Market Quotation - 1992 ISDA Provision

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) | 5 • 5(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 ᐅ to expand: 2002 ISDA 1992 ISDA section Market Quotation in a Nutshell™ Use at your own risk, campers! “Market Quotation” when valuing Terminated Transactions, will be based on quotations from Reference Market-makers for the amount that those Reference Market-makers would pay (expressed as a negative) or require (expressed as a positive) to enter into a “Replacement Transaction” preserving the economic equivalent of all remaining payments and deliveries after the Early Termination Date by the parties under the relevant Terminated Transactions had they not been terminated, excluding any Unpaid Amounts. Each Reference Market-maker must quote on or as soon as practicable after the Early Termination Date on the basis of such documentation as the determining party and the Reference Market-maker may in good faith agree, including as regards any Credit Support Document. If more than three Reference Market-makers quote, the Market Quotation will be their average having disregarded the highest and lowest. If exactly three do, the Market Quotation will be the middle quotation. If fewer than three Reference Market-makers quote, it will not be possible to determine a Market Quotation [and, to calculate the Settlement Amount, the determining party must value the affected Terminated Transactions by reference to the determining party’s Loss]. view template Full text of section Market Quotation “Market Quotation” means, with respect to one or more Terminated Transactions and a party making the determination, an amount determined on the basis of quotations from Reference Market-makers. Each quotation will be for an amount, if any, that would be paid to such party (expressed as a negative number) or by such party (expressed as a positive number) in consideration of an agreement between such party (taking into account any existing Credit Support Document with respect to the obligations of such party) and the quoting Reference Market-maker to enter into a transaction (the “Replacement Transaction”) that would have the effect of preserving for such party the economic equivalent of any payment or delivery (whether the underlying obligation was absolute or contingent and assuming the satisfaction of each applicable condition precedent) by the parties under Section 2(a)(i) in respect of such 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. For this purpose, Unpaid Amounts in respect of the Terminated Transaction or group of Terminated Transactions are to be excluded but, without limitation, any payment or delivery that would, but for the relevant Early Termination Date, have been required (assuming satisfaction of each applicable condition precedent) after that Early Termination Date is to be included. The Replacement Transaction would be subject to such documentation as such party and the Reference Market-maker may, in good faith, agree. The party making the determination (or its agent) will request each Reference Market-maker to provide its quotation to the extent reasonably practicable as of the same day and time (without regard to different time zones) on or as soon as reasonably practicable after the relevant Early Termination Date. The day and time as of which those quotations are to be obtained will be selected in good faith by the party obliged to make a determination under Section 6(e), and, if each party is so obliged, after consultation with the other. If more than three quotations are provided, the Market Quotation will be the arithmetic mean of the quotations, without regard to the quotations having the highest and lowest values. If exactly three such quotations are provided, the Market Quotation will be the quotation remaining after disregarding the highest and lowest quotations. For this purpose, if more than one quotation has the same highest value or lowest value, then one of such quotations shall be disregarded. If fewer than three quotations are provided, it will be deemed that the Market Quotation in respect of such Terminated Transaction or group of Terminated Transactions cannot be determined. view template Related agreements and comparisons Related Agreements Click here for the text of Section Market Quotation in the 2002 ISDA Comparisons Template:Isdadiff Market Quotation Tell me more Sign up for our newsletter — or just get in touch: for ½ a weekly 🍺 you get to consult JC. Ask about it here.

Content and comparisons

Market Quotation and Loss were originated in the 1987 ISDA, were refined in the 1992 ISDA and then unceremoniously ditched as Transaction valuation concepts under the 2002 ISDA in favour of Close-out Amount, which is closer to Loss, but still a bit different.

Here is a comparison between the 1987 and 1992 versions of Market Quotation. Quite a lot of fiddling around, as you will see. But all in vain. Did it make much difference? At this remove, nearly forty years on, do we care?

Americans probably do.

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Summary

If it weren’t so long ago, you would honestly say this ludicrous Market Quotation and Loss, and First Method and Second Method confection was designed with the sole purpose of keeping negotiators in tedious employment. It is all handled so much more deftly under the 2002 ISDA with the concept of Close-out Amount.

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General discussion

• Pricing methodology: Note that this quote comprises a portfolio of Transactions on identical economic terms (including as to collateralisation), but between the Non-affected Party and the relevant market maker; i.e. you don't take into account the (almost inevitable) deterioration of the creditworthiness of the Affected Party.
• Where there are fewer than three quotations: By dint of the definition of Settlement Amount, if there are fewer that three quotations, or the determining party thinks the value provided by Market Quotation is commercially unrealistic, Market Quotation defaults to Loss.
• Will there ever be any quotations?: No, which is why you need to note that the definition of Settlement Amount defaults to Loss when, as surely they will, every Reference Market-maker respectfully declines to take your call.

Relationship to Exposure under the 1995 CSA

Eagle-eyed observers will note that Market Quotation gets a name-check in the definition of Exposure in the 1995 CSA. So how does that work, you might ask, where you have a 2002 ISDA which doesn't have a definition of Market Quotation? Well, the answer lies in the 2002 ISDA Master Agreement Protocol. As long as your counterparty has adopted that, then the provisions are converted over to 2002-speak as it were.

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For details freaks

The quaint notion that a dealer poll would, at the point when needed, actually do anything was laid to rest in the 2023 case of Lehman Brothers International (Europe) v AG Financial Products, Inc. which involved the closeout and valuation of a 1992 ISDA following Lehman’s collapse.

This case is an object less on for many unacknowledged facts about derivatives trading — such as that cases involving seemingly tried and tested aspects of close-out methodology get litigated at all, let alone that they take 15 years to get to judgment — but the standout point is the forlorn pointlessness of convening dealer polls.

From Crane J’s factual summary:

In accordance with its responsibilities under the ISDA Master Agreement, following its declaration of an event of default, Assured engaged the assistance of Henderson Global Investors, Ltd. (Henderson), to conduct an auction so that it could satisfy the ISDA Market Quotation process. Henderson contacted 11 potential bidders in advance of the auction that took place on September 16, 2009. Not one bid was received.

LBIE did manage to get some indicative bids that were, expert witnesses thought “indicative market data of where these transactions, these underlyings would be trading at that stage on termination date”. But not one of them was prepared to make a binding offer, and the most fulsome indicative bid was disclaimed up the wazoo:

“This is not investment advice of any kind and we do not purport any degree of accuracy in these levels.”

Useless, you would think, as an input in determining a fair market level. Indeed, internal LBIE emails — kids, if you learn one sodding lesson from the history of financial market disaster let it be “don’t put your darkest thoughts in emails to your buddies” — suggested they only wanted indicative bids to encourage other banks (many may have had similar trades on their books as LBIE), to make any bid, so that LBIE could then argue there was a market price:

“any color is good color to us and [JP Morgan employee] is lobbying for [JP Morgan’s US trading team] to at least put a number on it even if it is zero”.

Crane J notes, somewhat drily: “This raises the concern that LBIE’s goal, with respect to the indicative bids, was to make these trades seem as worthless as possible to then be able to collect the most from Assured in a lawsuit.”

So here are some things to bear in mind before reaching for a dealer poll to unblock a negotiation that is stuck on valuation:

Firstly, at the point you are likely to be arguing about it, everyone’s hair — yours, the counterparty’s and the rest of the market’s — hair will be on fire. Prices will be yoyoing around and most people will be focussed on their own book and won’t care about yours. Imagine your reference dealer is sitting on one of those mechanical bucking broncos. At the moment you ask for a firm bid on your portfolio — that, by the way, you don’t intend to hit — someone switched the bronco on full.

Secondly, since it has nothing to gain from providing a price — you want “price discovery”, not an actual trade, remember — no dealer in its right mind will give you one. Best case scenario it is distracted from managing its own book while bronco machine is on max. Less edifying ones are that it could get called as a witness in the litigation that is bound to follow or, God forbid, joined as a defendant in it. All your incautious bloomies are suddenly discoverable before an unsympathetic court.
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See also

• Closing out a 1992 ISDA
• “Loss” under the 1992 ISDA
• The altogether superior “Close-out Amount” under the 2002 ISDA.
• I’m sorry I asked

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