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ISDA Comparison: Difference between revisions
→Valuation Method
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====Valuation Method==== | ====Valuation Method==== | ||
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: | 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''': {{isdaprov|Market Quotation}} was unreliable (in that | *'''Reliability''': {{isdaprov|Market Quotation}} was unreliable (in that few {{isdaprov|Reference Market-maker}}s 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 | *'''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 [[hedge]]s 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. | ||
*'''Force Majeure''': Special considerations exist when the {{isdaprov|Close-Out Amount}} is calculated following termination due to a {{isdaprov|Force Majeure}} or {{isdaprov|Illegality}}. When calculating the {{isdaprov|Close-Out Amount}} for an {{isdaprov|Illegality}} or a {{isdaprov|Force Majeure}}, mid-{{isdaprov|Market Quotation}}s must be used to value the Termination {{isdaprov|Transaction}}, and the creditworthiness of the {{isdaprov|Determining Party}} may not be considered. The {{2002isda}} requires the {{isdaprov|Determining Party}} to use “commercially reasonably procedures to produce a commercially reasonable result” when calculating the {{isdaprov|Close-Out Amount}}. This calculation method may be less attractive to some parties than the old {{isdaprov|Loss}} method due to concerns that this requirement adds uncertainty and limits the {{isdaprov|Determining Party}} ’s discretion in calculating the {{isdaprov|Close-Out Amount}}. | *'''Force Majeure''': Special considerations exist when the {{isdaprov|Close-Out Amount}} is calculated following termination due to a {{isdaprov|Force Majeure}} or {{isdaprov|Illegality}}. When calculating the {{isdaprov|Close-Out Amount}} for an {{isdaprov|Illegality}} or a {{isdaprov|Force Majeure}}, mid-{{isdaprov|Market Quotation}}s must be used to value the Termination {{isdaprov|Transaction}}, and the creditworthiness of the {{isdaprov|Determining Party}} may not be considered. The {{2002isda}} requires the {{isdaprov|Determining Party}} to use “commercially reasonably procedures to produce a commercially reasonable result” when calculating the {{isdaprov|Close-Out Amount}}. This calculation method may be less attractive to some parties than the old {{isdaprov|Loss}} method due to concerns that this requirement adds uncertainty and limits the {{isdaprov|Determining Party}} ’s discretion in calculating the {{isdaprov|Close-Out Amount}}. | ||