UPDATE 1-Ambac restructuring may trigger CDS payments

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NEW YORK, March 25 (Reuters) - Payments on credit default swaps insuring the policies of Ambac Financial Group's ABK.N insurance arm may need to be paid out, after state regulators said on Thursday that they are taking control of the company's worst assets.

Regulators in Wisconsin, where Ambac's main insurance unit, Ambac Assurance Corp, is legally based, ordered the insurer to set up a separate account to house liabilities from policies that have generated big losses. For details, see [ID:nN25237354]

The account will include guarantees against default that Ambac sold on roughly $35 billion of mortgage securities, and about $29 billion of other exposure. Ambac Assurance Corp as of Sept. 30 had about $650 billion of total guarantees in force.

UBS has submitted a request to an industry committee responsible for determining when CDS payments are triggered to resolve whether the regulatory intervention constitutes a bankruptcy under terms of the contracts, the International Swaps and Derivatives Association said on its website on Thursday.

Ambac Assurance will not need to pay out CDS protection it sold on risky assets after reaching agreement with its bank counterparties to separate the deals into a segregated account and suspend any payments from loan losses.

Contracts written by other parties, such as banks or fund managers, that reference the insurer's policies, however, may need to be paid if the ISDA committee determines the restructuring constitutes a bankruptcy.

Net volumes of around $2.9 billion are outstanding in CDS on Ambac Assurance, according to data by the Depository Trust & Clearing Corp.

Ambac's capital levels have become severely strained by the mortgage crisis, which forced it to make big payouts on a number of complicated repackaged mortgage bonds it had guaranteed, among other instruments.

Bond insurers broadly suffered from making big bets on the mortgage market, which took them away from their main business of guaranteeing bonds issued by states and cities. (Reporting by Karen Brettell; Editing by Leslie Adler)