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Derivative Instruments | 9 Months Ended
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Sep. 30, 2015
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 September 30, 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
September 30, 2015: |  |  |  |  |  |  |  |  |
Derivative Assets: |  |  |  |  |  |  |  |  |
Credit derivatives | $ | 1,345 |  |  | $ | — |  |  | $ | 1,345 |  |  | $ | — |  |  | $ | 1,345 |
Interest rate swaps | 153,528 |  |  | 63,785 |  |  | 89,743 |  |  | — |  |  | 89,743 |
Futures contracts | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total non-VIE derivative assets | $ | 154,873 |  |  | $ | 63,785 |  |  | $ | 91,088 |  |  | $ | — |  |  | $ | 91,088 |
Derivative Liabilities: |  |  |  |  |  |  |  |  |
Credit derivatives | $ | 31,232 |  |  | $ | — |  |  | $ | 31,232 |  |  | $ | — |  |  | $ | 31,232 |
Interest rate swaps | 408,168 |  |  | 63,785 |  |  | 344,383 |  |  | 186,752 |  |  | 157,631 |
Futures contracts | 220 |  |  | — |  |  | 220 |  |  | — |  |  | 220 |
Total non-VIE derivative liabilities | $ | 439,620 |  |  | $ | 63,785 |  |  | $ | 375,835 |  |  | $ | 186,752 |  |  | $ | 189,083 |
VIE derivative assets: |  |  |  |  |  |  |  |  |
Interest rate swaps | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Currency swaps | 31,429 |  |  | 31,429 |  |  | — |  |  | — |  |  | — |
Total VIE derivative assets | $ | 31,429 |  |  | $ | 31,429 |  |  | $ | — |  |  | $ | — |  |  | $ | — |
VIE derivative liabilities: |  |  |  |  |  |  |  |  |
Interest rate swaps | $ | 2,065,224 |  |  | $ | — |  |  | $ | 2,065,224 |  |  | $ | — |  |  | $ | 2,065,224 |
Currency swaps | — |  |  | 31,429 |  |  | (31,429 | ) |  | — |  |  | (31,429 | )
Total VIE derivative liabilities | $ | 2,065,224 |  |  | $ | 31,429 |  |  | $ | 2,033,795 |  |  | $ | — |  |  | $ | 2,033,795 |
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 $175,214 and $158,240 as of September 30, 2015 and December 31, 2014, respectively. There were no amounts held representing an obligation to return cash collateral as of September 30, 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 and nine months ended September 30, 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 September 30, |  | Nine Months Ended September 30,
|  | 2015 |  | 2014 |  | 2015 |  | 2014
Financial Guarantee: |  |  |  |  |  |  |  |  |
Credit derivatives | Net change in fair value of credit derivatives |  | $ | 36,952 |  |  | $ | 7,416 |  |  | $ | 44,746 |  |  | $ | 13,579 |
Financial Services derivatives products: |  |  |  |  |  |  |  |  |
Interest rate swaps | Derivative products |  | (63,044 | ) |  | (15,638 | ) |  | (48,839 | ) |  | (112,995 | )
Futures contracts | Derivative products |  | (2,039 | ) |  | (47 | ) |  | (3,019 | ) |  | (4,516 | )
Total Financial Services derivative products |  |  | (65,083 | ) |  | (15,685 | ) |  | (51,858 | ) |  | (117,511 | )
Variable Interest Entities: |  |  |  |  |  |  |  |  |
Currency swaps | Income (loss) on variable interest entities |  | 12,235 |  |  | 17,014 |  |  | 53,552 |  |  | 21,425 |
Interest rate swaps | Income (loss) on variable interest entities |  | (15,793 | ) |  | (44,846 | ) |  | 68,044 |  |  | (204,411 | )
Total Variable Interest Entities |  |  | (3,558 | ) |  | (27,832 | ) |  | 121,596 |  |  | (182,986 | )
Total derivative contracts |  |  | $ | (31,689 | ) |  | $ | (36,101 | ) |  | $ | 114,484 |  |  | $ | (286,918 | )
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 September 30, 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 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 September 30, 2015 and December 31, 2014:
| CLO |  | Other |  | Total
Ambac Rating - September 30, 2015: |  |  |  |  |
AAA | $ | — |  |  | $ | — |  |  | $ | — |
AA | 341,668 |  |  | 233,231 |  |  | 574,899 |
A | — |  |  | 9,322 |  |  | 9,322 |
BBB (1) | — |  |  | 469,724 |  |  | 469,724 |
Below investment grade (2) | — |  |  | 259,852 |  |  | 259,852 |
Total | $ | 341,668 |  |  | $ | 972,129 |  |  | $ | 1,313,797 |
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 September 30, 2015 and December 31, 2014:
| CLO |  | Other |  | Total
September 30, 2015: |  |  |  |  |
Number of CDS transactions | 5 |  |  | 9 |  |  | 14 |
Gross principal notional outstanding | $ | 341,668 |  |  | $ | 972,129 |  |  | $ | 1,313,797 |
Net derivative liabilities at fair value | $ | 1,740 |  |  | $ | 28,147 |  |  | $ | 29,887 |
December 31, 2014: |  |  |  |  |
Number of CDS transactions | 6 |  |  | 10 |  |  | 16 |
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, Including Variable Interest Entities ("VIEs"). 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 September 30, 2015, there are four CDS contracts on Ambac’s adversely classified credit listing, with a net derivative liability fair value of $14,958 and gross notional principal outstanding of $259,852. 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 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 September 30, 2015 and December 31, 2014 the notional amounts of AFS’s trading derivative products are as follows:
| Notional
Type of derivative | September 30, 2015 |  | December 31, 2014
Interest rate swaps—receive-fixed/pay-variable | $ | 757,135 |  |  | $ | 782,904 |
Interest rate swaps—pay-fixed/receive-variable | 1,446,248 |  |  | 1,479,650 |
Interest rate swaps—basis swaps | 38,965 |  |  | 55,800 |
Futures contracts | 75,000 |  |  | 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 September 30, 2015 and December 31, 2014 are as follows:
| Notional
Type of VIE derivative | September 30, 2015 |  | December 31, 2014
Interest rate swaps—receive-fixed/pay-variable | $ | 1,659,640 |  |  | $ | 1,710,344 |
Interest rate swaps—pay-fixed/receive-variable | 3,058,644 |  |  | 3,152,090 |
Currency swaps | 378,050 |  |  | 724,656 |
Credit derivatives | 16,035 |  |  | 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 September 30, 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 $101,698 and $92,869, respectively, related to which Ambac had posted assets as collateral with a fair value of $153,901 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 September 30, 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.

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