Second Method - ISDA Provision: Difference between revisions

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{{isda92anat|6(e)(i)}}
{{manual|MI|1992|6(e)(i)|Section|6(e)(i)|medium}}
''Compare with {{isdaprov|Close-out Amount}} under the {{2002ma}}''<br><br>
The ''' Second Method''' is a method of determining the {{isdaprov|Early Termination Amount}} due upon close out of an {{1992ma}}. 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 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 {{isdaprov|6(e)}} and Schedule 1(f)) covers this.
 
*'''{{isdaprov|Market Quotation}}''' requires at least three arm's length quotations to value the transactions to be terminated, compared to {{isdaprov|Loss}} where the {{isdaprov|Non-defaulting party}} determines (in "[[good faith]]") the losses and costs (minus its gains) in potentially replacing {{isdaprov|Terminated Transactions}}.
 
*'''{{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}}===
{{first method}}
===See also===
*{{isdaprov|General Conditions}} - the ominous subject of Section {{isdaprov|2(a)(iii)}} and the [[Metavante]] case.
*{{isdaprov|Close-out Amount}} - the {{2002ma}} equivalent.

Revision as of 17:55, 17 March 2020

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) | 55(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 to expand:

Section 6(e)(i) in a Nutshell

Use at your own risk, campers!
6(e)(i) Events of Default. If the Early Termination Date follows an Event of Default: —
(1) If First Method and Market Quotation applies, the Defaulting Party must pay any positive excess of (A) the sum of Settlement Amount 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) If First Method and Loss applies, the Defaulting Party must pay the Non-defaulting Party’s positive Loss (if it has suffered one).
(3) If Second Method and Market Quotation applies, the amount payable will be (A) the sum of the Settlement Amount for 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 positive, the Defaulting Party will pay that amount to the Non-defaulting Party; if negative, the Non-defaulting Party will pay its absolute value to the Defaulting Party.
(4) If Second Method and Loss applies, the Non-defaulting Party’s Loss in respect of this Agreement will be payable. If it is positive number, the Defaulting Party will pay it to the Non-defaulting Party; if negative, the Non-defaulting Party will pay its absolute value to the Defaulting Party.

Full text of Section 6(e)(i)

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.

Related agreements and comparisons

Related Agreements
Click here for the text of Section 6(e)(i) in the 2002 ISDA
Comparisons
Click to compare this section in the 1992 ISDA and 2002 ISDA.

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Content and comparisons

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.

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Summary

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General discussion

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See also

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References