Derivative Instruments

9 Months Ended

Sep. 30, 2011

Derivative Instruments [Abstract]

Derivative Instruments

Note 9: Derivative Instruments

Overview

MBIA has entered into derivative transactions as an additional form of financial guarantee and for purposes of hedging risks associated with existing assets and liabilities and forecasted transactions. CDS are also entered into in the asset/liability products business to replicate investments in cash assets consistent with the Company's risk objectives and credit guidelines for its asset management business. The Company accounts for derivative transactions in accordance with the accounting principles for derivative and hedging activities, which requires that all such transactions be recorded on the balance sheet at fair value. Fair value of derivative instruments is defined as the price that would be received to sell a derivative asset or paid to transfer a derivative liability (an exit price) in an orderly transaction between market participants at the measurement date.

Changes in the fair value of derivatives, excluding insured derivatives, are recorded each period in current earnings within "Net gains (losses) on financial instruments at fair value and foreign exchange." Changes in the fair value of insured derivatives are recorded each period in current earnings within "Net change in fair value of insured derivatives." The net change in the fair value of the Company's insured derivatives has two primary components: (i) realized gains (losses) and other settlements on insured derivatives and (ii) unrealized gains (losses) on insured derivatives. "Realized gains (losses) and other settlements on insured derivatives" include (i) premiums received and receivable on written CDS contracts, (ii) premiums paid and payable to reinsurers in respect to CDS contracts, (iii) net amounts received or paid on reinsurance commutations, (iv) losses paid and payable to CDS contract counterparties due to the occurrence of a credit event or settlement agreement, (v) losses recovered and recoverable on purchased CDS contracts due to the occurrence of a credit event or settlement agreement and (vi) fees relating to CDS contracts. The "Unrealized gains (losses) on insured derivatives" include all other changes in fair value of the insured derivative contracts.

U.S. Public Finance Insurance

The Company's derivative exposure within its U.S. public finance insurance operations primarily consists of insured interest rate and inflation-linked swaps related to insured U.S. public finance debt issues. These derivatives do not qualify for the financial guarantee scope exception. The Company has also purchased certain investments containing embedded derivatives. All derivatives are recorded at fair value on the Company's balance sheet with the changes in fair value recorded in current earnings within "Unrealized gains (losses) on insured derivatives."

Structured Finance and International Insurance

The Company entered into derivative transactions that it viewed as an extension of its core financial guarantee business but which do not qualify for the financial guarantee scope exception and, therefore, must be recorded at fair value on the balance sheet. The Company's structured finance and international insurance operations, which insured the majority of the Company's notional derivative exposure, have insured derivatives primarily consisting of structured pools of CDS contracts that the Company intends to hold for the entire term of the contract absent a negotiated settlement with the counterparty. The Company reduces risks embedded in its insured portfolio through the use of reinsurance. This includes cessions of insured derivatives under reinsurance agreements in which the Company economically hedges a portion of the credit and market risk associated with its insured credit derivative portfolio. Such arrangements are also accounted for as derivatives and recorded in the Company's financial statements at fair value. As of September 30, 2011 and December 31, 2010, the amount of these arrangements was immaterial.

Variable Interest Entities

VIEs consolidated by the Company have entered into derivative transactions primarily consisting of interest rate swaps and CDS contracts. Interest rate swaps are entered into to hedge the risks associated with fluctuations in interest rates or fair values of certain contracts. CDS contracts are entered into to hedge credit risk or to replicate investments in cash assets.

Asset/Liability Products

The Company's asset/liability products business has entered into derivative transactions primarily consisting of interest rate swaps, cross currency swaps, principal protection guarantees and CDS contracts. Interest rate swaps are entered into to hedge the risks associated with fluctuations in interest rates or fair values of certain contracts. Cross currency swaps are entered into to hedge the variability in cash flows resulting from fluctuations in foreign currency rates. The Company has also provided loss protection on certain Cutwater Investor Services Corp. ("Cutwater-ISC") managed municipal pools that invest in highly rated short-term fixed-income securities. Such protection is accounted for as a derivative and is included as part of the Company's principal protection guarantees. CDS contracts are entered into to hedge credit risk or to replicate investments in cash assets consistent with the Company's risk objectives and credit guidelines for its asset management business.

Certain interest rate and cross currency swaps qualify as fair value hedges. The fair value hedges are used to protect against changes in the market value of the hedged assets or liabilities. The gains and losses relating to the fair value hedges are recorded directly in earnings. Fair value hedges are hedging existing assets, liabilities or forecasted transactions.

 The following table presents information about credit derivatives sold (insured) by the Company's insurance operations that were outstanding as of September 30, 2011. Credit ratings represent the lower of underlying ratings currently assigned by Moody's, S&P or MBIA.

In millions			Notional Value
Credit Derivatives Sold	Weighted Average Remaining Expected Maturity		AAA		AA		A		BBB		Below BBB		Total Notional		Fair Value Asset (Liability)
Insured credit default swaps		6.0 Years	$	16,132	$	16,023	$	7,000	$	16,791	$	28,022	$	83,968	$	(4,838)
Non-insured credit default swaps-VIE		4.1 Years		-		-		-		-		2,476		2,476		(1,473)
Insured swaps		20.2 Years		-		281		4,323		2,663		142		7,409		(9)
All others		3.1 Years		-		-		-		-		195		195		(54)
Total notional			$	16,132	$	16,304	$	11,323	$	19,454	$	30,835	$	94,048
Total fair value			$	(147)	$	(114)	$	(147)	$	(1,052)	$	(4,914)			$	(6,374)

The following table presents information about credit derivatives sold (insured) by the Company's insurance operations that were outstanding as of December 31, 2010. Credit ratings represent the lower of underlying ratings currently assigned by Moody's, S&P or MBIA.

In millions			Notional Value
Credit Derivatives Sold	Weighted Average Remaining Expected Maturity		AAA		AA		A		BBB		Below BBB		Total Notional		Fair Value Asset (Liability)
Insured credit default swaps		7.6 Years	$	20,721	$	18,530	$	11,323	$	15,356	$	33,377	$	99,307	$	(4,325)
Non-insured credit default swaps-VIE		4.8 Years		-		-		-		-		2,612		2,612		(1,455)
Insured swaps		16.6 Years		-		321		4,801		4,740		676		10,538		(11)
All others		8.5 Years		-		-		113		-		195		308		(39)
Total notional			$	20,721	$	18,851	$	16,237	$	20,096	$	36,860	$	112,765
Total fair value			$	(41)	$	(86)	$	(315)	$	(477)	$	(4,911)			$	(5,830)

Referenced credit ratings assigned by MBIA to insured credit derivatives are derived by the Company's surveillance group. In assigning an internal rating, current status reports from issuers and trustees, as well as publicly available transaction-specific information, are reviewed. Also, where appropriate, cash flow analyses and collateral valuations are considered. The maximum potential amount of future payments (undiscounted) on CDS contracts are estimated as the notional value plus any additional debt service costs, such as interest or other amounts owing on CDS contracts. The maximum amount of future payments that MBIA may be required to make under these guarantees is $92.7 billion. This amount is net of $177 million of insured derivatives ceded under reinsurance agreements in which MBIA economically hedges a portion of the credit and market risk associated with its insured derivatives. The maximum potential amount of future payments (undiscounted) on insured swaps are estimated as the notional value of such contracts.

MBIA may hold recourse provisions with third parties in derivative transactions through both reinsurance and subrogation rights. MBIA's reinsurance arrangements provide that should MBIA pay a claim under a guarantee of a derivative contract, then MBIA could collect amounts from any reinsurers that have reinsured the guarantee on either a proportional or non-proportional basis, depending upon the underlying reinsurance agreement. MBIA may also have recourse through subrogation rights whereby if MBIA makes a claim payment, it is entitled to any rights of the insured counterparty, including the right to any assets held as collateral.

The following table presents information about credit derivatives sold by the Company's asset/liability products business that were outstanding as of September 30, 2011. Credit ratings represent the lower of ratings currently assigned by Moody's, S&P or external counterparties.

		$4,331		$4,331		$4,331		$4,331		$4,331		$4,331		$4,331		$4,331
In millions			Notional Value
Credit Derivatives Sold	Weighted Average Remaining Expected Maturity		AAA		AA		A		BBB		Below BBB		Total Notional		Fair Value Asset (Liability)
Principal protection guarantees		0.3 Years	$	4,331	$	-	$	-	$	-	$	-	$	4,331	$	-
Total notional			$	4,331	$	-	$	-	$	-	$	-	$	4,331	$	-
Total fair value			$	-	$	-	$	-	$	-	$	-			$	-

The following table presents information about credit derivatives sold by the Company's asset/liability products business that were outstanding as of December 31, 2010. Credit ratings represent the lower of ratings currently assigned by Moody's, S&P or external counterparties.

		$4,331		$4,331		$4,331		$4,331		$4,331		$4,331		$4,331		$4,331
In millions			Notional Value
Credit Derivatives Sold	Weighted Average Remaining Expected Maturity		AAA		AA		A		BBB		Below BBB		Total Notional		Fair Value Asset (Liability)
Principal protection guarantees		1.0 Years	$	4,237	$	-	$	-	$	-	$	-	$	4,237	$	-
Total notional			$	4,237	$	-	$	-	$	-	$	-	$	4,237	$	-
Total fair value			$	-	$	-	$	-	$	-	$	-			$	-

The maximum potential amount of future payments (undiscounted) on derivatives presented in the preceding table are estimated as the notional value of such contracts.

Financial Statement Impact

The fair value of amounts recognized for eligible derivative contracts executed with the same counterparty under a master netting agreement, including any cash collateral that may have been received or posted by the Company, is presented on a net basis in accordance with accounting guidance for the offsetting of fair value amounts related to derivative instruments.

As of September 30, 2011, the total fair value of the Company's derivative assets, after counterparty netting, was $724 million, of which $715 million was reported within "Derivative assets" and "Derivative assets-VIEs" on the Company's consolidated balance sheets, and the total fair value of the Company's derivative liabilities, after counterparty netting, was $7.2 billion which was reported within "Derivative liabilities" and "Derivative liabilities-VIEs" on the Company's consolidated balance sheets.

As of September 30, 2011, the total fair value of the Company's derivative assets, before counterparty netting, was $815 million and the total fair value of the Company's derivative liabilities, before counterparty netting, was $7.3 billion. The following table presents the total fair value of the Company's derivative assets and liabilities by instrument and balance sheet location, before counterparty netting, as of September 30, 2011:

In millions			Derivative Assets(1)			Derivative Liabilities(1)
Derivative Instruments	Notional Amount   Outstanding		Balance Sheet   Location	Fair Value		Balance Sheet Location	Fair Value
Designated as hedging instruments:
Interest rate swaps	$	268	Derivative assets	$	14	Derivative liabilities	$	(46)
Total designated	$	268		$	14		$	(46)
Not designated as hedging instruments:
Insured credit default swaps	$	83,968	Derivative assets	$	-	Derivative liabilities	$	(4,838)
Insured swaps		7,409	Derivative assets		-	Derivative liabilities		(9)
Non-insured credit default swaps		30	Derivative assets		1	Derivative liabilities		-
Non-insured credit default swaps-VIE		3,599	Derivative assets-VIE		709	Derivative liabilities-VIE		(1,473)
Interest rate swaps		2,894	Derivative assets		78	Derivative liabilities		(404)
Interest rate swaps-VIE		8,060	Derivative assets-VIE		-	Derivative liabilities-VIE		(397)
Interest rate swaps—embedded		495	Medium-term notes		9	Medium-term notes		(13)
Currency swaps		65	Derivative assets		-	Derivative liabilities		(6)
Currency swaps-VIE		126	Derivative assets-VIE		-	Derivative liabilities-VIE		(18)
All other		4,525	Derivative assets		-	Derivative liabilities		(54)
All other-VIE		465	Derivative assets-VIE		4	Derivative liabilities-VIE		-
All other—embedded		168	Other investments		-	Other investments		(14)
Total non-designated	$	111,804		$	801		$	(7,226)
Total derivatives	$	112,072		$	815		$	(7,272)

(1) - In accordance with the accounting guidance for derivative instruments and hedging activities, the balance sheet location of the Company's embedded derivative instruments is determined by the location of the related host contract.

As of December 31, 2010, the total fair value of the Company's derivative assets, after counterparty netting, was $708 million, of which $703 million was reported within "Derivative assets" and "Derivative assets-VIEs" on the Company's consolidated balance sheets, and the total fair value of the Company's derivative liabilities, after counterparty netting, was $6.7 billion which was reported within "Derivative liabilities" and "Derivative liabilities-VIEs" on the Company's consolidated balance sheets.

As of December 31, 2010, the total fair value of the Company's derivative assets, before counterparty netting, was $769 million and the total fair value of the Company's derivative liabilities, before counterparty netting was $6.8 billion. The following table presents the total fair value of the Company's derivative assets and liabilities by instrument and balance sheet location, before counterparty netting, as of December 31, 2010:

In millions			Derivative Assets(1)			Derivative Liabilities(1)
Derivative Instruments	Notional Amount   Outstanding		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Designated as hedging instruments:
Interest rate swaps	$	394	Derivative assets	$	16	Derivative liabilities	$	(41)
Currency swaps		20	Derivative assets		-	Derivative liabilities		(2)
Total designated	$	414		$	16		$	(43)
Not designated as hedging instruments:
Insured credit default swaps	$	99,331	Derivative assets	$	-	Derivative liabilities	$	(4,325)
Insured swaps		10,537	Derivative assets		-	Derivative liabilities		(11)
Non-insured credit default swaps		35	Derivative assets		3	Derivative liabilities		-
Non-insured credit default swaps-VIE		3,973	Derivative assets-VIE		687	Derivative liabilities-VIE		(1,455)
Interest rate swaps		3,480	Derivative assets		46	Derivative liabilities		(255)
Interest rate swaps-VIE		14,054	Derivative assets-VIE		2	Derivative liabilities-VIE		(634)
Interest rate swaps—embedded		493	Medium-term notes		5	Medium-term notes		(7)
Interest rate swaps—embedded-VIE		100	Other assets-VIE		-	Other liabilities-VIE		(1)
Currency swaps		47	Derivative assets		-	Derivative liabilities		(4)
Currency swaps-VIE		137	Derivative assets-VIE		-	Derivative liabilities-VIE		(14)
All other		4,644	Derivative assets		-	Derivative liabilities		(40)
All other-VIE		592	Derivative assets-VIE		10	Derivative liabilities-VIE		-
All other—embedded		219	Other investments		-	Other investments		(9)
Total non-designated	$	137,642		$	753		$	(6,755)
Total derivatives	$	138,056		$	769		$	(6,798)

(1) - In accordance with the accounting guidance for derivative instruments and hedging activities, the balance sheet location of the Company's embedded derivative instruments is determined by the location of the related host contract.

The following tables present the effect of derivative instruments on the consolidated statements of operations for the three months ended September 30, 2011:

In millions
Derivatives in Fair Value Hedging Relationships	Location of Gain (Loss) Recognized in Income on Derivative	Gain (Loss) Recognized in Income on Derivative		Gain (Loss) Recognized in Income on Hedged Item		Net Gain (Loss) Recognized in Income
Interest rate swaps	Net gains (losses) on financial instruments at fair value and foreign exchange	$	(8)	$	8	$	-
Interest rate swaps	Interest income (expense)		-		-		(2)
Total		$	(8)	$	8	$	(2)

In millions
Derivatives Not Designated as Hedging Instruments	Location of Gain (Loss) Recognized in Income on Derivative	Net Gain (Loss) Recognized in Income
Insured credit default swaps	Unrealized gains (losses) on insured derivatives	$	756
Insured credit default swaps	Realized gains (losses) and other settlements on insured derivatives		(53	)
Non-insured credit default swaps-VIE	Net gains (losses) on financial instruments at fair value and foreign exchange-VIE		154
Interest rate swaps	Net gains (losses) on financial instruments at fair value and foreign exchange		(128	)
Interest rate swaps-VIE	Net gains (losses) on financial instruments at fair value and foreign exchange-VIE		(25	)
Currency swaps	Net gains (losses) on financial instruments at fair value and foreign exchange		4
Currency swaps-VIE	Net gains (losses) on financial instruments at fair value and foreign exchange-VIE		(2	)
All other	Unrealized gains (losses) on insured derivatives		20
All other	Net gains (losses) on financial instruments at fair value and foreign exchange		(6	)
All other-VIE	Net gains (losses) on financial instruments at fair value and foreign exchange-VIE		(5	)
Total		$	715

The following tables present the effect of derivative instruments on the consolidated statements of operations for the three months ended September 30, 2010:

In millions
Derivatives in Fair Value Hedging Relationships	Location of Gain (Loss) Recognized in Income on Derivative	Gain (Loss) Recognized in Income on Derivative		Gain (Loss) Recognized in Income on Hedged Item		Net Gain (Loss) Recognized in Income
Interest rate swaps	Net gains (losses) on financial instruments at fair value and foreign exchange	$	(4)	$	4	$	-
Interest rate swaps	Interest income (expense)		-		-		(2)
Currency swaps	Net gains (losses) on financial instruments at fair value and foreign exchange		(2)		2		-
Total		$	(6)	$	6	$	(2)

In millions
Derivatives Not Designated as Hedging Instruments	Location of Gain (Loss) Recognized in Income on Derivative	Net Gain (Loss) Recognized in Income
Insured credit default swaps	Unrealized gains (losses) on insured derivatives	$	(1,042)
Insured credit default swaps	Realized gains (losses) and other settlements on insured derivatives		552
Insured swaps	Unrealized gains (losses) on insured derivatives		2
Non-insured credit default swaps	Net gains (losses) on financial instruments at fair value and foreign exchange		(1)
Non-insured credit default swaps-VIE	Net gains (losses) on financial instruments at fair value and foreign exchange-VIE		(16)
Interest rate swaps	Net gains (losses) on financial instruments at fair value and foreign exchange		(60)
Interest rate swaps-VIE	Net gains (losses) on financial instruments at fair value and foreign exchange-VIE		(106)
Currency swaps	Net gains (losses) on financial instruments at fair value and foreign exchange		38
All other	Unrealized gains (losses) on insured derivatives		(4)
All other	Net gains (losses) on financial instruments at fair value and foreign exchange		(4)
All other-VIE	Net gains (losses) on financial instruments at fair value and foreign exchange-VIE		(2)
Total		$	(643)

The following tables present the effect of derivative instruments on the consolidated statements of operations for the nine months ended September 30, 2011:

In millions
Derivatives in Fair Value Hedging Relationships	Location of Gain (Loss) Recognized in Income on Derivative	Gain (Loss) Recognized in Income on Derivative		Gain (Loss) Recognized in Income on Hedged Item		Net Gain (Loss) Recognized in Income
Interest rate swaps	Net gains (losses) on financial instruments at fair value and foreign exchange	$	(6)	$	6	$	-
Interest rate swaps	Interest income (expense)		-		-		(7)
Currency swaps	Net gains (losses) on financial instruments at fair value and foreign exchange		2		(2)		-
Total		$	(4)	$	4	$	(7)

In millions
Derivatives Not Designated as Hedging Instruments	Location of Gain (Loss) Recognized in Income on Derivative	Net Gain (Loss) Recognized in Income
Insured credit default swaps	Unrealized gains (losses) on insured derivatives	$	(516)
Insured credit default swaps	Realized gains (losses) and other settlements on insured derivatives		(599)
Non-insured credit default swaps	Net gains (losses) on financial instruments at fair value and foreign exchange		(1)
Non-insured credit default swaps-VIE	Net gains (losses) on financial instruments at fair value and foreign exchange-VIE		4
Interest rate swaps	Net gains (losses) on financial instruments at fair value and foreign exchange		(178)
Interest rate swaps-VIE	Net gains (losses) on financial instruments at fair value and foreign exchange-VIE		24
Currency swaps	Net gains (losses) on financial instruments at fair value and foreign exchange		(3)
Currency swaps-VIE	Net gains (losses) on financial instruments at fair value and foreign exchange-VIE		(4)
All other	Unrealized gains (losses) on insured derivatives		(15)
All other	Net gains (losses) on financial instruments at fair value and foreign exchange		(7)
All other-VIE	Net gains (losses) on financial instruments at fair value and foreign exchange-VIE		(6)
Total		$	(1,301)

The following tables present the effect of derivative instruments on the consolidated statements of operations for the nine months ended September 30, 2010:

In millions
Derivatives in Fair Value Hedging Relationships	Location of Gain (Loss) Recognized in Income on Derivative	Gain (Loss) Recognized in Income on Derivative		Gain (Loss) Recognized in Income on Hedged Item		Net Gain (Loss) Recognized in Income
Interest rate swaps	Net gains (losses) on financial instruments at fair value and foreign exchange	$	(45)	$	45	$	-
Interest rate swaps	Interest income (expense)		-		-		(3)
Currency swaps	Net gains (losses) on financial instruments at fair value and foreign exchange		1		(1)		-
Total		$	(44)	$	44	$	(3)

In millions
Derivatives Not Designated as Hedging Instruments	Location of Gain (Loss) Recognized in Income on Derivative	Net Gain (Loss) Recognized in Income
Insured credit default swaps	Unrealized gains (losses) on insured derivatives	$	(1,707)
Insured credit default swaps	Realized gains (losses) and other settlements on insured derivatives		454
Insured swaps	Unrealized gains (losses) on insured derivatives		2
Non-insured credit default swaps-VIE	Net gains (losses) on financial instruments at fair value and foreign exchange-VIE		(19)
Interest rate swaps	Net gains (losses) on financial instruments at fair value and foreign exchange		(184)
Interest rate swaps-VIE	Net gains (losses) on financial instruments at fair value and foreign exchange-VIE		(191)
Credit linked notes	Net gains (losses) on financial instruments at fair value and foreign exchange		18
Currency swaps	Net gains (losses) on financial instruments at fair value and foreign exchange		2
All other	Unrealized gains (losses) on insured derivatives		(12)
All other	Net gains (losses) on financial instruments at fair value and foreign exchange		(12)
All other-VIE	Net gains (losses) on financial instruments at fair value and foreign exchange-VIE		(11)
Total		$	(1,660)

Counterparty Credit Risk

The Company manages counterparty credit risk on an individual counterparty basis through master netting agreements covering derivative transactions in the asset/liability product segment. These agreements allow the Company to contractually net amounts due from a counterparty with those amounts due to such counterparty when certain triggering events occur. The Company only executes swaps under master netting agreements, which typically contain mutual credit downgrade provisions that generally provide the ability to require assignment or termination in the event either MBIA or the counterparty is downgraded below a specified credit rating.

Under these arrangements, the Company may receive or provide U.S. Treasury and other highly rated securities or cash to secure counterparties' exposure to the Company or its exposure to counterparties, respectively. Such collateral is available to the holder to pay for replacing the counterparty in the event that the counterparty defaults. As of September 30, 2011 and December 31, 2010, the Company did not hold or post cash collateral from derivative counterparties. As of September 30, 2011 and December 31, 2010, the Company had securities with a fair value of $496 million and $452 million, respectively, posted to derivative counterparties.

As of September 30, 2011, the fair value was positive on one Credit Support Annex ("CSA") which governs collateral posting requirements between MBIA and its derivative counterparties. The positive fair value for this CSA was $2 million for which the Company did not receive collateral because the Company's credit rating was below the CSA minimum credit ratings level for holding counterparty collateral. The rating of the counterparty was Aa3 by Moody's and A+ by S&P.

As of December 31, 2010, the fair value was positive on two CSAs which govern collateral posting requirements between MBIA and its derivative counterparties. The aggregate positive fair value for these two CSAs was $4 million, for which the Company did not receive collateral because the Company's credit rating was below the CSA minimum credit ratings level for holding counterparty collateral. The lowest rated of the two counterparties was A1 by Moody's and A+ by S&P.