Net Change in Fair Value of Credit Derivatives

The net change in fair value of credit derivatives, which comprises realized gains/(losses) and other settlements from credit derivatives and unrealized gains/(losses) on credit derivatives, was a gain of $9.4 million for the third quarter of 2010, compared to a gain of $2,132.9 million for the third quarter of 2009. Third quarter of 2009 results included the impact of fair value changes to the CDO of ABS portfolio, which was fully commuted in June 2010. The CDO of ABS portfolio contributed significantly to the volatility of the net change in fair value of credit derivatives throughout 2009.

Realized losses and other settlements from credit derivative contracts represent the normal accretion into income of fees received for transactions executed in credit derivative format, offset by loss and settlement payments on such transactions. Net realized gains/(losses) and other settlements from credit derivative contracts in the third quarter of 2010 and 2009 amounted to $4.9 million and ($732.9) million, respectively. The third quarter 2009 net realized loss was primarily driven by settlement and commutation payments on certain CDO of ABS transactions during that period.

Net unrealized gains on credit derivative contracts in the third quarter of 2010 and 2009 amounted to $4.5 million and $2,865.8 million, respectively. The net unrealized gain during the third quarter of 2010 is primarily the result of the net amortization of par outstanding on the underlying reference obligations of the remaining credit derivative portfolio. The third quarter 2009 net unrealized gain primarily reflects the effect of AAC’s widening credit spreads during that period on the fair value of CDO of ABS derivative liabilities, pricing improvements on underlying reference obligations, and the reclassification of $732.9 million to realized losses, partially offset by the negative impact of rating downgrades on the fair value of CDO of ABS.