Comparing negotiations of the 1992 ISDA Master Agreement (Multicurrency Cross-Border) and the 2002 ISDA Master Agreement
Produced in partnership with King & Wood Mallesons
Comparing negotiations of the 1992 ISDA Master Agreement (Multicurrency Cross-Border) and the 2002 ISDA Master Agreement

The following Banking & Finance guidance note Produced in partnership with King & Wood Mallesons provides comprehensive and up to date legal information covering:

  • Comparing negotiations of the 1992 ISDA Master Agreement (Multicurrency Cross-Border) and the 2002 ISDA Master Agreement
  • Payments on early termination—close-out amount replacing market quotation, loss and first and second methods
  • Amendments to events of default/shortening of grace periods
  • Credit event upon merger—more trigger events
  • Illegality, force majeure and waiting periods
  • Set-off
  • Interest
  • Representations
  • Notices—the addition of email

The International Swaps and Derivatives Association, Inc. (ISDA) publishes two versions of its commonly used master agreement, which sets out the terms and conditions for over-the-counter (OTC) derivatives transactions. They are:

  1. the ISDA Master Agreement (Multicurrency—Cross Border) (the 1992 Master Agreement); and

  2. the ISDA 2002 Master Agreement (the 2002 Master Agreement)

This Practice Note summarises the key changes brought about in the 2002 Master Agreement and highlights issues to consider when negotiating a 2002 Master Agreement as compared to the 1992 Master Agreement.

Payments on early termination—close-out amount replacing market quotation, loss and first and second methods

Perhaps the most significant change to the Master Agreement relates to the manner in which payments are calculated on an early termination.

The inclusion of 'Close-out Amount' in the 2002 Master Agreement has eliminated the need for two of the key elections in the 1992 Master Agreement: the choices between 'Market Quotation' and 'Loss' and between the 'First Method' and the 'Second Method as methods of calculating what is due by the parties on an early termination.

The advent of the Close-out Amount concept can be described as a compromise between Market Quotation and Loss. It also in substance imposes the Second Method on parties, though the term is no longer used.

The old regime

Under the 1992 Master Agreement, Market Quotation provides