DERIVATIVE INSTRUMENTS

12 Months Ended

Dec. 31, 2011

DERIVATIVE INSTRUMENTS

8.       DERIVATIVE INSTRUMENTS

    In connection with the Company’s interest rate risk management strategy, the Company economically hedges a portion of its interest rate risk by entering into derivative financial instrument contracts.  As of December 31, 2011, such instruments are comprised of interest rate swaps, which in effect modify the cash flows on repurchase agreements.  The use of interest rate swaps creates exposure to credit risk relating to potential losses that could be recognized if the counterparties to these instruments fail to perform their obligations under the contracts.  The purpose of the swaps is to mitigate the risk of rising interest rates that affect the Company’s cost of funds.  In the event of a default by the counterparty, the Company could have difficulty obtaining its Investment Securities pledged as collateral for swaps.  The Company does not anticipate any defaults by its counterparties.

The location and fair value of derivative instruments reported in the Consolidated Statement of Financial Position as of December 31, 2011 and 2010 are as follows:

	Location on Statement of Financial Condition	Notional Amount		Net Estimated Fair Value/Carrying Value
	(dollars in thousands)
Interest rate swaps
December 31, 2011	Liabilities	$	40,109,880	$	(2,552,687	)
December 31, 2011	Assets		-		-
December 31, 2010	Liabilities	$	26,882,460	$	(754,439	)
December 31, 2010	Assets	$	200,000	$	2,561

  The effect of derivatives on the Consolidated Statements of Operations and Comprehensive Income (Loss) is as follows:

	Location on Statement of Operations and Comprehensive Income
	Realized Gains (Losses) Recognized on Interest Rate Swaps*			Unrealized Gains (Losses) on Interest Rate Swaps
	(dollars in thousands)
For the Year Ended December 31, 2011	$	(882,395	)	$	(1,815,107	)
For the Year Ended December 31, 2010	$	(735,107	)	$	(318,832	)
For the Year Ended December 31, 2009	$	(719,803	)	$	349,521

* Net interest payments on interest rate swaps is presented in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss) as realized gains (losses) on interest rate swaps.

The weighted average pay rate at December 31, 2011 was 2.55% and the weighted average receive rate was 0.33%.  The weighted average pay rate at December 31, 2010 was 3.21% and the weighted average receive rate was 0.28%.  Without netting the market value of the swaps by dealer at December 31, 2011, the gross unrealized loss on interest rate swaps was $2.6 billion, with a notional amount of $40.1 billion.  Without netting the market value of the swaps by dealer at December 31, 2010, the gross unrealized loss on interest rate swaps was $820.0 million, with a notional amount of $23.2 billion and the gross unrealized gain on interest rate swaps was $68.2 million, with a notional amount of $3.9 billion.

In connection with RCap’s proprietary trading activities, it has entered into U.S. Treasury, Eurodollar, and federal funds futures and options contracts for speculative or hedging purposes. RCap invests in futures and options contracts for economic hedging purposes to reduce exposure to changes in yields of its U.S Treasury securities and for speculative purposes to achieve capital appreciation.  The use of futures and options contracts creates exposure to credit risk relating to potential losses that could be recognized if the counterparties to these instruments fail to perform their obligations under the contracts.  RCap executes these trades through an independent futures and options broker dealer.