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ITEM 8 / NOTE 12. DERIVATIVES AND HEDGE ACCOUNTING.....................................................................................................................................................................................The following table presents the fair values of derivative assets and liabilities in the Consolidated BalanceSheet:December 31, 2012 December 31, 2011Derivative Assets Derivative Liabilities Derivative Assets Derivative LiabilitiesNotional Fair Notional Fair Notional Fair Notional Fair(in millions) Amount Value Amount Value Amount Value Amount ValueGlobal Capital Marketsderivatives:AIG Financial Products $ 59,854 $ 4,725 $ 66,717 $ 5,506 $ 86,128 $ 7,063 $ 90,241 $ 8,853AIG Markets 14,028 1,308 18,774 1,818 7,908 1,409 8,201 1,168Total Global Capital Marketsderivatives 73,882 6,033 85,491 7,324 94,036 8,472 98,442 10,021Non-Global Capital Marketsderivatives (a) 24,040 1,014 32,139 2,436 12,053 1,188 26,620 2,076Total derivatives, gross $ 97,922 7,047 $ 117,630 9,760 $ 106,089 9,660 $ 125,062 12,097Counterparty netting (b) (2,467) (2,467)(3,660) (3,660)Cash collateral (c) (909) (1,976)(1,501) (2,786)Total derivatives, net 3,671 5,3174,499 5,651Less: Bifurcated embeddedderivatives – 1,256– 918Total derivatives onconsolidated balance sheet $ 3,671 $ 4,061$ 4,499 $ 4,733(a) Represents derivatives used to hedge the foreign currency and interest rate risk associated with insurance as well as embedded derivativesincluded in insurance contracts. Liabilities include bifurcated embedded derivatives, which are recorded in Policyholder contract deposits.(b) Represents netting of derivative exposures covered by a qualifying master netting agreement.(c) Represents cash collateral posted and received that is eligible for netting.Collateral..............................................................................................................................................................................................We engage in derivative transactions directly with unaffiliated third parties in most cases under International Swapsand Derivatives Association, Inc. (ISDA) agreements. Many of the ISDA agreements also include Credit SupportAnnex (CSA) provisions, which generally provide for collateral postings at various ratings and threshold levels. Weattempt to reduce our risk with certain counterparties by entering into agreements that enable collateral to beobtained from a counterparty on an upfront or contingent basis. We minimize the risk that counterparties totransactions might be unable to fulfill their contractual obligations by monitoring counterparty credit exposure andcollateral value and generally requiring additional collateral to be posted upon the occurrence of certain events orcircumstances. In addition, a significant portion of the derivative transactions have provisions that require collateral tobe posted upon a downgrade of our long-term debt ratings or give the counterparty the right to terminate thetransaction. In the case of some of the derivative transactions, as an alternative to posting collateral and subject tocertain conditions, we may assign the transaction to an obligor with higher debt ratings or arrange for a substituteguarantee of our obligations by an obligor with higher debt ratings or take other similar action. The actual amount ofcollateral required to be posted to counterparties in the event of such downgrades, or the aggregate amount ofpayments that we could be required to make, depends on market conditions, the fair value of outstanding affectedtransactions and other factors prevailing at and after the time of the downgrade.Collateral posted by us to third parties for derivative transactions was $4.5 billion and $4.7 billion at December 31,2012 and December 31, 2011, respectively. This collateral can generally be repledged or resold by thecounterparties. Collateral obtained by us from third parties for derivative transactions was $1.4 billion and $1.6 billionat December 31, 2012 and December 31, 2011, respectively. We generally can repledge or resell this collateral.Hedge Accounting..............................................................................................................................................................................................We designated certain derivatives entered into by GCM with third parties as fair value hedges of available-for-saleinvestment securities held by our insurance subsidiaries. The fair value hedges include foreign currency forwards..................................................................................................................................................................................................................................278 AIG 2012 Form 10-K