Our derivative liabilities valuation methodology incorporates our own non-performance risk by including our observable  CDS spread as an input into the determination of the fair value of our derivative liabilities. Considerable judgment is required to  interpret market data to develop the estimates of fair value.  Accordingly, the estimates may not be indicative of amounts we  could realize in a current market exchange or negotiated termination. Our derivative liability valuation is not counterparty  specific and is intended to estimate the average exchange price between typical participants.  The use of different market  assumptions or estimation methodologies may have a material ef fect on the estimated fair value amounts or negotiated  terminations. In a negotiated termination, certain factors unique to the counterparty may have a greater impact on the amount  exchanged than in an estimated fair value amount between typical market participants and another market participant could  have materially different views given the level of judgment associated with the valuation.  The fair value of each of our corporate CDO transactions is estimated based on the dif ference between: (1) the present  value of the expected future contractual premiums we char ge; and (2) the fair premium amount that we estimate that another  financial guarantor would require to assume the rights and obligations under our contracts.  The fair value estimates reflect the  fair value of the asset or liability , which is consistent with the “in-exchange” approach, in which fair value is determined based  on the price that would be received or paid in a current transaction as defined by the accounting standard regarding fair value  measurements. These credit derivatives are categorized in Level III of the fair value hierarchy .  Present Value of Expected Future Contractual Premiums —Our contractual premiums are subject to change primarily for  two reasons: (1) all of our contracts provide our counterparties with the right to terminate upon our default; and (2)  80% of the  aggregate net par outstanding of our corporate CDO transactions  (as of December 31, 2012) provide our counterparties with the  right to terminate these transactions. In determining the expected future premiums of these transactions, we adjust the  contractual premiums for such transactions to reflect the estimated fair value of those premiums based on our estimate of the  probability of our counterparties exercising this downgrade termination right and the impact it would have on the remaining  expected lifetime premium.We also cap the total estimated fair value of the contracts subject to termination such that none of  these contracts are in a derivative asset position.  As of December 31, 2012, 37% of the aggregate net par outstanding of our  corporate CDO transactions was capped in this manner . The discount rate we use to determine the present value of expected  future premiums is our CDS spread plus a risk-free rate.  This discount rate reflects the risk that we may not collect future  premiums due to our inability to satisfy our contractual obligations, which provides our counterparties the right to terminate the  contracts. Determining the Fair Premium Amount —For each corporate CDO transaction, we perform three principal steps in  determining the fair premium amount: Defining the Equivalent-Risk Tranche —Direct observations of fair premium amounts for our transactions are not  available because these transactions cannot be traded or transferred pursuant to their terms and there is currently no active  market for these transactions. However , CDS on tranches of a standardized index (the “CDX index”) are widely traded and  observable and provide relevant market data for determining the fair premium amount of our transactions, as described more  fully below.  The CDX index is an index based on a synthetic corporate CDO that comprises a list of corporate obligors and is  segmented into multiple tranches of synthetic senior unsecured debt of these obligors ranging from the equity tranche (i.e., the  most credit risk or first-loss position) to the most senior tranche (i.e., the least credit risk).  We refer to each of these tranches as  a “standard CDX tranche.” A tranche is defined by an attachment point and detachment point, representing the range of  portfolio losses for which the protection seller would be required to make a payment. 150 •  first, we define a tranche on the CDX index (defined below) that equates to the risk profile of our specific transaction  (we refer to this tranche as an “equivalent-risk tranche”); •  second, we determine the fair premium amount on the equivalent-risk tranche for those market participants engaged in  trading on the CDX index (we refer to each of these participants as a “typical market participant”); and •  third, we adjust the fair premium amount for a typical market participant to account for the dif ference between the  non-performance or default risk of a typical market participant and the non-performance or default risk of a financial  guarantor of similar credit quality to us (in each case, we refer to the risk of non-performance as “non-performance  risk”).  Corporate CDOs