Derivative Instruments

3 Months Ended

Mar. 31, 2013

Derivative Instruments And Hedging Activities Disclosure [Abstract]

Derivative Instruments

9. DERIVATIVE INSTRUMENTS

The following tables summarize the gross fair values of individual derivative instruments and the impact of legal rights of offset as reported in the Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012.

	Gross Amounts of Recognized Assets / Liabilities		Gross Amounts Offset in the Consolidated Balance Sheet		Net Amounts of Assets / Liabilities Presented in the Consolidated Balance Sheet		Gross Amount of Collateral Received / Pledged Not Offset in the Consolidated Balance Sheet		Net Amount
March 31, 2013
Derivative Assets:
Interest rate swaps	$	178,447	$	65,636	$	112,811	$	—	$	112,811
Futures contracts		—		—		—		—		—
Total non-VIE derivative assets	$	178,447	$	65,636	$	112,811	$	—	$	112,811
Derivative Liabilities:
Credit derivatives	$	203,307	$	—	$	203,307	$	—	$	203,307
Interest rate swaps		366,949		65,636		301,313		147,925		153,388
Futures contracts		911		—		911		911		—
Other contracts		215		—		215		—		215
Total non-VIE derivative liabilities	$	571,382	$	65,636	$	505,746	$	148,836	$	356,910
Variable Interest Entities
Interest rate swaps	$	2,231,863	$	—	$	2,231,863	$	—	$	2,231,863
Currency swaps		85,762		—		85,762		—		85,762
Total VIE derivative liabilities	$	2,317,625	$	—	$	2,317,625	$	—	$	2,317,625

	Gross Amounts of Recognized Assets / Liabilities		Gross Amounts Offset in the Consolidated Balance Sheet		Net Amounts of Assets / Liabilities Presented in the Consolidated Balance Sheet		Gross Amount of Collateral Received / Pledged Not Offset in  the Consolidated Balance Sheet		Net Amount
December 31, 2012
Derivative Assets:
Interest rate swaps	$	198,117	$	73,264	$	124,853	$	—	$	124,853
Futures contracts		1,253		—		1,253		—		1,253
Total non-VIE derivative assets	$	199,370	$	73,264	$	126,106	$	—	$	126,106
Derivative Liabilities:
Credit derivatives	$	213,585	$	—	$	213,585	$	—	$	213,585
Interest rate swaps		390,774		73,264		317,510		180,113		137,397
Futures contracts		0		—		0		—		0
Other contracts		220		—		220		—		220
Total non-VIE derivative liabilities	$	604,579	$	73,264	$	531,315	$	180,113	$	351,202
Variable Interest Entities
Interest rate swaps	$	2,131,315	$	—	$	2,131,315	$	—	$	2,131,315
Currency swaps		90,466		—		90,466		—		90,466
Total VIE derivative liabilities	$	2,221,781	$	—	$	2,221,781	$	—	$	2,221,781

Amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral are not offset against fair value amounts recognized for derivative instruments on the Consolidated Balance Sheets. The amounts representing the right to reclaim cash collateral and posted margin, recorded in “Other assets” were $5,197 and $5,472 as of March 31, 2013 and December 31, 2012, respectively. The amounts representing the obligation to return cash collateral recorded in “Other liabilities” were $0 and $0 as of March 31, 2013 and December 31, 2012.

The following tables summarize the location and amount of gains and losses of derivative contracts in the Consolidated Statements of Total Comprehensive Loss for the three month periods ended March 31, 2013 and 2012, respectively:

	Location of Gain or (Loss) Recognized in Consolidated Statement of Total Comprehensive Income	Amount of Gain or (Loss) Recognized in Consolidated Statement of Total Comprehensive Income
		March 31, 2013			March 31, 2012
Financial Guarantee:
Credit derivatives	Net change in fair value of credit derivatives	$	12,787		$	(7,222	)
Financial Services derivatives products:
Interest rate swaps	Derivative products		(1,022	)		42,185
Currency swaps	Derivative products		0			156
Futures contracts	Derivative products		455			4,308
Other derivatives	Derivative products		(2	)		308
Total Financial Services derivative products			(569	)		46,957
Call options on long-term debt	Other income		—			61,680
Variable Interest Entities:
Currency swaps	Income on variable interest entities		4,704			(11,207	)
Interest rate swaps	Income on variable interest entities		(100,548	)		93,715
Total Variable Interest Entities			(95,844	)		82,508
Total derivative contracts		($	83,626	)	$	183,923

Financial Guarantee Credit Derivatives:

Credit derivatives, which are privately negotiated contracts, provide the counterparty with credit protection against the occurrence of a specific event such as a payment default or bankruptcy relating to an underlying obligation. Upon a credit event, Ambac is generally required to make payments equal to the difference between the scheduled debt service payment and the actual payment made by the issuer. Substantially all of Ambac’s credit derivative contracts relate to structured finance transactions. Credit derivatives issued are insured by Ambac Assurance. None of our outstanding credit derivative transactions at March 31, 2013, include ratings based collateral-posting triggers or otherwise require Ambac to post collateral regardless of Ambac’s ratings or the size of the mark to market exposure to Ambac.

The majority of our credit derivatives are written on a “pay-as-you-go” basis. Similar to an insurance policy execution, pay-as-you-go provides that Ambac pays interest shortfalls on the referenced transaction as they are incurred on each scheduled payment date, but only pays principal shortfalls upon the earlier of (i) the date on which the assets designated to fund the referenced obligation have been disposed of and (ii) the legal final maturity date of the referenced obligation. In a small number of transactions, Ambac is required to (i) make a payment equal to the difference between the par value and market value of the underlying obligation or (ii) purchase the underlying obligation at its par value and a loss is realized for the difference between the par and market value of the underlying obligation. There are two transactions, which are not “pay-as-you-go”, with a combined notional of approximately $57,154 and a net liability fair value of $76 as of March 31, 2013. These transactions are CLOs written prior to 2004.

Ambac maintains internal credit ratings on its guaranteed obligations, including credit derivative contracts, solely to indicate management’s view of the underlying credit quality of the guaranteed obligations. Independent rating agencies may have assigned different ratings on the credits in Ambac’s portfolio than Ambac’s internal ratings. The following tables summarize the net par outstanding for CDS contracts, by Ambac rating, for each major category as of March 31, 2013 and December 31, 2012:

March 31, 2013 Ambac Rating	CLO		Other		Total
AAA	$	272,685	$	483,486	$	756,171
AA		4,187,258		1,220,571		5,407,829
A		1,242,423		1,840,701		3,083,124
BBB (1)		—		665,792		665,792
Below investment grade (2)		—		291,822		291,822
	$	5,702,366	$	4,502,372	$	10,204,738

December 31, 2012 Ambac Rating	CLO		Other		Total
AAA	$	166,200	$	512,283	$	678,483
AA		4,676,362		1,278,756		5,955,118
A		1,313,205		2,370,988		3,684,193
BBB(1)		—		672,293		672,293
Below investment grade (2)		—		291,690		291,690
	$	6,155,767	$	5,126,010	$	11,281,777

(1) BBB internal rating reflects bonds which are of medium grade credit quality with adequate capacity to pay interest and repay principal. Certain protective elements and margins may weaken under adverse economic conditions and changing circumstances. These bonds are more likely than higher rated bonds to exhibit unreliable protection levels over all cycles.

(2) Below investment grade (“BIG”) internal ratings reflect bonds which are of speculative grade credit quality with the adequacy of future margin levels for payment of interest and repayment of principal potentially adversely affected by major ongoing uncertainties or exposure to adverse conditions.

The tables below summarize information by major category as of March 31, 2013 and December 31, 2012:

	CLO			Other			Total
March 31, 2013
Number of CDS transactions		28			21			49
Remaining expected weighted-average life of obligations (in years)		2.1			5.3			3.5
Gross principal notional outstanding	$	5,702,366		$	4,502,372		$	10,204,738
Net derivative liabilities at fair value	$	(30,736	)	$	(172,571	)	$	(203,307	)

	CLO			Other			Total
December 31, 2012
Number of CDS transactions		30			21			51
Remaining expected weighted-average life of obligations (in years)		2.2			5.2			3.6
Gross principal notional outstanding	$	6,155,767		$	5,126,010		$	11,281,777
Net derivative liabilities at fair value	$	(34,645	)	$	(178,940	)	$	(213,585	)

The maximum potential amount of future payments under Ambac’s credit derivative contracts written on a “pay-as-you-go” basis is generally the gross principal notional outstanding amount included in the above table plus future interest payments payable by the derivative reference obligations. For contracts that are not written with pay-as-you-go terms, the maximum potential future payment is represented by the principal notional only. Since Ambac’s credit derivatives typically reference obligations of or assets held by SPEs that meet the definition of a VIE, the amount of maximum potential future payments for credit derivatives is included in the table in Note 3, Special Purpose Entities, Including Variable Interest Entities.

Changes in fair value of Ambac’s credit derivative contracts are accounted for at fair value since they do not qualify for the financial guarantee scope exception under ASC Topic 815. Changes in fair value are recorded in “Net change in fair value of credit derivatives” on the Consolidated Statements of Total Comprehensive Income. Although CDS contracts are accounted for at fair value, they are surveilled similar to non-derivative financial guarantee contracts. As with financial guarantee insurance policies, Ambac’s surveillance group tracks credit migration of CDS contracts’ reference obligations from period to period. Adversely classified credits are assigned risk classifications by the surveillance group. As of March 31, 2013, there are four CDS contracts on Ambac’s adversely classified credit listing, with a net derivative liability fair value of $60,791 and total notional principal outstanding of $291,822. As of December 31, 2012, there were four CDS contracts on Ambac’s adversely classified credit listing, with a net derivative liability fair value of $67,219 and total notional principal outstanding of $291,690.

Financial Services Derivative Products:

Ambac, through its subsidiary Ambac Financial Services (“AFS”), provided interest rate and currency swaps to states, municipalities and their authorities, asset-backed issuers and other entities in connection with their financings. AFS manages its interest rate swaps business with the goal of retaining some basis risk and excess interest rate sensitivity as an economic hedge against the effects of rising interest rates elsewhere in the Company, including on Ambac’s financial guarantee exposures. As of March 31, 2013 and December 31, 2012 the notional amounts of AFS’s trading derivative products are as follows:

	Notional
Type of derivative	March 31, 2013		December 31, 2012
Interest rate swaps—receive-fixed/pay-variable	$	704,272	$	727,926
Interest rate swaps—pay-fixed/receive-variable		1,576,832		1,657,382
Interest rate swaps—basis swaps		161,690		161,690
Futures contracts		161,500		161,500
Other contracts		75,651		75,651

Derivatives of Consolidated Variable Interest Entities

Certain VIEs consolidated under ASC Topic 810 entered into derivative contracts to meet specified purposes within the securitization structure. The notional for VIE derivatives outstanding as of March 31, 2013 and December 31, 2012 are as follows:

Type of VIE derivative	Notional
	March 31, 2013		December 31, 2012
Interest rate swaps—receive-fixed/pay-variable	$	1,667,651	$	1,782,999
Interest rate swaps—pay-fixed/receive-variable		4,372,613		4,707,454
Currency swaps		706,568		755,438
Credit derivatives		18,939		20,885

Call Option on Long-Term Debt

Ambac Assurance had certain contractual options to repurchase $500,000 of its surplus notes at a discount to their par value which were considered stand-alone derivatives. Surplus notes are classified under Long-term debt on the Consolidated Balance Sheets. These call options were exercised in June 2012. Gains of $61,680 from the change in fair value of the call options were recognized within Other income in the Consolidated Statements of Total Comprehensive Income for the three month period ended March 31, 2012.

Contingent Features in Derivatives Related to Ambac Credit Risk

Ambac’s interest rate swaps with professional swap-dealer counterparties and certain front-end counterparties are generally executed under standardized derivative documents including collateral support and master netting agreements. Under these agreements, Ambac is required to post collateral in the event net unrealized losses exceed predetermined threshold levels. Additionally, given that Ambac Assurance is no longer rated by an independent rating agency, counterparties have the right to terminate the swap positions.

As of March 31, 2013 and December 31, 2012, the aggregate fair value of all derivative instruments with contingent features linked to Ambac’s own credit risk that are in a net liability position after considering legal rights of offset was $147,925 and $180,113, respectively, related to which Ambac had posted assets as collateral with a fair value of $233,425 and $271,251, respectively. All such ratings-based contingent features have been triggered as requiring maximum collateral levels to be posted by Ambac while preserving counterparties’ rights to terminate the contracts. Assuming all contracts terminated on March 31, 2013, settlement of collateral balances and net derivative liabilities would result in a net receipt of cash and/or securities by Ambac. If counterparties elect to exercise their right to terminate, the actual termination payment amounts will be determined in accordance with derivative contract terms, which may result in amounts that differ from market values as reported in Ambac’s financial statements.