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DERIVATIVE INSTRUMENTS
 12 Months Ended
Dec. 31, 2013
DERIVATIVE INSTRUMENTS
9.      DERIVATIVE INSTRUMENTS
In connection with the Company’s investment/market rate risk management strategy, the Company economically hedges a portion of its interest rate risk by entering into derivative financial instrument contracts, which include interest rate swaps, swaptions and U.S. Treasury futures contracts. The Company also enters into TBA derivatives and MBS options to economically hedge its exposure to market risks. The purpose of using derivatives is to manage overall portfolio risk with the potential to generate additional income for distribution to stockholders. These derivatives are subject to changes in market value resulting from changes in interest rates, volatility, Agency mortgage-backed security spreads to U.S. Treasuries and market liquidity. The use of derivatives also 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 stated contract. Additionally, the Company may have to pledge cash or assets as collateral for the derivative transactions, the amount which may vary based on the market value, notional amount and remaining term of the derivative contract. In the event of a default by the counterparty, the Company could have difficulty obtaining its Investment Securities pledged as collateral as well as receiving payments in accordance with the terms of the derivative contracts. None of the Company’s derivative transactions have been designated as hedging instruments for accounting purposes.
The table below summarizes fair value information about our derivative assets and liabilities as of December 31, 2013 and 2012:
Derivatives Instruments
Balance Sheet Location
December 31, 2013
December 31, 2012
Assets:
(dollars in thousands)
Interest rate swaps
Interest rate swaps, at fair value
 $ 559,044 $ -
Interest rate swaptions
Other derivative contracts, at fair value
 110,361 -
TBA derivatives
Other derivative contracts, at fair value
 20,693 1,875
MBS options
Other derivative contracts, at fair value
 12,184 -
U.S. Treasury futures
Other derivative contracts, at fair value
 3,487 7,955
$ 705,769 $ 9,830
Liabilities:
Interest rate swaps
Interest rate swaps, at fair value
 $ 1,141,828 $ 2,584,907
Interest rate swaptions
Other derivative contracts, at fair value
 24,662 -
TBA derivatives
Other derivative contracts, at fair value
 13,779 -
MBS options
Other derivative contracts, at fair value
 16,638 -
U.S. Treasury futures
Other derivative contracts, at fair value
 439 -
$ 1,197,346 $ 2,584,907
The following table summarizes certain characteristics of the Company’s interest rate swaps at December 31, 2013:
Maturity
Current Notional
Weighted Average Pay
Rate
Weighted Average
Receive Rate
Weighted Average
Years to Maturity
(dollars in thousands)
0 - 3 years
 $ 24,286,000 1.83 % 0.18 % 1.98
3 - 6 years
 8,865,410 2.02 % 0.19 % 4.19
6 - 10 years
 15,785,500 2.37 % 0.23 % 7.66
Greater than 10 years
 3,490,000 3.62 % 0.20 % 19.93
Total / Weighted Average
 $ 52,426,910 2.14 % 0.20 % 5.26
The following table summarizes certain characteristics of the Company’s interest rate swaptions at December 31, 2013:
Current Underlying
Notional
Weighted Average
Underlying Pay
Rate
Weighted Average
Underlying Receive
Rate
Weighted Average
Underlying Years to
Maturity
Weighted Average Months
to Expiration
(dollars in thousands)
Long
 $ 5,150,000 3.07 % 3M LIBO R 10.10 4.26
Short
 $ 1,000,000 3M LIBO R 2.83 % 5.96 23.71
The following table summarizes certain characteristics of the Company’s TBA derivatives as of December 31, 2013:
December 31, 2013
(dollars in thousands)
Purchase and sale contracts
for derivative TBAs
Notional
Cost Basis
Market Value
Net Carrying Value
Purchase contracts
 $ 2,625,000 $ 2,733,682 $ 2,722,324 $ (11,357 )
Sale contracts
 (3,875,000 ) (3,923,213 ) (3,904,941 ) 18,271
Net TBA derivatives
 $ (1,250,000 ) $ (1,189,531 ) $ (1,182,617 ) $ 6,914
Derivative contracts may contain legally enforceable provisions that allow for netting or setting off receivables and payables with each counterparty. Beginning on September 30, 2013, the Company elected to present derivative contracts on a gross basis on the Consolidated Statements of Financial Condition. Prior to September 30, 2013, the Company presented the fair value of derivative contracts net, by counterparty. The following tables present information about our derivative assets and liabilities that are subject to such provisions and can potentially be offset on our Consolidated Statements of Financial Condition as of December 31, 2013 and 2012, respectively.
December 31, 2013
Gross Amounts
Amounts Eligible for
Offset
Net Amounts
Assets:
(dollars in thousands)
Interest rate swaps, at fair value
 $ 559,044 $ (408,553 ) $ 150,491
Interest rate swaptions, at fair value
 110,361 (24,662 ) 85,699
TBA derivatives, at fair value
 20,693 (9,775 ) 10,918
MBS options, at fair value
 12,184 (3,292 ) 8,892
U.S. Treasury futures, at fair value
 3,487 (439 ) 3,048
Liabilities:
Interest rate swaps, at fair value
 $ 1,141,828 $ (408,553 ) $ 733,275
Interest rate swaptions, at fair value
 24,662 (24,662 ) -
TBA derivatives, at fair value
 13,779 (9,775 ) 4,004
MBS options, at fair value
 16,638 (3,292 ) 13,346
U.S. Treasury futures, at fair value
 439 (439 ) -
December 31, 2012
Gross Amounts
Amounts Eligible for
Offset
Net Amounts
Assets:
(dollars in thousands)
Interest rate swaps, at fair value
 $ 26,020 $ (26,020 ) $ -
TBA derivatives, at fair value
 1,875 - 1,875
U.S. Treasury futures, at fair value
 7,955 - 7,955
Liabilities:
Interest rate swaps, at fair value
 $ 2,610,927 $ (26,020 ) $ 2,584,907
The effect of interest rate swaps on the Consolidated Statements of Operations and Comprehensive Income (Loss) is as follows:
Location on Consolidated Statements of Operations and Comprehensive Income (Loss)
Realized Gains (Losses) on
Interest Rate Swaps
Realized Gains (Losses) on
Termination of Interest Rate Swaps
Unrealized Gains (Losses) on
Interest Rate Swaps
(dollars in thousands)
For the Years Ended:
December 31, 2013
 $ (908,294 ) $ (101,862 ) $ 2,002,200
December 31, 2012
 $ (893,769 ) $ (2,385 ) $ (32,219 )
December 31, 2011
 $ (882,395 ) $ - $ (1,815,107 )
The weighted average pay rate on the Company’s interest rate swaps at December 31, 2013 was 2.14% and the weighted average receive rate was 0.20%. The weighted average pay rate at December 31, 2012 was 2.21% and the weighted average receive rate was 0.24%.
Year Ended December 31, 2013
Derivative Instruments
Realized Gain (Loss)
Unrealized Gain (Loss)
Amount of Gain/(Loss) Recognized in
Net Gains (Losses) on Trading Assets
(dollars in thousands)
Net TBA derivatives (1)
 $ 33,728 $ 6,630 $ 40,358
Net interest rate swaptions
 $ (2,697 ) $ (15,467 ) $ (18,164 )
U.S. Treasury futures
 $ (38,514 ) $ (2,851 ) $ (41,365 )
$ (19,171 )
(1) Includes options on TBA securities
Certain of the Company’s derivative contracts are subject to International Swaps and Derivatives Association Master Agreements (“ISDA”) which contain provisions that grant counterparties certain rights with respect to the applicable ISDA upon the occurrence of (i) negative performance that results in a decline in net assets in excess of specified thresholds or dollar amounts over set periods of time, (ii) the Company’s failure to maintain its REIT status, (iii) the Company’s failure to comply with limits on the amount of leverage, and (iv) the Company’s stock being delisted from the New York Stock Exchange (NYSE). Upon the occurrence of any one of items (i) through (iv), the counterparty to the applicable ISDA has a right to terminate the ISDA in accordance with its provisions. The aggregate fair value of all derivative instruments with the aforementioned features that are in a net liability position at December 31, 2013 is approximately $492 million, which represents the maximum amount the Company would be required to pay upon termination. This amount is fully collateralized.

In connection with RCap’s proprietary trading activities, it enters primarily into U.S. Treasury, Eurodollar, federal funds, German government and U.S. equity index and currency futures and options contracts. 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 uses appropriately licensed FCMs to execute its orders to buy and sell futures and options contracts. RCap’s derivative contracts are presented in the Consolidated Statements of Financial Condition as Other derivatives, at fair value.