Comparison with the {{isdaprov|First Method}}===
===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.
{{first method}}
===See also===
===See also===
*{{isdaprov|General Conditions}} - the ominous subject of Section {{isdaprov|2(a)(iii)}} and the [[Metavante]] case.
*{{isdaprov|General Conditions}} - the ominous subject of Section {{isdaprov|2(a)(iii)}} and the [[Metavante]] case.
*{{isdaprov|Close-out Amount}} - the {{2002ma}} equivalent.
*{{isdaprov|Close-out Amount}} - the {{2002ma}} equivalent.

Revision as of 17:25, 29 July 2019

Template:Isda92anat Compare with Close-out Amount under the 2002 ISDA

The Second Method is a method of determining the Early Termination Amount due upon close out of an 1992 ISDA. 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.

Comparison with the First Method

Fun fact: That terrible FT book about derivatives, and other like-minded sources, label the First Method a “limited two-way payments” clause, by which lights Long John Silver was a “limited two-legged pirate”. Less disingenuously also known as a “walkaway clause”, the First Method, which ensured that on close-out a Defaulting Party got paid nothing, regardless of how far in-the-money its Transactions were, was rarely used, even in the heady early 1990s, when derivatives seemed fun, new and mostly harmless.

Under the First Method, a payment is only ever made if the Settlement Amount is payable by the Defaulting Party to the Non-defaulting Party. This is, needless to say, a big fat free option against a Defaulting Party. The First Method is thus a back door to withhold payments that otherwise would due under the ISDA Master Agreement, it is hard to see why anyone in their right mind would give away this kind of optionality at the commencement of a derivative trading relationship, and, predictably, no one did.

Very, very rarely seen.

See also