Close-out Amount - ISDA Provision
2002 ISDA Master Agreement A Jolly Contrarian owner’s manual™ Close-out Amount in all its glory
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Overview
A comparison between the 1992 ISDA and the 2002 ISDA can be found on the ISDA Comparison page.
On the difference between an “Early Termination Amount” and a “Close-out Amount”
The 1992 ISDA features neither an Early Termination Amount or a Close-out Amount, which many would see as a regrettable oversight. The 2002 ISDA has both, which looks like rather an indulgence, until you realise that they do different things.[1]
A Close-out Amount is the termination value for a single Transaction, or a related group of Transactions that a Non-Defaulting Party or Non-Affected Party calculates while closing out an 2002 ISDA, but it is not the final, overall sum due under the ISDA Master Agreement itself. Each of the determined Close-out Amounts summed with the various Unpaid Amounts to arrive at the Early Termination Amount, which is the total net sum due under the ISDA Master Agreement at the conclusion of the close-out process. (See Section 6(e)(i) for more on that).
ISDA’s crack drafting squad™ introduced the Close-out Amount into the 2002 ISDA to correct the total trainwreck of a close-out methodology set out in the 1992 ISDA. In the “good old days”, you valued Terminated Transactions were valued according to Market Quotation or Loss and those un-intuitive and — well, flat-out nutso — “First” and “Second” Methods. There is a “Settlement Amount” concept under the 1992 ISDA, but it only really relates to Market Quotation.
Summary
From the you’ll be sorry you asked file. Have a butcher’s at the nutshell version on the right. If, having read that, you’re still not really feeling sorry or resentful, the full text (below) right might get your remorse radar pinging.
Note the prominent requirement to achieve a “reasonable” (1992 ISDA) or “commercially reasonable” (2002 ISDA) result. On what that latter lovely expression means see Barclays v Unicredit. Spoiler: it’s basically good for brokers as long as they aren’t being total dicks.
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- The JC’s famous Nutshell™ summary of this clause
- On dealer polls (still germane, even in 2002) and their utter forlornity, as evidenced in the Lehman litigation
- What about penalties suffered as a result of failures by a party to perform its obligations? The strange case of Emissions Allowances
See also
- Section 6(e) of the ISDA Master Agreement
- Early Termination Amount
- Market Quotation
- Loss
- Barclays v Unicredit on what amounts to acting in a “commercially reasonable manner”
- I’m sorry I asked
References
- ↑ This is not to say it isn’t hugely over-engineered, all the same: regular readers will know that the JC would never not say that about the output of ISDA’s crack drafting squad™.