DERIVATIVE INSTRUMENTS (Tables)

9 Months Ended

Sep. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Summarizes Fair Value Information about Derivative Assets Liabilities

The table below summarizes fair value information about our derivative assets and liabilities at September 30, 2019 and December 31, 2018:

Derivatives Instruments	September 30, 2019		December 31, 2018
Assets	(dollars in thousands)
Interest rate swaps	$	2,556	$	48,114
Interest rate swaptions	39,251		7,216
TBA derivatives	15,706		141,688
Futures contracts	102,400		—
Purchase commitments	3,787		844
Credit derivatives (1)	5,055		2,641
	$	168,755	$	200,503
Liabilities
Interest rate swaps	$	861,067	$	420,365
TBA derivatives	28,373		—
Futures contracts	80,563		462,309
Purchase commitments	1,074		33
Credit derivatives (1)	1,338		7,043
	$	972,415	$	889,750

⁽¹⁾ 

The notional amount of the credit derivatives in which the Company purchased protection was $15.0 million and $30.0 million at September 30, 2019 and December 31, 2018, respectively. The maximum potential amount of future payments is the notional amount of credit derivatives in which the Company sold protection of $410.0 million and $451.0 million at September 30, 2019 and December 31, 2018, respectively, plus any coupon shortfalls on the underlying tranche. The credit derivative tranches referencing the basket of bonds had a range of ratings between AA and BBB-.

Summary of Certain Characteristics of Derivatives

The following table summarizes certain characteristics of the Company’s interest rate swaps at September 30, 2019 and December 31, 2018:

 

September 30, 2019
Maturity	Current Notional (1)(2)		Weighted Average Pay Rate (3)(4)		Weighted Average Receive Rate (3)		Weighted Average Years to Maturity (3)
(dollars in thousands)
0 - 3 years	$	41,234,400	1.62	%	2.11	%	1.42
3 - 6 years	12,815,950		1.91	%	2.19	%	4.58
6 - 10 years	16,071,500		2.23	%	2.29	%	9.24
Greater than 10 years	3,060,000		3.76	%	2.11	%	18.14
Total / Weighted average	$	73,181,850	1.88	%	2.16	%	4.32
December 31, 2018
Maturity	Current Notional (1)(2)		Weighted Average Pay Rate		Weighted Average Receive Rate		Weighted Average Years to Maturity
(dollars in thousands)
0 - 3 years	$	31,900,200	1.84	%	2.73	%	1.21
3 - 6 years	16,603,200		2.29	%	2.70	%	4.30
6 - 10 years	18,060,900		2.57	%	2.56	%	8.62
Greater than 10 years	3,901,400		3.63	%	2.59	%	17.33
Total / Weighted average	$	70,465,700	2.17	%	2.68	%	4.26

⁽¹⁾ As of September 30, 2019, 81% and 19% of the Company’s interest rate swaps were linked to LIBOR and the overnight index swap rate, respectively. As of December 31, 2018, all of the Company’s interest rate swaps were linked to LIBOR.

⁽²⁾ Notional amount includes $130.0 million forward starting pay fixed swaps at September 30, 2019. There were no forward starting swaps at December 31, 2018.

⁽³⁾ Excludes forward starting swaps.

⁽⁴⁾ Weighted average fixed rate on forward starting pay fixed swaps was 1.59% at September 30, 2019.

The following table presents swaptions outstanding at September 30, 2019 and December 31, 2018.

September 30, 2019
	Current Underlying Notional	Weighted Average Underlying Fixed Rate	Weighted Average Underlying Floating Rate	Weighted Average Underlying Years to Maturity	Weighted Average Months to Expiration
(dollars in thousands)
Long Pay	$5,175,000	2.57%	3M LIBOR	9.55	7.23
Long Receive	$2,000,000	1.49%	3M LIBOR	10.55	6.47
December 31, 2018
	Current Underlying Notional	Weighted Average Underlying Fixed Rate	Weighted Average Underlying Floating Rate	Weighted Average Underlying Years to Maturity	Weighted Average Months to Expiration
(dollars in thousands)
Long Pay	$4,075,000	3.30%	3M LIBOR	10.08	3.06

The following table summarizes certain characteristics of the Company’s TBA derivatives at September 30, 2019 and December 31, 2018:

September 30, 2019
Purchase and sale contracts for derivative TBAs	Notional		Implied Cost Basis		Implied Market Value		Net Carrying Value
(dollars in thousands)
Purchase contracts	$	10,823,000	$	10,999,389	$	10,986,722	(12,667	)
December 31, 2018
Purchase and sale contracts for derivative TBAs	Notional		Implied Cost Basis		Implied Market Value		Net Carrying Value
(dollars in thousands)
Purchase contracts	$	13,803,000	$	13,823,109	$	13,964,797	141,688

 The following table summarizes certain characteristics of the Company’s futures derivatives at September 30, 2019 and December 31, 2018:

 

September 30, 2019
	Notional - Long Positions		Notional - Short Positions			Weighted Average Years to Maturity
	(dollars in thousands)
U.S. Treasury futures - 5 year	—		(5,314,900		)	4.42
U.S. Treasury futures - 10 year and greater	2,600,000		(5,151,400		)	10.03
Total	$	2,600,000	$	(10,466,300	)	7.75
December 31, 2018
	Notional - Long Positions		Notional - Short Positions			Weighted Average Years to Maturity
	(dollars in thousands)
U.S. Treasury futures - 2 year	$	—	$	(1,166,000	)	1.97
U.S. Treasury futures - 5 year	—		(6,359,400		)	4.39
U.S. Treasury futures - 10 year and greater	—		(11,152,600		)	7.10
Total	$	—	$	(18,678,000	)	5.86

Offsetting of Derivative Assets and Liabilities

The following tables present information about derivative assets and liabilities that are subject to such provisions and can potentially be offset on our Consolidated Statements of Financial Condition at September 30, 2019 and December 31, 2018, respectively.

September 30, 2019
			Amounts Eligible for Offset
	Gross Amounts		Financial Instruments			Cash Collateral			Net Amounts
Assets	(dollars in thousands)
Interest rate swaps, at fair value	$	2,556	$	(2,291	)	$	—		$	265
Interest rate swaptions, at fair value	39,251		—			—			39,251
TBA derivatives, at fair value	15,706		(7,208		)	—			8,498
Futures contracts, at fair value	102,400		(37,973		)	—			64,427
Purchase commitments	3,787		—			—			3,787
Credit derivatives	5,055		(1,026		)	—			4,029
Liabilities
Interest rate swaps, at fair value	$	861,067	$	(2,291	)	$	(121,915	)	$	736,861
TBA derivatives, at fair value	28,373		(7,208		)	—			21,165
Futures contracts, at fair value	80,563		(37,973		)	(42,590		)	—
Purchase commitments	1,074		—			—			1,074
Credit derivatives	1,338		(1,026		)	(312		)	—
December 31, 2018
			Amounts Eligible for Offset
	Gross Amounts		Financial Instruments			Cash Collateral			Net Amounts
Assets	(dollars in thousands)
Interest rate swaps, at fair value	$	48,114	$	(29,308	)	$	—		$	18,806
Interest rate swaptions, at fair value	7,216		—			—			7,216
TBA derivatives, at fair value	141,688		—			—			141,688
Purchase commitments	844		—			—			844
Credit derivatives	2,641		(2,641		)	—			—
Liabilities
Interest rate swaps, at fair value	$	420,365	$	(29,308	)	$	(11,856	)	$	379,201
Futures contracts, at fair value	462,309		—			(462,309		)	—
Purchase commitments	33		—			—			33
Credit derivatives	7,043		(2,641		)	(4,402		)	—

Schedule of Derivative Instruments in Statement of Operations and Comprehensive Income Loss

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)
	Net Interest Component of Interest Rate Swaps		Realized Gains (Losses) on Termination of Interest Rate Swaps			Unrealized Gains (Losses) on Interest Rate Swaps
For the three months ended	(dollars in thousands)
September 30, 2019	$	88,466	$	(682,602	)	$	(326,309	)
September 30, 2018	$	51,349	$	575		$	417,203
For the nine months ended
September 30, 2019	$	306,154	$	(1,438,349	)	$	(1,992,884	)
September 30, 2018	$	34,664	$	1,409		$	1,737,963

Effect of Other Derivative Contracts on the Consolidated Statements of Operations and Comprehensive Income (Loss)

The effect of other derivative contracts on the Company’s Consolidated Statements of Comprehensive Income (Loss) is as follows:

Three Months Ended September 30, 2019
Derivative Instruments	Realized Gain (Loss)			Unrealized Gain (Loss)			Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives
(dollars in thousands)
Net TBA derivatives	$	93,919		$	(46,124	)	$	47,795
Net interest rate swaptions	(2,778		)	(4,571		)	(7,349		)
Futures	(424,268		)	364,613			(59,655		)
Purchase commitments	—			(348		)	(348		)
Credit derivatives	1,784			885			2,669
Total							$	(16,888	)

 

Three Months Ended September 30, 2018
Derivative Instruments	Realized Gain (Loss)			Unrealized Gain (Loss)			Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives
(dollars in thousands)
Net TBA derivatives	$	8,569		$	(85,741	)	$	(77,172	)
Net interest rate swaptions	(28,754		)	(17,663		)	(46,417		)
Futures	(114,317		)	327,787			213,470
Purchase commitments	—			(841		)	(841		)
Credit derivatives	3,096			1,676			4,772
Total							$	93,812

Nine Months Ended September 30, 2019
Derivative Instruments	Realized Gain (Loss)			Unrealized Gain (Loss)			Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives
(dollars in thousands)
Net TBA derivatives	$	481,865		$	(154,355	)	$	327,510
Net interest rate swaptions	(44,088		)	7,935			(36,153		)
Futures	(1,430,450		)	484,146			(946,304		)
Purchase commitments	—			1,903			1,903
Credit derivatives	5,285			9,301			14,586
Total							$	(638,458	)

Nine Months Ended September 30, 2018
Derivative Instruments	Realized Gain (Loss)			Unrealized Gain (Loss)			Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives
(dollars in thousands)
Net TBA derivatives	$	(299,560	)	$	(56,701	)	$	(356,261	)
Net interest rate swaptions	(85,854		)	53,557			(32,297		)
Futures	443,314			14,959			458,273
Purchase commitments	—			(416		)	(416		)
Credit derivatives	7,498			4,060			11,558
Total							$	80,857