Derivative Instruments

3 Months Ended

Mar. 31, 2020

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 March 31, 2020 and December 31, 2019:



	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, 2020:
Derivative Assets:
Interest rate swaps	$	89	$	1	$	88	$	—	$	88
Total non-VIE derivative assets	$	89	$	1	$	88	$	—	$	88
Derivative Liabilities:
Credit derivatives	$	2	$	—	$	2	$	—	$	2
Interest rate swaps	136		1		135		134		1
Total non-VIE derivative liabilities	$	138	$	1	$	137	$	134	$	3
Variable Interest Entities Derivative Assets:
Currency swaps	$	62	$	—	$	62	$	—	$	62
Total VIE derivative assets	$	62	$	—	$	62	$	—	$	62
Variable Interest Entities Derivative Liabilities:
Interest rate swaps	$	1,610	$	—	$	1,610	$	—	$	1,610
Total VIE derivative liabilities	$	1,610	$	—	$	1,610	$	—	$	1,610



December 31, 2019:
Derivative Assets:
Interest rate swaps	$	75	$	—	$	75	$	—	$	75
Total non-VIE derivative assets	$	75	$	—	$	75	$	—	$	75
Derivative Liabilities:
Credit derivatives	$	—	$	—	$	—	$	—	$	—
Interest rate swaps	89		—		90		89		1
Total non-VIE derivative liabilities	$	90	$	—	$	90	$	89	$	1
Variable Interest Entities Derivative Assets:
Currency swaps	$	52	$	—	$	52	$	—	$	52
Total VIE derivative assets	$	52	$	—	$	52	$	—	$	52
Variable Interest Entities Derivative Liabilities:
Interest rate swaps	$	1,657	$	—	$	1,657	$	—	$	1,657
Total VIE derivative liabilities	$	1,657	$	—	$	1,657	$	—	$	1,657

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 $80 and $36 as of March 31, 2020 and December 31, 2019, respectively. There were no amounts held representing an obligation to return cash collateral as of March 31, 2020 and December 31, 2019.

The following tables summarize the location and amount of gains and losses of derivative contracts in the Unaudited Consolidated Statements of Total Comprehensive Income (Loss) for the three months ended March 31, 2020 and 2019:



	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 March 31,
		2020			2019
Non-VIE derivatives:
Credit derivatives	Net gains (losses) on derivative contracts	$	(1	)	$	—
Interest rate swaps	Net gains (losses) on derivative contracts	(29		)	(3		)
Futures contracts	Net gains (losses) on derivative contracts	(40		)	(14		)
Total Non-VIE derivatives		$	(70	)	$	(16	)
Variable Interest Entities:
Currency swaps	Income (loss) on variable interest entities	$	10		$	(7	)
Interest rate swaps	Income (loss) on variable interest entities	47			(70		)
Total Variable Interest Entities		57			(77		)
Total derivative contracts		$	(13	)	$	(93	)

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 March 31, 2020, 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 credit derivate contracts was $275 and $280 as of March 31, 2020 and December 31, 2019, 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 March 31, 2020 and December 31, 2019 the notional amounts of AFS’s derivatives are as follows:



	Notional
Type of Derivative	March 31, 2020		December 31, 2019
Interest rate swaps—receive-fixed/pay-variable	$	328	$	332
Interest rate swaps—pay-fixed/receive-variable	1,261		1,261
US Treasury futures contracts—short	240		755

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, 2020 and December 31, 2019 are as follows:



	Notional
Type of VIE Derivative	March 31, 2020		December 31, 2019
Interest rate swaps—receive-fixed/pay-variable	$	1,121	$	1,194
Interest rate swaps—pay-fixed/receive-variable	1,093		1,176
Currency swaps	302		329
Credit derivatives	8		9

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 March 31, 2020 and December 31, 2019, the net liability fair value of derivative instruments with contingent features linked to Ambac’s own credit risk was $132 and $89, respectively, related to which Ambac had posted cash and securities as collateral with a fair value of $154 and $109, 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 March 31, 2020, 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.