Financial Derivatives

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

September 30, 2013:



Derivative Type	Primary Risk Exposure	Net Realized Gain/(Loss) for the Three Month Period Ended September 30, 2013			Change in Net Unrealized Gain/(Loss) for the Three Month Period Ended September 30, 2013			Net Realized Gain/(Loss) for the Nine Month Period Ended September 30, 2013			Change in Net Unrealized Gain/(Loss) for the Nine Month Period Ended September 30, 2013
(In thousands)
Financial derivatives - assets
Credit default swaps on asset-backed securities	Credit	$	(3,113	)	$	2,995		$	(404	)	$	(1,497	)
Credit default swaps on asset-backed indices	Credit	(181		)	(1,011		)	(4,302		)	2,503
Credit default swaps on corporate bond indices	Credit	(84		)	44			(3		)	—
Total return swaps	Equity Market	907			(112		)	911			15
Interest rate swaps	Interest Rates	(512		)	(195		)	(229		)	15,768
Futures	Interest Rates	255			970			103			975
Other	Interest Rates	67			(41		)	67			(41		)
		(2,661		)	2,650			(3,857		)	17,723
Financial derivatives - liabilities
Credit default swaps on asset-backed securities	Credit	(2		)	222			(59		)	(318		)
Credit default swaps on asset-backed indices	Credit	339			959			539			1,772
Credit default swaps on corporate bond indices	Credit	(2,985		)	(1,959		)	(7,517		)	(1,759		)
Total return swaps	Equity Market	(53		)	96			(448		)	43
Interest rate swaps	Interest Rates	(10		)	(4,099		)	282			(2,997		)
Futures	Interest Rates	(1,029		)	82			(1,673		)	70
Other	Interest Rates/Equity Market	(41		)	44			(41		)	44
		(3,781		)	(4,655		)	(8,917		)	(3,145		)
Total		$	(6,442	)	$	(2,005	)	$	(12,774	)	$	14,578

September 30, 2012:



Derivative Type	Primary Risk Exposure	Net Realized Gain/(Loss) for the Three Month Period Ended September 30, 2012			Change in Net Unrealized Gain/(Loss) for the Three Month Period Ended September 30, 2012			Net Realized Gain/(Loss) for the Nine Month Period Ended September 30, 2012			Change in Net Unrealized Gain/(Loss) for the Nine Month Period Ended September 30, 2012
(In thousands)
Financial derivatives - assets
Credit default swaps on asset-backed securities	Credit	$	3,963		$	(3,823	)	$	(1,514	)	$	4,285
Credit default swaps on asset-backed indices	Credit	(134		)	(4,174		)	(7,200		)	(6,442		)
Credit default swaps on corporate bond indices	Credit	12			(602		)	(1,548		)	570
Total return swaps	Equity Market	(1,520		)	257			(1,520		)	257
Interest rate swaps	Interest Rates	—			495			49			417
Futures	Interest Rates	(15		)	—			(32		)	(12		)
		2,306			(7,847		)	(11,765		)	(925		)
Financial derivatives - liabilities
Credit default swaps on asset-backed indices	Credit	(190		)	1,543			4,372			650
Credit default swaps on corporate bond indices	Credit	(160		)	11			143			11
Total return swaps	Equity Market	1,066			252			(2,262		)	273
Interest rate swaps	Interest Rates	(6,209		)	3,410			(22,157		)	15,093
Futures	Interest Rates	—			(33		)	—			(87		)
		(5,493		)	5,183			(19,904		)	15,940
Total		$	(3,187	)	$	(2,664	)	$	(31,669	)	$	15,015

From time to time the Company enters into credit derivative contracts for which the Company sells credit protection ("written credit derivatives"). As of September 30, 2013 and December 31, 2012, all of the Company's open written credit derivatives consisted of credit default swaps on mortgage/asset-backed indices (ABX and CMBX indices), for which the Company receives periodic payments at fixed rates from credit protection buyers, and is obligated to make payments to the credit 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, 2013 and December 31, 2012, are summarized below:



Credit Default Swaps on Asset-Backed Indices	Amount at September 30, 2013			Amount at December 31, 2012
(In thousands)
Fair Value of Written Credit Derivatives, Net	$	(19,248	)	$	(11,986	)
Fair Value of Purchased Credit Derivatives Offsetting Written Credit Derivatives with Third Parties ⁽¹⁾	$	—		$	(717	)
Notional Amount of Written Credit Derivatives ⁽²⁾	$	(64,780	)	$	(40,216	)
Notional Amount of Purchased Credit Derivatives Offsetting Written Credit Derivatives with Third Parties ⁽¹⁾	$	—		$	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 protection 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 credit derivative contracts with an International Swaps and Derivatives Association, or "ISDA," counterparty may be offset against amounts due or owed on other credit derivative contracts with the same ISDA counterparty. As a result, the notional amount of written credit derivatives involving a particular underlying reference asset or index has been reduced (but not below zero) by the notional amount of any contracts where the Company has purchased credit protection on the same reference asset or index with the same ISDA counterparty.

Unless terminated by mutual agreement by both the buyer and seller, a credit default swap on a mortgage/asset-backed index typically terminates at the date that all of the reference assets underlying the index are paid off in full, retired, or otherwise cease to exist. Implied credit spreads may be used to determine the market value of such contracts and are reflective of the cost of buying/selling credit protection. Higher spreads would indicate a greater likelihood that a seller will be obligated to perform (i.e., make payment) under the 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 risk. Credit protection sellers entering the market would expect to be paid points up front corresponding to the approximate fair value of the contract. For the Company’s written credit derivatives that were outstanding at September 30, 2013, periodic payment rates range between 25 and 458 basis points. For the Company’s written credit derivatives that were outstanding at December 31, 2012, periodic payment rates range between 35 and 458 basis points. Total net up-front payments received relating to written credit derivatives outstanding at September 30, 2013 and December 31, 2012 were $20.9 million and $12.6 million, respectively.