Template:M comp disc 1992 ISDA 6(e)(i)

Compare with Close-out Amount under the 2002 ISDA

The 1992 ISDA close out methodology is hideous. In a nutshell, what you need to know (if “it being hideous” really isn’t enough for you) is:

(i) Ignore First Method: No-one in their right mind would ever agree to the First Method, so you don’t need to worry about that. (It provides that on an Event of Default, the Defaulting Party never gets paid anything, even if the total mark-to-market value of its exposure under the 1992 ISDA is massively in its favour).

(ii) Market Quotation basically defaults to Loss: Market Quotation basically defaults to Loss anyway, seeing as if you can’t get at least three Reference Market-maker quotations, Market Quotation is deemed indeterminable and the Non-defaulting Party determines its Loss instead (only excluding Unpaid Amounts, since they are excluded from Market Quotation).

(iii) Market Quotation and Loss are needlessly inconsistent: As noted above, for reasons best known to 1992’s ISDA’s crack drafting squad™ (and look: it was a gentler, more naive time, when complexity for the sake of it was half the fun of derivatives practice) Market Quotation excludes Unpaid Amounts, where as Loss includes them, and Loss is calculated in the Termination Currency Equivalent, whereas Market Quotation is not.

The above nutshell in a nutshell: If you can’t see your way clear to using a 2002 ISDA — and some Americans cannot — select “Second Method and Loss” and have done with it.