Financial Derivatives

Gains and losses on the Company's derivative contracts for the three and six month periods ended June 30, 2013 and 2012 are summarized in the tables below:

June 30, 2013:



Derivative Type	Primary Risk Exposure	Net Realized Gain/(Loss) for the Three Month Period Ended June 30, 2013			Change in Net Unrealized Gain/(Loss) for the Three Month Period Ended June 30, 2013			Net Realized Gain/(Loss) for the Six Month Period Ended June 30, 2013			Change in Net Unrealized Gain/(Loss) for the Six Month Period Ended June 30, 2013
(In thousands)
Financial derivatives - assets
Credit default swaps on asset-backed securities	Credit	$	(542	)	$	1,107		$	2,709		$	(4,492	)
Credit default swaps on asset-backed indices	Credit	(2,634		)	3,489			(4,121		)	3,514
Credit default swaps on corporate bond indices	Credit	82			(44		)	82			(44		)
Total return swaps	Equity Market	42			66			4			127
Interest rate swaps	Interest Rates	500			15,583			283			15,962
U.S. Treasury Note futures	Interest Rates	(153		)	5			(153		)	5
		(2,705		)	20,206			(1,196		)	15,072
Financial derivatives - liabilities
Credit default swaps on asset-backed securities	Credit	(29		)	(540		)	(57		)	(540		)
Credit default swaps on asset-backed indices	Credit	22			455			200			814
Credit default swaps on corporate bond indices	Credit	(905		)	378			(4,532		)	200
Total return swaps	Equity Market	(363		)	(90		)	(395		)	(53		)
Interest rate swaps	Interest Rates	(325		)	1,462			292			1,101
U.S. Treasury Note futures	Interest Rates	(597		)	(54		)	(597		)	(54		)
Eurodollar futures	Interest Rates	(25		)	20			(47		)	42
		(2,222		)	1,631			(5,136		)	1,510
Total		$	(4,927	)	$	21,837		$	(6,332	)	$	16,582

June 30, 2012:



Derivative Type	Primary Risk Exposure	Net Realized Gain/(Loss) for the Three Month Period Ended June 30, 2012			Change in Net Unrealized Gain/(Loss) for the Three Month Period Ended June 30, 2012			Net Realized Gain/(Loss) for the Six Month Period Ended June 30, 2012			Change in Net Unrealized Gain/(Loss) for the Six Month Period Ended June 30, 2012
(In thousands)
Financial derivatives - assets
Credit default swaps on asset-backed securities	Credit	$	(734	)	$	1,308		$	(5,477	)	$	8,107
Credit default swaps on asset-backed indices	Credit	(1,573		)	1,522			(7,066		)	(2,268		)
Credit default swaps on corporate bond indices	Credit	(12		)	602			(1,560		)	1,173
Interest rate swaps	Interest Rates	49			(69		)	49			(78		)
Eurodollar futures	Interest Rates	(9		)	—			(17		)	(12		)
		(2,279		)	3,363			(14,071		)	6,922
Financial derivatives - liabilities
Credit default swaps on asset-backed indices	Credit	253			(927		)	4,562			(893		)
Credit default swaps on corporate bond indices	Credit	301			(66		)	304			—
Total return swaps	Equity Market	(1,273		)	(4		)	(3,328		)	21
Interest rate swaps	Interest Rates	(5,548		)	562			(15,948		)	11,683
Eurodollar futures	Interest Rates	—			(2		)	—			(54		)
		(6,267		)	(437		)	(14,410		)	10,757
Total		$	(8,546	)	$	2,926		$	(28,481	)	$	17,679

As of June 30, 2013 and December 31, 2012, the Company was a party to credit derivatives contracts in the form of credit default swaps on mortgage/asset-backed indices (ABX and CMBX indices) as well as credit default swaps on corporate bond indices (CDX), collectively referred to as credit indices. For those open credit derivative contracts for which the Company sold credit protection ("written credit derivatives") via credit indices, the Company receives periodic payments at fixed rates 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 June 30, 2013 and December 31, 2012, respectively, are summarized below:



Credit Default Swaps on Asset-Backed Indices	Amount at June 30, 2013			Amount at December 31, 2012
(In thousands)
Fair Value of Written Credit Derivatives, Net	$	(13,351	)	$	(11,986	)
Fair Value of Purchased Credit Derivatives Offsetting Written Credit Derivatives with Third Parties ⁽¹⁾	$	126		$	(717	)
Notional Amount of Written Credit Derivatives ⁽²⁾	$	(48,522	)	$	(40,216	)
Notional Amount of Purchased Credit Derivatives Offsetting Written Credit Derivatives with Third Parties ⁽¹⁾	$	4,875		$	7,792


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

(2)

The notional value is the maximum amount that a seller of credit indices 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 credit index contract may be offset against amounts due or owed on another credit index contract with the same ISDA counterparty.

Unless terminated by mutual agreement by both the buyer and seller, credit index contracts typically terminate at the date that all of the underlying reference assets are paid off in full, retired, or otherwise cease 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 the underlying reference assets have deteriorated, the percentage of notional values paid up front ("points up front") is frequently used as an indication of credit index risk. Credit index credit protection sellers entering the market would expect to be paid points up front corresponding to the approximate fair value of the contract in order to write protection on the reference assets underlying the Company's credit index contracts. Periodic payment rates at June 30, 2013 on credit index contracts where the Company wrote protection range between 25 and 500 basis points on contracts that were outstanding at this date. Periodic payment rates at December 31, 2012 on credit index contracts where the Company wrote protection range between 35 and 458 basis points on contracts that were outstanding at this date. Total net up-front payments received relating to credit index contracts outstanding at June 30, 2013 and December 31, 2012 were $14.0 million and $12.6 million, respectively.