Derivative Instruments

9 Months Ended

Sep. 30, 2017

Text Block [Abstract]

Derivative Instruments

Note 8: Derivative Instruments

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 and are accounted for as derivative instruments.

Corporate

The Company has entered into derivative instruments primarily consisting of interest rate swaps to manage the risks associated with fluctuations in interest rates affecting the value of certain assets.

Internationaland StructuredFinanceInsurance

The Company has entered into derivative instruments to provide financial guarantee insurance to structured finance transactions that do not qualify for the financial guarantee scope exception and, therefore, are accounted for as derivatives. These insured CDS contracts, primarily referencing CMBS and ABS, are intended to be held for the entire term of the contract unless a settlement with the counterparty is negotiated. The Company no longer insures new CDS contracts except for transactions related to the restructuring or reduction of existing derivative exposure. The Company’s derivative exposure within its international and structured finance insurance segment also includes insured interest rate and inflation-linked swaps related to insured debt issues.

The Company has also entered into a derivative contract as a result of a commutation occurring in 2014. Changes in the fair value of the Company’s non-insured derivative are included in “Net gains (losses) on financial instruments at fair value and foreign exchange” on the Company’s consolidated statements of operations.

Variable Interest Entities

VIEs consolidated by the Company have entered into derivative instruments consisting of cross currency swaps.Cross currency swaps are entered into to manage the variability in cash flows resulting from fluctuations in foreign currency rates.

Credit Derivatives Sold

The following tables present information about credit derivatives sold by the Company’s insurance operations that were outstanding as of September 30,2017 and December 31,2016. Credit ratings represent the lower of underlying ratings assigned to the collateral by Moody’s, S&P or MBIA.

$ in millions	As of September 30, 2017
		Notional Value
Credit Derivatives Sold	Weighted Average Remaining Expected Maturity		AAA		AA		A		BBB		Below Investment Grade		Total Notional		Fair Value Asset (Liability)
Insured credit default swaps	3.0 Years	$	-	$	-	$	115	$	-	$	137	$	252	$	(74)
Insured swaps	15.6 Years		-		125		1,903		847		20		2,895		(2)
Total notional		$	-	$	125	$	2,018	$	847	$	157	$	3,147
Total fair value		$	-	$	-	$	(1)	$	(1)	$	(74)			$	(76)

$ in millions	As of December 31, 2016
		Notional Value
Credit Derivatives Sold	Weighted Average Remaining Expected Maturity		AAA		AA		A		BBB		Below Investment Grade		Total Notional		Fair Value Asset (Liability)
Insured credit default swaps	3.8 Years	$	-	$	-	$	115	$	-	$	473	$	588	$	(64)
Insured swaps	15.7 Years		-		137		2,146		732		20		3,035		(2)
Insured swaps - held for sale	14.3 Years		-		-		-		420		-		420		-
Total notional		$	-	$	137	$	2,261	$	1,152	$	493	$	4,043
Total fair value		$	-	$	-	$	(1)	$	(1)	$	(64)			$	(66)

Internal credit ratings assigned by MBIA on the underlying collateral are derived bythe Company’ssurveillance group.In assigning aninternal rating,currentstatusreportsfromissuersand trustees,aswell aspubliclyavailable transaction-specificinformation,are reviewed.Also,where appropriate,cash flowanalysesand collateralvaluationsare considered.Themaximumpotentialamountoffuturepayments(undiscounted)onCDScontractsareestimatedasthe notionalvalue plusanyadditional debtservicecosts,suchasinterestorotheramountsowing on CDScontracts.The maximumamountoffuture debt service paymentsthatMBIAmaybe required tomake undertheseguarantees as of September 30,2017is $282 million.The maximumpotential amountoffuture payments(undiscounted)on insuredswapsare estimated asthe notionalvalue ofsuchcontracts.

MBIAmayhold recourse provisionswiththird partiesin derivativeinstrumentsthroughsubrogation rights, wherebyifMBIAmakesa claimpayment,it may beentitled to anyrightsofthe insured counterparty,including the rightto anyassetsheld ascollateral.

Counterparty Credit Risk

The Company manages counterparty credit risk on an individual counterparty basis through master netting agreements covering derivative instruments in the corporate 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 agreements, the Company may receive or provide cash, U.S. Treasury or other highly rated securities 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 30,2017, the Company did not hold or post cash collateral to derivative counterparties. As of December 31,2016, the Company did not hold cash collateral to derivative counterparties but posted cash collateral to derivative counterparties of $1 million. All of the $1 million is included within “Other liabilities” as cash collateral netted against accrued interest on derivative liabilities. As of September 30,2017 and December 31,2016, the Company had securities with a fair value of $250 million and $276 million, respectively, posted to derivative counterparties and these amountsare included within “Fixed-maturity securities held as available-for-sale, at fair value” on the Company’s consolidated balance sheets.

As of September 30,2017 and December 31,2016, the fair value on one Credit Support Annex (“CSA”) was $3 million. This CSA governs collateral posting requirements between MBIA and its derivative counterparties. The Company did not receive collateral due to the Company’s credit rating, which was below the CSA minimum credit ratings level for holding counterparty collateral. As of September 30,2017 and December 31, 2016, the counterparty was rated A1 by Moody’s and A by S&P.

Financial Statement Presentation

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. Insured CDS and insured swaps are not subject to master netting agreements. VIE derivative assets and liabilities are not presented net of any master netting agreements.Counterparty netting of derivative assets and liabilities offsets balances in “Interest rate swaps”, when applicable.

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 and posting ofcash collateral, as of September 30,2017:

In millions				Derivative Assets (1)			Derivative Liabilities (1)
		Notional
		Amount			Fair			Fair
Derivative Instruments		Outstanding		Balance Sheet Location	Value		Balance Sheet Location	Value
Not designated as hedging instruments:
	Insured credit default swaps	$	252	Other assets	$	-	Derivative liabilities	$	(74)
	Insured swaps		2,895	Other assets		-	Derivative liabilities		(2)
	Interest rate swaps		749	Other assets		3	Derivative liabilities		(204)
	Interest rate swaps-embedded		419	Medium-term notes		2	Medium-term notes		(14)
	Currency swaps-VIE		63	Other assets-VIE		13	Derivative liabilities-VIE		-
	All other		49	Other assets		-	Derivative liabilities		(4)
	All other-embedded		1	Other investments		-	Other investments		(1)
Total non-designated derivatives		$	4,428		$	18		$	(299)
__________
(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 table presents the total fair value of the Company’s derivative assets and liabilities by instrument and balance sheet location, before counterparty netting and posting of cash collateral, as of December 31,2016:

In millions				Derivative Assets (1)			Derivative Liabilities (1)
			Notional
			Amount		Fair			Fair
Derivative Instruments			Outstanding	Balance Sheet Location	Value		Balance Sheet Location	Value
Not designated as hedging instruments:
	Insured credit default swaps	$	588	Other assets	$	-	Derivative liabilities	$	(64)
	Insured swaps		3,035	Other assets		-	Derivative liabilities		(2)
	Insured swaps - held for sale		420	Assets held for sale		-	Liabilities held for sale		-
	Interest rate swaps		1,062	Other assets		3	Derivative liabilities		(213)
	Interest rate swaps-embedded		376	Medium-term notes		2	Medium-term notes		(17)
	Currency swaps-VIE		71	Other assets-VIE		20	Derivative liabilities-VIE		-
	All other		83	Other assets		-	Derivative liabilities		(20)
	All other-VIE		35	Other assets-VIE		-	Derivative liabilities-VIE		-
	All other-embedded		5	Other investments		-	Other investments		-
Total non-designated derivatives		$	5,675		$	25		$	(316)
__________
(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.

Thefollowing tablepresentsthe effectofderivativeinstrumentson the consolidated statementsofoperationsforthe three months endedSeptember 30,2017 and 2016:

In millions
Derivatives Not Designated as		Three Months Ended September 30,
Hedging Instruments	Location of Gain (Loss) Recognized in Income on Derivative	2017		2016
Insured credit default swaps	Unrealized gains (losses) on insured derivatives	$	6	$	20
Insured credit default swaps	Realized gains (losses) and other settlements on insured derivatives		(7)		(4)
Interest rate swaps	Net gains (losses) on financial instruments at fair value and foreign exchange		(3)		(1)
Currency swaps-VIE	Net gains (losses) on financial instruments at fair value and foreign exchange-VIE		4		4
All other	Net gains (losses) on financial instruments at fair value and foreign exchange		-		2
Total		$	-	$	21

Thefollowing tablepresentsthe effectofderivativeinstrumentson the consolidated statementsofoperationsforthe nine months endedSeptember 30,2017 and 2016:

In millions
Derivatives Not Designated as		Nine Months Ended September 30,
Hedging Instruments	Location of Gain (Loss) Recognized in Income on Derivative	2017		2016
Insured credit default swaps	Unrealized gains (losses) on insured derivatives	$	(10)	$	-
Insured credit default swaps	Realized gains (losses) and other settlements on insured derivatives		(41)		(20)
Interest rate swaps	Net gains (losses) on financial instruments at fair value and foreign exchange		(8)		(86)
Interest rate swaps-VIE	Net gains (losses) on financial instruments at fair value and foreign exchange-VIE		-		8
Currency swaps-VIE	Net gains (losses) on financial instruments at fair value and foreign exchange-VIE		(6)		3
All other	Net gains (losses) on financial instruments at fair value and foreign exchange		(19)		(1)
Total		$	(84)	$	(96)