. 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, 2015 and December 31, 2014:



	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, 2015:
Derivative Assets:
Credit derivatives	$	—	$	—	$	—	$	—	$	—
Interest rate swaps	182,103		68,481		113,622		—		113,622
Total non-VIE derivative assets	$	182,103	$	68,481	$	113,622	$	—	$	113,622
Derivative Liabilities:
Credit derivatives	$	76,377	$	—	$	76,377	$	—	$	76,377
Interest rate swaps	438,518		68,481		370,037		196,039		173,998
Futures contracts	942		—		942		942		—
Total non-VIE derivative liabilities	$	515,837	$	68,481	$	447,356	$	196,981	$	250,375
Variable Interest Entities:
Interest rate swaps	$	2,081,082	$	—	$	2,081,082	$	—	$	2,081,082
Currency swaps	44,631		—		44,631		—		44,631
Total VIE derivative liabilities	$	2,125,713	$	—	$	2,125,713	$	—	$	2,125,713

December 31, 2014:
Derivative Assets:
Credit derivatives	$	2,043	$	—	$	2,043	$	—	$	2,043
Interest rate swaps	161,640		54,666		106,974		—		106,974
Total non-VIE derivative assets	$	163,683	$	54,666	$	109,017	$	—	$	109,017
Derivative Liabilities:
Credit derivatives	$	75,502	$	—	$	75,502	$	—	$	75,502
Interest rate swaps	385,546		54,666		330,880		169,573		161,307
Futures contracts	562		—		562		562		—
Total non-VIE derivative liabilities	$	461,610	$	54,666	$	406,944	$	170,135	$	236,809
Variable Interest Entities:
Interest rate swaps	$	2,133,268	$	—	$	2,133,268	$	—	$	2,133,268
Currency swaps	66,895		—		66,895		—		66,895
Total VIE derivative liabilities	$	2,200,163	$	—	$	2,200,163	$	—	$	2,200,163

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 $195,697 and $158,240 as of March 31, 2015 and December 31, 2014, respectively. There were no amounts held representing an obligation to return cash collateral as of March 31, 2015 and December 31, 2014.

The following tables summarize the location and amount of gains and losses of derivative contracts in the Consolidated Statements of Total Comprehensive Income for the three months ended March 31, 2015 and 2014:



	Location of Gain or (Loss) Recognized in Consolidated Statements of Total Comprehensive Income	Amount of Gain or (Loss) Recognized in Consolidated Statement of Total Comprehensive Income
		Three Months Ended March 31,
		2015			2014
Financial Guarantee:
Credit derivatives	Net change in fair value of credit derivatives	$	(2,499	)	$	7,382
Financial Services derivatives products:
Interest rate swaps	Derivative products	(35,547		)	(51,849		)
Futures contracts	Derivative products	(2,227		)	(1,992		)
Total Financial Services derivative products		(37,774		)	(53,841		)
Variable Interest Entities:
Currency swaps	Income (loss) on variable interest entities	22,264			5,408
Interest rate swaps	Income (loss) on variable interest entities	52,186			(77,792		)
Total Variable Interest Entities		74,450			(72,384		)
Total derivative contracts		$	34,177		$	(118,843	)

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 the outstanding credit derivative transactions at March 31, 2015 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.

Our remaining outstanding credit derivatives were 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.

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 gross principal notional outstanding for CDS contracts, by Ambac rating, for each major category as of March 31, 2015 and December 31, 2014:



	CLO		Other		Total
Ambac Rating - March 31, 2015:
AAA	$	—	$	—	$	—
AA	466,453		303,860		770,313
A	—		43,160		43,160
BBB ⁽¹⁾	—		515,578		515,578
Below investment grade ⁽²⁾	—		265,520		265,520
Total	$	466,453	$	1,128,118	$	1,594,571

Ambac Rating - December 31, 2014:
AAA	$	—	$	—	$	—
AA	549,923		217,680		767,603
A	—		43,160		43,160
BBB⁽¹⁾	—		448,249		448,249
Below investment grade ⁽²⁾	—		270,747		270,747
Total	$	549,923	$	979,836	$	1,529,759


(1)	BBB internal ratings reflect 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 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, 2015 and December 31, 2014:



	CLO		Other		Total
March 31, 2015:
Number of CDS transactions	5		10		15
Remaining expected weighted-average life of obligations (in years)	1.5		5.6		4.4
Gross principal notional outstanding	$	466,453	$	1,128,118	$	1,594,571
Net derivative liabilities at fair value	$	1,533	$	74,844	$	76,377

December 31, 2014:
Number of CDS transactions	6		10		16
Remaining expected weighted-average life of obligations (in years)	1.8		5.4		4.1
Gross principal notional outstanding	$	549,923	$	979,836	$	1,529,759
Net derivative liabilities at fair value	$	2,027	$	71,432	$	73,459

The maximum potential amount of future payments under Ambac’s credit derivative contracts is generally the gross principal notional outstanding amount included in the above table plus future interest payments payable by the derivative reference obligations. Since Ambac’s credit derivatives typically reference obligations of or assets held by special purpose entities 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.

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 the Derivatives and Hedging Topic of the ASC. Changes in fair value are recorded in “Net change in fair value of credit derivatives” on the Consolidated Statements of Total Comprehensive Income (Loss). 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 risk group tracks credit migration of CDS contracts’ reference obligations from period to period.

Adversely classified credits are assigned risk classifications by the risk group. As of March 31, 2015, there are four CDS contracts on Ambac’s adversely classified credit listing, with a net derivative liability fair value of $61,338 and gross notional principal outstanding of $265,520. As of December 31, 2014, there were four CDS contracts on Ambac’s adversely classified credit listing, with a net derivative liability fair value of $60,729 and total notional principal outstanding of $270,747.

Financial Services Derivative Products:

Ambac, through its subsidiary Ambac Financial Services (“AFS”), provides 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, 2015 and December 31, 2014 the notional amounts of AFS’s trading derivative products are as follows:



	Notional
Type of derivative	March 31, 2015		December 31, 2014
Interest rate swaps—receive-fixed/pay-variable	$	760,808	$	782,904
Interest rate swaps—pay-fixed/receive-variable	1,465,871		1,479,650
Interest rate swaps—basis swaps	55,800		55,800
Futures contracts	60,000		80,000

Derivatives of Consolidated Variable Interest Entities

Certain VIEs consolidated under the Consolidation Topic of the ASC entered into derivative contracts to meet specified purposes within the securitization structure. The notional for VIE derivatives outstanding as of March 31, 2015 and December 31, 2014 are as follows:



	Notional
Type of VIE derivative	March 31, 2015		December 31, 2014
Interest rate swaps—receive-fixed/pay-variable	$	1,629,458	$	1,710,344
Interest rate swaps—pay-fixed/receive-variable	3,003,021		3,152,090
Currency swaps	690,386		724,656
Credit derivatives	16,249		18,278

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, 2015 and December 31, 2014, the net liability fair value of all derivative instruments with contingent features linked to Ambac’s own credit risk was $107,213 and $92,869, respectively, related to which Ambac had posted assets as collateral with a fair value of $136,810 and $118,844, 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, 2015, 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.