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Ambac Default-Swap Traders Seek Ruling on Bankruptcy Trigger

Traders are looking to trigger $1.56 billion in credit-default swap protection on Ambac Financial Group Inc. (ABKFQ) after the holding company for the bond insurer filed for bankruptcy.

The International Swaps and Derivatives Association’s determinations committee will rule if swaps on Ambac Financial Group should be settled, the New York-based association said today on its website. Contracts protecting a net $1.56 billion of Ambac Financial debt were outstanding as of Oct. 29 according to the Depository Trust Clearing Corp., which runs a central repository for the credit swaps market.

Ambac Financial filed for bankruptcy yesterday in Manhattan to reschedule payments on more than $1 billion in bonds and other claims. Ambac Financial is the holding company of Ambac Assurance Corp., which has about $57.6 billion in policies insuring credit derivatives and other financial products that are being restructured by Wisconsin regulators, according to the company. While state regulators handle workouts of U.S. insurance companies, their holding companies can go through federal bankruptcy courts.

Credit swaps protecting against an Ambac default for five years jumped 4.4 percentage points to 83.5 percent upfront, according to data provider CMA. That’s in addition to 5 percent a year, meaning it would cost $8.35 million initially and $500,000 annually to protect $10 million of Ambac debt.

Credit-default swaps pay the buyer face value if a borrower fails to meet its debt obligations less the value of the defaulted debt.

To contact the reporter on this story: Mary Childs in New York at mchilds5@bloomberg.net;

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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