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DERIVATIVE INSTRUMENTS
 3 Months Ended
Mar. 31, 2014
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 March 31, 2014 and December 31, 2013:
Derivatives Instruments
Balance Sheet Location
March 31, 2014
December 31, 2013
Assets:
(dollars in thousands)
Interest rate swaps
Interest rate swaps, at fair value
 $ 340,890 $ 559,044
Interest rate swaptions
Other derivative contracts, at fair value
 36,965 110,361
TBA derivatives
Other derivative contracts, at fair value
 3,140 20,693
MBS options
Other derivative contracts, at fair value
 - 12,184
U.S. Treasury futures
Other derivative contracts, at fair value
 - 3,487
$ 380,995 $ 705,769
Liabilities:
Interest rate swaps
Interest rate swaps, at fair value
 $ 1,272,616 1,141,828
Interest rate swaptions
Other derivative contracts, at fair value
 - 24,662
TBA derivatives
Other derivative contracts, at fair value
 6,045 13,779
MBS options
Other derivative contracts, at fair value
 - 16,638
U.S. Treasury futures
Other derivative contracts, at fair value
 - 439
$ 1,278,661 $ 1,197,346
The following table summarizes certain characteristics of the Company’s interest rate swaps at March 31, 2014 and December 31, 2013:
March 31, 2014
Maturity
Current Notional(1)
Weighted Average Pay
Rate(2)(3)
Weighted Average
Receive Rate(2)(4)
Weighted Average
Years to Maturity(2)
(dollars in thousands)
0 - 3 years
 $ 24,516,550 1.78 % 0.17 % 1.84
3 - 6 years
 8,723,500 2.07 % 0.19 % 4.60
6 - 10 years
 17,179,700 2.49 % 0.23 % 7.83
Greater than 10 years
 6,290,000 3.66 % 0.18 % 21.09
Total / Weighted Average
 $ 56,709,750 2.16 % 0.19 % 5.31
(1) Notional amount includes $3.1 billion in forward starting pay fixed swaps, offset by $1.4 billion in forward starting receive fixed swaps.
(2)
Excludes forward starting swaps.
(3) Weighted average fixed rate on forward starting pay fixed swaps was 3.00%
(4) Weighted average fixed rate on forward starting pay receive swaps was 1.81%
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 March 31, 2014 and December 31, 2013:
March 31, 2014
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
 $ 4,100,000 3.14%
3M LIBOR
 10.04 4.70
Short
 $ - - - - -
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 LIBOR
 10.10 4.26
Short
 $ 1,000,000
3M LIBOR
 2.83% 5.96 23.71
The following table summarizes certain characteristics of the Company’s TBA derivatives as of March 31, 2014 and December 31, 2013:
March 31, 2014
Purchase and sale contracts for
derivative TBAs
Notional
Cost Basis
Market Value
Net Carrying Value
(dollars in thousands)
Purchase contracts
 $ 1,500,000 $ 1,569,331 $ 1,568,184 $ (1,147 )
Sale contracts
 (2,125,000 ) (2,127,773 ) (2,129,531 ) (1,758 )
Net TBA derivatives
 $ (625,000 ) $ (558,442 ) $ (561,347 ) $ (2,905 )
December 31, 2013
Purchase and sale contracts for
derivative TBAs
Notional
Cost Basis
Market Value
Net Carrying Value
(dollars in thousands)
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 March 31, 2014 and December 31, 2013, respectively.
March 31, 2014
Gross Amounts
Amounts Eligible for Offset
Net Amounts
Assets:
(dollars in thousands)
Interest rate swaps, at fair value
 $ 340,890 $ (311,264 ) $ 29,626
Interest rate swaptions, at fair value
 36,965 - 36,965
TBA derivatives, at fair value
 3,140 (1,304 ) 1,836
Liabilities:
Interest rate swaps, at fair value
 1,272,616 (311,264 ) 961,352
Interest rate swaptions, at fair value
 - - -
TBA derivatives, at fair value
 6,045 (1,304 ) 4,741
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 ) -
The effect of interest rate swaps on the Consolidated Statements of Comprehensive Income (Loss) is as follows:
Location on Consolidated Statements of Comprehensive Income (Loss)
Realized Gains (Losses) on
Interest Rate Swaps(1)
Realized Gains (Losses) on
Termination of Interest Rate Swaps
Unrealized Gains (Losses) on
Interest Rate Swaps
(dollars in thousands)
For the Quarter Ended:
March 31, 2014
 $ (260,435 ) $ (6,842 ) $ (348,942 )
March 31, 2013
 $ (225,476 ) $ (16,378 ) $ 325,734
(1) Interest expense related to the Company’s interest rate swaps is recorded in Realized gains (losses) on interest rate swaps on the Consolidated Statements of Comprehensive Income (Loss).
As of March 31, 2014, the swap portfolio, excluding forward starting swaps, had a weighted average pay rate of 2.16% and a weighted average receive rate of 0.19%. The weighted average pay rate at December 31, 2013 was 2.14% and the weighted average receive rate was 0.20%.
The effect of other derivative contracts on the Company’s Consolidated Statements of Comprehensive Income (Loss) is as follows:
Three Months Ended March 31, 2014
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)
 $ (37,837 ) $ (11,410 ) $ (49,247 )
Net interest rate swaptions
 $ (40,943 ) $ (52,917 ) $ (93,860 )
U.S. Treasury futures
 $ (5,669 ) $ (3,048 ) $ (8,717 )
$ (151,824 )
(1) Includes options on TBA securities.
Three Months Ended March 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
 $ 9,340 $ (1,875 ) $ 7,465
Net interest rate swaptions
 $ - $ - $ -
U.S. Treasury futures
 $ 12,702 $ (12,458) $ 244
$ 7,709
Certain of the Company’s derivative contracts are subject to International Swaps and Derivatives Association Master Agreements (“ISDA”) which may contain provisions that grant counterparties certain rights with respect to the applicable ISDA upon the occurrence of certain events such as (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 March 31, 2014 is approximately $898 million, which represents the maximum amount the Company would be required to pay upon termination. This amount is fully collateralized.