AIG 2010 Annual Report Download - page 203

American International Group, Inc., and Subsidiaries
Expected Loss Models — Under this mechanism, the amount of collateral to be posted is determined based on
the amount of expected credit losses, generally determined using a rating-agency model.
Negotiated Amount — Under this mechanism, the amount of collateral to be posted is determined based on
terms negotiated between AIGFP and the counterparty, which could be a fixed percentage of the notional
amount or present value of premiums to be earned by AIGFP.
The following table presents the amount of collateral postings by underlying mechanism as described above with
respect to the regulatory capital relief portfolio (prior to consideration of transactions other than the Capital
Markets super senior credit default swaps subject to the same Master Agreements) as of the periods ended:
(in millions) December 31, 2009 December 31, 2010 February 16, 2011
Reference to market indices $ 60 $ 19 $ 10
Expected loss models 20 - -
Negotiated amount 230 217 216
Total $ 310 $ 236 $ 226
Arbitrage Portfolio — Multi-Sector CDOs
In the CDS transactions with physical settlement provisions, in respect of multi-sector CDOs, the standard CSA
provisions for the calculation of exposure have been modified, with the exposure amount determined pursuant to
an agreed formula that is based on the difference between the net notional amount of such transaction and the
market value of the relevant underlying CDO security, rather than the replacement value of the transaction. As of
any date, the ‘‘market value’’ of the relevant CDO security is the price at which a marketplace participant would
be willing to purchase such CDO security in a market transaction on such date, while the ‘‘replacement value of
the transaction’’ is the cost on such date of entering into a credit default swap transaction with substantially the
same terms on the same referenced obligation (e.g., the CDO security). In cases where a formula is utilized, a
transaction-specific threshold is generally factored into the calculation of exposure, which reduces the amount of
collateral required to be posted. These thresholds typically vary based on the credit ratings of AIG and/or the
reference obligations, with greater posting obligations arising in the context of lower ratings. For the large majority
of counterparties to these transactions, the Master Agreement and CSA cover non-CDS transactions (e.g., interest
rate and cross currency swap transactions) as well as CDS transactions. As a result, the amount of collateral to be
posted by AIGFP in relation to the CDS transactions will be added to or offset by the amount, if any, of the
exposure AIG has to the counterparty on the non-CDS transactions.
Arbitrage Portfolio — Corporate Debt/CLOs
All of the Capital Markets corporate arbitrage-CLO transactions are subject to CSAs. These transactions are
treated the same as other transactions subject to the same Master Agreement and CSA, with the calculation of
collateral in accordance with the standard CSA procedures outlined above.
The vast majority of corporate debt transactions are no longer subject to future collateral postings. In exchange
for an upfront payment to an intermediary counterparty, AIGFP has eliminated all future obligations to post
collateral on corporate debt transactions that mature after 2011.
Collateral Calls
AIGFP has received collateral calls from counterparties in respect of certain super senior credit default swaps,
of which a large majority relate to multi-sector CDOs. To a lesser extent, AIGFP has also received collateral calls
in respect of certain super senior credit default swaps entered into by counterparties for regulatory capital relief
purposes and in respect of corporate arbitrage.
From time to time, valuation methodologies used and estimates made by counterparties with respect to certain
super senior credit default swaps or the underlying reference CDO securities, for purposes of determining the
AIG 2010 Form 10-K 187