Second Method - ISDA Provision

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.

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.