Market Quotation - 1992 ISDA Provision
A comparison between the 1992 ISDA and the 2002 ISDA can be found on the ISDA Comparison page.
1992 ISDA Master Agreement
“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.
Ghastly piece of drafting, isn't it.
2002 ISDA Master Agreement
Note that there is no concept of "Market Quotation" under 2002 ISDA. Instead, the concept of Close-out Amount applies to the valuation of terminated transactions.
Olly's plain English summary of the Market Quotation definition
(liability for errors and omissions excluded)
“Market Quotation” is an amount determined by reference to quotations from Reference Market-makers for the amount that the Reference Market Maker would be prepared to pay (in which case positive) or require to be paid (in which case negative), taking into account any existing Credit Support Document, to enter into a replacement transaction with the Non-affected Party preserving the economics of certain Terminated Transactions (i.e., had they not been terminated early).
Unpaid Amounts under the Terminated Transactions are excluded but obligations that would otherwise have been required after that Early Termination Date are included. Quotations must be given contemporaenously and soon as reasonably practicable after the Early Termination Date.
If there are:
- more than three quotations, the Market Quotation will be the average excluding the top and bottom quotations.
- exactly three quotations , the Market Quotation will be the middle one.
- fewer than three quotations, the Market Quotation will be deemed not to be determined.
Commentary
- Pricing methodology: Note that this quote comprises a portfolio of transactions on identical economic terms (including 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.