Derivative Instruments

9 Months Ended

Sep. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

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 September 30, 2019 and December 31, 2018:



	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
September 30, 2019:
Derivative Assets:
Interest rate swaps	$	81,837	$	68	$	81,769	$	—	$	81,769
Futures contracts	393		—		393		—		393
Total non-VIE derivative assets	$	82,230	$	68	$	82,162	$	—	$	82,162
Derivative Liabilities:
Credit derivatives	$	422	$	—	$	422	$	—	$	422
Interest rate swaps	102,960		68		102,892		102,076		816
Total non-VIE derivative liabilities	$	103,382	$	68	$	103,314	$	102,076	$	1,238
Variable Interest Entities Derivative Assets:
Currency swaps	$	67,921	$	—	$	67,921	$	—	$	67,921
Total VIE derivative assets	$	67,921	$	—	$	67,921	$	—	$	67,921
Variable Interest Entities Derivative Liabilities:
Interest rate swaps	$	1,779,077	$	—	$	1,779,077	$	—	$	1,779,077
Total VIE derivative liabilities	$	1,779,077	$	—	$	1,779,077	$	—	$	1,779,077



December 31, 2018:
Derivative Assets:
Interest rate swaps	$	59,768	$	300	$	59,468	$	—	$	59,468
Total non-VIE derivative assets	$	59,768	$	300	$	59,468	$	—	$	59,468
Derivative Liabilities:
Credit derivatives	$	1,459	$	—	$	1,459	$	—	$	1,459
Interest rate swaps	72,161		300		71,861		67,126		4,735
Futures contracts	3,379		—		3,379		3,379		—
Total non-VIE derivative liabilities	$	76,999	$	300	$	76,699	$	70,505	$	6,194
Variable Interest Entities Derivative Assets:
Currency swaps	$	66,302	$	—	$	66,302	$	—	$	66,302
Total VIE derivative assets	$	66,302	$	—	$	66,302	$	—	$	66,302
Variable Interest Entities Derivative Liabilities:
Interest rate swaps	$	1,712,062	$	—	$	1,712,062	$	—	$	1,712,062
Total VIE derivative liabilities	$	1,712,062	$	—	$	1,712,062	$	—	$	1,712,062

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 $50,310 and $102,904 as of September 30, 2019 and December 31, 2018, respectively. There were no amounts held representing an obligation to return cash collateral as of September 30, 2019 and December 31, 2018.

The following tables summarize the location and amount of gains and losses of derivative contracts in the Consolidated Statements of Total Comprehensive Income (Loss) for the three and nine months ended September 30, 2019 and 2018:



	Location of Gain or (Loss) Recognized in Consolidated Statements of Total Comprehensive Income (Loss)	Amount of Gain or (Loss) Recognized in Consolidated Statement of Total Comprehensive Income (Loss)
		Three Months Ended September 30,					Nine Months Ended September 30,
		2019			2018		2019			2018
Non-VIE derivatives:
Credit derivatives	Net gains (losses) on derivative contracts	$	528		$	250	$	1,311		$	(313	)
Interest rate swaps	Net gains (losses) on derivative contracts	(547		)	3,157		(10,656		)	9,320
Futures contracts	Net gains (losses) on derivative contracts	(9,871		)	14,176		(52,116		)	42,699
Total Non-VIE derivatives		$	(9,890	)	$	17,583	(61,461		)	51,706
Variable Interest Entities:
Currency swaps	Income (loss) on variable interest entities	$	9,618		$	1,140	6,257			6,666
Interest rate swaps	Income (loss) on variable interest entities	(165,664		)	335,054		(271,875		)	548,092
Total Variable Interest Entities		(156,046		)	336,194		(265,618		)	554,758
Total derivative contracts		$	(165,936	)	$	353,777	$	(327,079	)	$	606,464

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. Credit derivatives issued are insured by Ambac Assurance. None of the outstanding credit derivative transactions at September 30, 2019, 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 portfolio 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.

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. The gross principal notional outstanding for CDS contracts was $272,550 and $295,342 as of September 30, 2019 and December 31, 2018, respectively, all of which had internal Ambac ratings of AA in both periods.

Interest Rate Derivatives:

Ambac, through its subsidiary Ambac Financial Services (“AFS”), uses interest rate swaps and US Treasury futures contracts to provide a partial economic hedge against the effects of rising interest rates elsewhere in the Company, including on Ambac’s financial guarantee exposures. Additionally, AFS provided interest rate swaps to states, municipalities and their authorities, asset-backed issuers and other entities in connection with their financings. As of September 30, 2019 and December 31, 2018 the notional amounts of AFS’s derivatives are as follows:



	Notional
Type of Derivative	September 30, 2019		December 31, 2018
Interest rate swaps—receive-fixed/pay-variable	$	337,481	$	493,368
Interest rate swaps—pay-fixed/receive-variable	1,265,895		1,121,532
US Treasury futures contracts—short	855,000		1,760,000

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 September 30, 2019 and December 31, 2018 are as follows:



	Notional
Type of VIE Derivative	September 30, 2019		December 31, 2018
Interest rate swaps—receive-fixed/pay-variable	$	1,103,656	$	1,399,532
Interest rate swaps—pay-fixed/receive-variable	1,103,199		1,176,748
Currency swaps	312,264		344,992
Credit derivatives	8,676		10,254

Contingent Features in Derivatives Related to Ambac Credit Risk

Ambac’s over-the-counter interest rate swaps are centrally cleared when eligible. Certain interest rate swaps remain with professional swap-dealer counterparties and direct customer counterparties. These non-cleared swaps 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 September 30, 2019 and December 31, 2018, the net liability fair value of derivative instruments with contingent features linked to Ambac’s own credit risk was $102,147 and $67,071, respectively, related to which Ambac had posted cash and securities as collateral with a fair value of $120,733 and $83,700, respectively. All such ratings-based contingent features have been triggered requiring maximum collateral levels to be posted by Ambac while preserving counterparties’ rights to terminate the contracts. Assuming all such contracts terminated on September 30, 2019, 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.