Close-out Amount - ISDA Provision

Commentary

Close-out amount as a concept was introduced in the 2002 ISDA and doesn't exist under the 1992 ISDA. Instead, terminated transactions are determined according to Market Quotation or Loss. There are some local variations which are worth bearing in mind:

Close-out amount and Italian counterparties

• See for more detail, here: Italian counterparties

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Summary

In a nutshell the 2002 ISDA amounts to this:

“Close-out Amount” means, the Expenses the Determining Party would incur (expressed as a positive) or gains it would realise (expressed as a negative) in replacing, (a) the material terms of that Terminated Transaction, and (b) the option rights of the parties in respect of that Terminated Transaction.

Any Close-out Amount will be determined by the Determining Party in good faith and using commercially reasonable procedures to produce a commercially reasonable result.

The Determining Party may determine a Close-out Amount for any group of Terminated Transactions but, in the aggregate, for not less than all Terminated Transactions. Each Close-out Amount will be determined as of the Early Termination Date or such later date as would be commercially reasonable.

Unpaid Amounts in respect of a Terminated Transaction and Expenses are to be excluded in all determinations of Close-out Amounts.

In determining a Close-out Amount, the Determining Party may consider any relevant information, including, without limitation:
(i) quotations for replacement transactions supplied by third parties that may take into account the Determining Party's creditworthiness and the terms of any documentation, between the Determining Party and the third party;
(ii) relevant market data supplied by one or more third parties; or
(iii) information as described above from internal sources if it is of the same type used by the Determining Party in the regular course of its business for the valuation of similar transactions.
unless the Determining Party reasonably believes that they are not readily available or would produce a result that would not satisfy the standards and procedures described in this definition.

1992 ISDA Master Agreement

Close-out amount concept doesn't exist under the 1992 ISDA Master. Instead, terminated transactions are determined according to Market Quotation or Loss. See ISDA Comparison for a comparison between the 1992 ISDA and the 2002 ISDA.

2002 ISDA Master Agreement

also from the you'll be sorry you asked file.

2002 ISDA
“Close-out Amount” means, with respect to each Terminated Transaction or each group of Terminated Transactions

and a Determining Party, the amount of the losses or costs of the Determining Party that are or would be incurred

under then prevailing circumstances (expressed as a positive number) or gains of the Determining Party that are or

would be realised under then prevailing circumstances (expressed as a negative number) in replacing, or in providing

for the Determining Party the economic equivalent of, (a) the material terms of that Terminated Transaction or group

of Terminated Transactions, including the payments and deliveries by the parties under Section 2(a)(i) in respect of

that Terminated Transaction or group of Terminated Transactions that would, but for the occurrence of the relevant

Early Termination Date, have been required after that date (assuming satisfaction of the conditions precedent in

Section 2(a)(iii)) and (b) the option rights of the parties in respect of that Terminated Transaction or group of

Terminated Transactions.



Any Close-out Amount will be determined by the Determining Party (or its agent), which will act in good faith and

use commercially reasonable procedures in order to produce a commercially reasonable result. The Determining

Party may determine a Close-out Amount for any group of Terminated Transactions or any individual Terminated

Transaction but, in the aggregate, for not less than all Terminated Transactions. Each Close-out Amount will be

determined as of the Early Termination Date or, if that would not be commercially reasonable, as of the date or dates

following the Early Termination Date as would be commercially reasonable.



Unpaid Amounts in respect of a Terminated Transaction or group of Terminated Transactions and legal fees and out-

of-pocket expenses referred to in Section 11 are to be excluded in all determinations of Close-out Amounts.



In determining a Close-out Amount, the Determining Party may consider any relevant information, including, without

limitation, one or more of the following types of information:―



(i) quotations (either firm or indicative) for replacement transactions supplied by one or more third parties that

may take into account the creditworthiness of the Determining Party at the time the quotation is provided and the

terms of any relevant documentation, including credit support documentation, between the Determining Party and the

third party providing the quotation;



(ii) information consisting of relevant market data in the relevant market supplied by one or more third parties

including, without limitation, relevant rates, prices, yields, yield curves, volatilities, spreads, correlations or other

relevant market data in the relevant market; or



(iii) information of the types described in clause (i) or (ii) above from internal sources (including any of the

Determining Party’s Affiliates) if that information is of the same type used by the Determining Party in the regular

course of its business for the valuation of similar transactions.



The Determining Party will consider, taking into account the standards and procedures described in this definition,

quotations pursuant to clause (i) above or relevant market data pursuant to clause (ii) above unless the Determining

Party reasonably believes in good faith that such quotations or relevant market data are not readily available or would

produce a result that would not satisfy those standards. When considering information described in clause (i), (ii) or

(iii) above, the Determining Party may include costs of funding, to the extent costs of funding are not and would not

be a component of the other information being utilised. Third parties supplying quotations pursuant to clause (i)

above or market data pursuant to clause (ii) above may include, without limitation, dealers in the relevant markets,

end-users of the relevant product, information vendors, brokers and other sources of market information.



Without duplication of amounts calculated based on information described in clause (i), (ii) or (iii) above, or other

relevant information, and when it is commercially reasonable to do so, the Determining Party may in addition

consider in calculating a Close-out Amount any loss or cost incurred in connection with its terminating, liquidating or

re-establishing any hedge related to a Terminated Transaction or group of Terminated Transactions (or any gain

resulting from any of them).



Commercially reasonable procedures used in determining a Close-out Amount may include the following:―



(1) application to relevant market data from third parties pursuant to clause (ii) above or information from

internal sources pursuant to clause (iii) above of pricing or other valuation models that are, at the time of the

determination of the Close-out Amount, used by the Determining Party in the regular course of its business in pricing

or valuing transactions between the Determining Party and unrelated third parties that are similar to the Terminated

Transaction or group of Terminated Transactions; and



(2) application of different valuation methods to Terminated Transactions or groups of Terminated Transactions

depending on the type, complexity, size or number of the Terminated Transactions or group of Terminated

Transactions. 

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I’m sorry I asked

• Market Quotation
• Loss