Settlement Amount - 1992 ISDA Provision

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1992 ISDA Master Agreement
A Jolly Contrarian owner’s manual

Definition of Settlement Amount in a Nutshell
Use at your own risk, campers!

Settlement Amount” means, for a party and any Early Termination Date, the sum of: —

(a) the Termination Currency Equivalent of the Market Quotations for each Terminated Transaction for which a Market Quotation is determined; and
(b) such party’s Loss (without reference to any Unpaid Amounts) for each Terminated Transaction for which a Market Quotation cannot be determined or would not (in the determining party’s reasonable opinion) produce a commercially reasonable result.

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Definition of Settlement Amount in full

Settlement Amount” means, with respect to a party and any Early Termination Date, the sum of: —

(a) the Termination Currency Equivalent of the Market Quotations (whether positive or negative) for each Terminated Transaction or group of Terminated Transactions for which a Market Quotation is determined; and
(b) such party’s Loss (whether positive or negative and without reference to any Unpaid Amounts) for each Terminated Transaction or group of Terminated Transactions for which a Market Quotation cannot be determined or would not (in the reasonable belief of the party making the determination) produce a commercially reasonable result.

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Related agreements and comparisons

Related Agreements
Click here for the text of Section Close-out Amount in the 2002 ISDA
Comparisons
Template:Isdadiff Close-out Amount

Resources and navigation

Resources Wikitext | Nutshell wikitext | 2002 ISDA wikitext | 2002 vs 1992 Showdown | 2006 ISDA Definitions | 2008 ISDA
Navigation Preamble | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14
Events of Default: 5(a)(i) Failure to Pay or Deliver5(a)(ii) Breach of Agreement5(a)(iii) Credit Support Default5(a)(iv) Misrepresentation5(a)(v) Default Under Specified Transaction5(a)(vi) Cross Default5(a)(vii) Bankruptcy5(a)(viii) Merger Without Assumption
Termination Events: 5(b)(i) Illegality5(b)(ii) Tax Event5(b)(iii) Tax Event Upon Merger5(b)(iv) Credit Event Upon Merger5(b)(v) Additional Termination Event

Index — Click ᐅ to expand:

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Content and comparisons

As the left-handed policeman said when you asked for directions, “well, I wouldn’t start from here”.

This is the closest you’ll get to the Close-out Amount in the 1992 ISDA, but it only applies to Market Quotation and not Loss — though in a pitiless irony, its practical effect is that you will find yourself using Loss even though you chose Market Quotation in any case. In most cases, the world will have long since arrived at hell in its hand-basket by the time you get to refer to this clause, no Reference Market-maker worth a tuppenny damn will be quoting Monty Python let alone firm prices on your portfolio of Terminated Transactions, so the whole intellectual edifice of Market Quotation will have long since collapsed into Loss and the mechanics of this Settlement Amount will be totes academic.

For the full picture see Section 6(e)(i). A conclusion you may feel bound to draw, even if it doesn’t help you as you manhandle the grizzly bear of a termination process in the 1992 ISDA, is that it is much, much easier in the 2002 ISDA.
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Summary

Settlement Amount only applies to Transaction terminations where Market Quotation is the nominated valuation methodology. In the astoundingly unlikely circumstances[1] that there is not a Reference Market-maker on the Lord’s green planet with the time, risk tolerance or general inclination to give you, a competitor, a series of firm quotes on your portfolio that she knows you have no interest in actually hitting — let alone four of the blighters — that this provision has the effect of converting a Market Quotation into, for all intents and purposes, Loss, though — and, viewers, it pains me to have to say this because it is so stupid, but I have to because it is true — your measure of Loss is defined to include Unpaid Amounts where you have elected full-blown Loss in your Schedule, but Loss excludes Unpaid Amounts if you elected Market Quotation but wound up at Loss because, stap me vitals,m you couldn’t get enough quotations from Reference Market-makers to make up a Market Quotation.

So, if you are a true Loss person, you don’t have to adjust Unpaid Amounts because they’re embedded in the definition of Loss, but if you’re a Loss-via-a-failed-Market Quotation person, you have to add/subtract Unpaid Amounts independently.

But in any case you will wind up at the same number.

This is just some ghastly intellectual game played on we wanton boys and girls by the derivative gods.
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See also

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References

  1. Not remotely unlikely. Almost certain, in fact.