12. 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 December 31, 2015 and 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
December 31, 2015:
Derivative Assets:
Credit derivatives	$	—	$	—	$	—		$	—	$	—
Interest rate swaps	137,015		52,129		84,886			—		84,886
Futures contracts	109		—		109			—		109
Total non-VIE derivative assets	$	137,124	$	52,129	$	84,995		$	—	$	84,995
Derivative Liabilities:
Credit derivatives	$	34,543	$	—	$	34,543		$	—	$	34,543
Interest rate swaps	370,944		52,129		318,815			176,386		142,429
Futures contracts	—		—		—			—		—
Total non-VIE derivative liabilities	$	405,487	$	52,129	$	353,358		$	176,386	$	176,972
Variable Interest Entities Derivative Assets:
Interest rate swaps	$	—	$	—	$	—		$	—	$	—
Currency swaps	36,862		36,862		—			—		—
Total VIE derivative assets	$	36,862	$	36,862	$	—		$	—	$	—
Variable interest entities derivative liabilities:
Interest rate swaps	$	1,965,265	$	—	$	1,965,265		$	—	$	1,965,265
Currency swaps	—		36,862		(36,862		)	—		(36,862		)
Total VIE derivative liabilities	$	1,965,265	$	36,862	$	1,928,403		$	—	$	1,928,403

December 31, 2014:
Derivative Assets:
Credit derivatives	$	2,043	$	—	$	2,043		$	—	$	2,043
Interest rate swaps	161,640		54,666		106,974			—		106,974
Futures contracts	—		—		—			—		—
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 Derivative Liabilities:
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 $165,073 and $158,240 as of December 31, 2015 and 2014, respectively. There were no amounts held representing an obligation to return cash collateral as of December 31, 2015 and 2014.



		Successor Ambac
	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 – Year Ended December 31,2015			Amount of Gain or (Loss) Recognized in Consolidated Statement of Total Comprehensive Income – Year Ended December 31, 2014
Financial Guarantee:
Credit derivatives	Net change in fair value of credit derivatives	$	41,701		$	23,906
Financial Services derivatives products:
Interest rate swaps	Derivative products	(41,177		)	(173,615		)
Currency swaps	Derivative products	—			—
Futures contracts	Derivative products	(1,367		)	(7,472		)
Total Financial Services derivative products		(42,544		)	(181,087		)
Variable Interest Entities:
Currency swaps	Income (loss) on variable interest entities	103,757			24,577
Interest rate swaps	Income (loss) on variable interest entities	168,003			(452,434		)
Total Variable Interest Entities		271,760			(427,857		)
Total derivative contracts		$	270,917		$	(585,038	)



		Successor Ambac			Predecessor Ambac
	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 – Period from May 1 through December 31, 2013			Amount of Gain or (Loss) Recognized in Consolidated Statement of Total Comprehensive Income – Period from January 1 through April 20, 2013
Financial Guarantee:
Credit derivatives	Net change in fair value of credit derivatives	$	192,869		$	(60,384	)
Financial Services derivatives products:
Interest rate swaps	Derivative products	103,846			(30,602		)
Futures contracts	Derivative products	10,925			(3,133		)
Total Financial Services derivative products		114,771			(33,735		)
Call options on long-term debt	Other income	—			—
Variable Interest Entities:
Currency swaps	Income (loss) on variable interest entities	(890		)	(116		)
Interest rate swaps	Income (loss) on variable interest entities	495,712			(203,620		)
Total Variable Interest Entities		494,822			(203,736		)
Total derivative contracts		$	802,462		$	(297,855	)

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 December 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.

The majority of our 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. The last transaction that was not “pay-as-you-go” terminated in July 2013.

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 December 31, 2015 and 2014:



December 31	2015						2014
Ambac Rating	CLO		Other		Total		CLO		Other		Total
AAA	$	—	$	—	$	—	$	—	$	—	$	—
AA	295,254		241,458		536,712		549,923		217,680		767,603
A	—		9,322		9,322		—		43,160		43,160
BBB ⁽¹⁾	—		356,323		356,323		—		448,249		448,249
Below investment grade ⁽²⁾	—		68,526		68,526		—		270,747		270,747
Total	$	295,254	$	675,629	$	970,883	$	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 December 31, 2015 and 2014:



	2015						2014
December 31	CLO		Other		Total		CLO		Other		Total
Number of CDS transactions	5		9		14		6		10		16
Remaining expected weighted-average life of obligations (in years)	1.1		5.6		4.3		1.8		5.4		4.1
Gross principal notional outstanding	$	295,253	$	675,630	$	970,883	$	549,923	$	979,836	$	1,529,759
Net derivative liabilities at fair value	$	1,837	$	32,706	$	34,543	$	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 4. 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 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 December 31, 2015, there are two credit derivative contracts on Ambac’s adversely classified credit listing, with a net derivative liability fair value of $19,820 and gross notional principal outstanding of $68,526. 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 December 31, 2015 and 2014 the notional amounts of AFS’s trading derivative products are as follows:



	Notional - December 31,
Type of derivative	2015		2014
Interest rate swaps—receive-fixed/pay-variable	$	773,072	$	782,904
Interest rate swaps—pay-fixed/receive-variable	1,429,644		1,479,650
Interest rate swaps—basis swaps	38,965		55,800
Futures contracts	100,000		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 December 31, 2015 and 2014 are as follows:



	Notional - December 31,
Type of VIE derivative	2015		2014
Interest rate swaps—receive-fixed/pay-variable	$	1,616,289	$	1,710,344
Interest rate swaps—pay-fixed/receive-variable	2,796,496		3,152,090
Currency swaps	488,924		724,656
Credit derivatives	15,616		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 December 31, 2015 and 2014, the net liability fair value of all derivative instruments with contingent features linked to Ambac’s own credit risk was $95,415 and $92,869, respectively, related to which Ambac had posted assets as collateral with a fair value of $147,974 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 December 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 values as reported in Ambac’s financial statements.