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ISDA Comparison: Difference between revisions
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The {{2002ma}}, with its {{isdaprov|Close-Out Amount}}, is way simpler than the {{1992ma}} which gets bogged down with all this {{isdaprov|Loss}}, {{isdaprov|Market Quotation}}, {{isdaprov|First Method}}, {{isdaprov|Second Method}} malarkey. | The {{2002ma}}, with its {{isdaprov|Close-Out Amount}}, is way simpler than the {{1992ma}} which gets bogged down with all this {{isdaprov|Loss}}, {{isdaprov|Market Quotation}}, {{isdaprov|First Method}}, {{isdaprov|Second Method}} malarkey. | ||
====Two way payments only==== | ====Two way payments only==== | ||
The {{1992isda}} offered parties the choice between one-way payment (the “{{isdaprov|First Method}}”) and two-way payment (the “{{isdaprov|Second Method}}”) of | The {{1992isda}} offered parties the choice between the outrageous one-way payment (the “{{isdaprov|First Method}}”) where only an innocent party could realise its net [[mark-to-market]] gain; and two-way payment (the “{{isdaprov|Second Method}}”) of the {{isdaprov|Settlement Amount}} following early termination, where a {{isdaprov|Non-defaulting Party}} could nonetheless find itself having to pay the {{isdaprov|Defaulting Party}} on close-out under the {{1992isda}}, where it was overall out-of-the-money on its {{isdaprov|Transaction}}s. Seeing as no-one with a functioning frontal lobe would (or, in the ten years of the {{1992ma}}, did) agree to the {{isdaprov|First Method}}, the {{2002isda}} ditches it and provides for only two-way payment, under the “{{isdaprov|Close-out Amount}}” concept. | ||
====Valuation Method==== | ====Valuation Method==== | ||
Likewise, the election of the {{isdaprov|Loss}} | Likewise, the election of the counter-intuitive and needlessly convoluted {{isdaprov|Loss}}/{{isdaprov|Market Quotation}} methods in the {{1992isda}} has been replaced with a hybrid valuation method called {{isdaprov|Close-Out Amount}}. {{isdaprov|Close-Out Amount}} was established in response to the following concerns: | ||
*'''Reliability''': | *'''Reliability''': {{isdaprov|Market Quotation}} was unreliable (in that no {{isdaprov|Reference Market-maker}} would bother putting in a quote) and potentially inaccurate (in that those that did had no skin in the game and could just put in any number they liked, knowing it was never going to be traded on), especially in illiquid markets or at times of market stress (being the typical situations in which you would be closing out {{isdama}}s), and | ||
*'''Objectivity''': the inherent subjectivity of the {{isdaprov|Loss}} valuation method. {{isdaprov|Close-Out Amount}} is a calculation of the gains, losses, and costs incurred in replacing or realizing the economic equivalent of the {{isdaprov|Terminated Transaction}}s including (i) the cost of terminating, liquidating or re-establishing hedges so long as this value does not duplicate any other amount already included in the {{isdaprov|Close-Out Amount}} calculation; and (ii) the value of the option rights of the parties. | *'''Objectivity''': the inherent subjectivity of the {{isdaprov|Loss}} valuation method. {{isdaprov|Close-Out Amount}} is a calculation of the gains, losses, and costs incurred in replacing or realizing the economic equivalent of the {{isdaprov|Terminated Transaction}}s including (i) the cost of terminating, liquidating or re-establishing hedges so long as this value does not duplicate any other amount already included in the {{isdaprov|Close-Out Amount}} calculation; and (ii) the value of the option rights of the parties. | ||
*'''Valuation Process''': The {{isdaprov|Determining Party}} enjoys flexibility in its choice of price sources, including the option to use internal valuations so long as the internal information used is of the same type used in valuing similar {{isdaprov|Transaction}}s in the ordinary course of its business. However, regardless of the valuation method used, the {{isdaprov|Determining Party}} must use third party quotations or market data in its valuations unless it believes the information is not available or would not provide commercially reasonable results. The {{isdaprov|Determining Party}} may consider its creditworthiness and any {{isdaprov|Credit Support Document}} ation existing between the {{isdaprov|Determining Party}} and the entity providing the quotation when obtaining {{isdaprov|Market Quotation}}s. | *'''Valuation Process''': The {{isdaprov|Determining Party}} enjoys flexibility in its choice of price sources, including the option to use internal valuations so long as the internal information used is of the same type used in valuing similar {{isdaprov|Transaction}}s in the ordinary course of its business. However, regardless of the valuation method used, the {{isdaprov|Determining Party}} must use third party quotations or market data in its valuations unless it believes the information is not available or would not provide commercially reasonable results. The {{isdaprov|Determining Party}} may consider its creditworthiness and any {{isdaprov|Credit Support Document}} ation existing between the {{isdaprov|Determining Party}} and the entity providing the quotation when obtaining {{isdaprov|Market Quotation}}s. | ||