Further evidence of the dangers of dabbling in derivatives markets is emerging in the troubled bond insurance sector.

Bond insurers, from the troubled, such as FGIC, to the relatively stronger Ambac and MBIA, are immersed in complex talks with banks about whether there is any way the credit default swaps (CDS) bought by the banks as insurance on risky deals can be torn up. In order to commute these contracts, bond insurers would have to pay banks an upfront fee.