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Financial Derivatives

9 Months Ended

Sep. 30, 2011

4. Financial Derivatives

Gains and losses on the Company's derivative contracts for the three and nine month periods ended September 30, 2011 are summarized in the tables below (in thousands):

September 30, 2011:


Derivative Type	Primary Risk Exposure	Net Realized Gain/(Loss) for the Three Month Period Ended September 30, 2011			Change in Net Unrealized Gain/(Loss) for the Three Month Period Ended September 30, 2011			Net Realized Gain/(Loss) for the Nine Month Period Ended September 30, 2011			Change in Net Unrealized Gain/(Loss) for the Nine Month Period Ended September 30, 2011
Financial derivatives - assets
Credit Default Swaps on Asset Backed Securities	Credit	$	3,088		$	(248	)	$	8,396		$	(4,987	)
Credit Default Swaps on Asset Backed Indices	Credit		6,539			3,746			5,313			5,719
Credit Default Swaps on Corporate Bond Indices	Credit		(150	)		109			(150	)		109
Total Return Swaps	Equity Market		(29	)		826			(29	)		826
Interest Rate Swaps	Interest Rates		456			(938	)		(195	)		(1,773	)

			9,904			3,495			13,335			(106	)

Financial derivatives - liabilities
Credit Default Swaps on Asset Backed Indices	Credit		24			(1,038	)		8,886			(1,256	)
Credit Default Swaps on Corporate Bond Indices	Credit		100			220			—			186
Interest Rate Swaps	Interest Rates		(3,249	)		(14,154	)		(4,250	)		(17,844	)

			(3,125	)		(14,972	)		4,636			(18,914	)

Futures contracts
Short Eurodollar contracts	Interest Rates		(375	)		369			(1,094	)		890

Total		$	6,404		$	(11,108	)	$	16,877		$	(18,130	)

Gains and losses on the Company's derivative contracts for the three and nine month periods ended September 30, 2010 are summarized in the tables below (in thousands):

September 30, 2010:


Derivative Type	Primary Risk Exposure		Net Realized Gain/(Loss) for the Three Month Period Ended September 30, 2010			Change in Net Unrealized Gain/(Loss) for the Three Month Period Ended September 30, 2010			Net Realized Gain/(Loss) for the Nine Month Period Ended September 30, 2010			Change in Net Unrealized Gain/(Loss) for the Nine Month Period Ended September 30, 2010
Financial derivatives - assets
Credit Default Swaps on Asset Backed Securities		Credit	$	(2,683	)	$	(1,647	)	$	8,787		$	(16,802	)
Credit Default Swaps on Asset Backed Indices		Credit		(892	)		(723	)		(5,184	)		934
Credit Default Swaps on Corporate Bond Indices		Credit		(50	)		(166	)		(48	)		(168	)
Credit Default Swaps on Corporate Bonds		Credit		—			—			(2,281	)		(2,650	)
Other Swaps		Credit		—			—			335			(257	)
Interest Rate Swaps		Interest Rates		125			—			—			(109	)

				(3,500	)		(2,536	)		1,609			(19,052	)

Financial derivatives - liabilities
Credit Default Swaps on Asset Backed Securities		Credit		—			—			(1,658	)		3,881
Credit Default Swaps on Asset Backed Indices		Credit		(243	)		38			6,281			(228	)
Credit Default Swaps on Corporate Bond Indices		Credit		—			—			(1,003	)		1,146
Total Return Swaps		Equity Market		—			—			(854	)		88
Interest Rate Swaps		Interest Rates		(125	)		(1,850	)		(1,023	)		(3,064	)

				(368	)		(1,812	)		1,743			1,823

Futures contracts
Short Eurodollar contracts		Interest Rates		(581	)		(579	)		(1,607	)		(1,928	)

Total			$	(4,449	)	$	(4,927	)	$	1,745		$	(19,157	)

As of September 30, 2011, the Company is party to credit derivatives contracts in the form of credit default swaps on mortgage/asset backed securities and indices, or "ABSCDS." As a seller of credit protection via ABSCDS, the Company receives periodic payments from protection buyers, and is obligated to make payments to the protection buyer upon the occurrence of a "credit event" with respect to underlying reference assets. Written credit derivatives held by the Company at September 30, 2011 and December 31, 2010, respectively, are summarized below (in thousands):


Single Name and Index Credit Default Swaps (Asset Backed Securities)	Amount at September 30, 2011			Amount at December 31, 2010
Fair Value of Written Credit Derivatives, Net	$	(15,467	)	$	(14,375	)
Fair Value of Purchased Credit Derivatives Offsetting Written Credit Derivatives with Third Parties⁽¹⁾	$	5,806		$	18,286
Notional Amount of Written Credit Derivatives⁽²⁾	$	(26,907	)	$	(111,717	)
Notional Amount of Purchased Credit Derivatives Offsetting Written Credit Derivatives with Third Parties⁽¹⁾	$	13,107		$	43,721

⁽¹⁾	Offsetting transactions with third parties include purchased credit derivatives which have the same reference obligation.

⁽²⁾

The notional amount is the maximum amount that a seller of ABSCDS would be obligated to pay, and a buyer of credit protection would receive upon occurrence of a "credit event." Movements in the value of credit default swap transactions may require the Company or the counterparty to post or receive collateral. Amounts due or owed under an ABSCDS contract may be offset against amounts due or owed on other ABSCDS contracts with the same ISDA counterparty.

Unless terminated by mutual agreement by both the buyer and seller, ABSCDS contracts typically terminate at the earlier of the (i) date the buyer of protection delivers the reference asset to the seller in exchange for payment of the notional balance following the occurrence of a credit event or (ii) date the reference asset is paid off in full, retired, or otherwise ceases to exist. Implied credit spreads may be used to determine the market value of swap contracts and are reflective of the cost of buying/selling protection. Higher spreads would indicate a greater likelihood that a seller will be obligated to perform (i.e., make payment) under the swap contract. In situations where the credit quality of an underlying reference asset has deteriorated, credit spreads combined with a percentage of notional amounts paid up front (points up front) are frequently used as an indication of ABSCDS risk. ABSCDS credit protection sellers entering the market would expect to be paid a percentage of the current notional balance up front (points up front) approximately equal to the fair value of the contract in order to write protection on the reference assets underlying the Company's ABSCDS contracts. Stated spreads at September 30, 2011 on ABSCDS contracts where the Company wrote protection range between 9 and 350 basis points on contracts that were outstanding at this date. Stated spreads at December 31, 2010 on ABSCDS contracts where the Company wrote protection range between 9 and 442 basis points on contracts that were outstanding at this date. However, participants entering the market at September 30, 2011 and December 31, 2010 would likely transact on similar contracts with material points upfront given these spreads. Total net up-front payments received relating to ABSCDS contracts outstanding at September 30, 2011 and December 31, 2010 were $13.8 million and $13.5 million, respectively.