Second Method - ISDA Provision: Difference between revisions

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The ''' Second Method''' is a method of determining the {{isdaprov|Termination Payment}}s due upon close out of an {{isdama}}. It requires a payment to be made equal to the net value of the terminated transactions, even if this means a payment ''to'' the {{isdaprov|Defaulting Party}}. By contrast, in the {{isdaprov|First Method}}, a payment is only ever made by the {{isdaprov|Defaulting Party}} to the {{isdaprov|Non-defaulting Party}}. Which is a bit rubbish, and plays havoc with capital adequacy calculations.
{{isda92manual|6(e)(i)}}
 
In case of a termination event under the {{isdama}} it is good to have your payment and calculation methods well-defined. The section {{isdaprov|Payments on Early Termination}} ({{isdama}} Section {{isdaprov|6(e)}} and Schedule 1(f)) covers this.
 
*'''{{isdaprov|Market Quotation}}''' requires at least three arm's length quotations to value the transactions to be terminated, compared to {{isdaprov|Loss}} where the Non-defaulting party determines (in "[[good faith]]") the losses and costs (minus its gains) in potentially replacing {{isdaprov|Terminated Transactions}}.
 
*'''{{isdaprov|Second Method}}''': the net [[close-out]] amount is always paid out to the party to which it is due, regardless whether it is the {{isdaprov|Defaulting Party}} or the {{isdaprov|Non-defaulting party}}. {{isdaprov|First Method}} is a backdoor to withhold payments due under the {{isdama}} and set those off with other (possible) defaulted payments and is therefore undesirable.
===See also===
*{{isdaprov|General Conditions}} - the ominous subject of Section {{isdaprov|2(a)(iii)}} and the [[Metavante]] case.
 
{{isdaanatomy}}