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DERIVATIVE INSTRUMENTS
 9 Months Ended
Sep. 30, 2021
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVE INSTRUMENTS
10. DERIVATIVE INSTRUMENTS
Derivative instruments include, but are not limited to, interest rate swaps, options to enter into interest rate swaps (“swaptions”), TBA derivatives, options on TBA securities (“MBS options”), U.S. Treasury and Eurodollar futures contracts and certain forward purchase commitments.  The Company may also enter into other types of mortgage derivatives such as interest-only securities, credit derivatives referencing the commercial mortgage-backed securities index and synthetic total return swaps. 
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 futures contracts. The Company may also enter into TBA derivatives, MBS options and U.S. Treasury or Eurodollar futures contracts, certain forward purchase commitments and credit derivatives 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 values 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 of which may vary based on the market value and terms of the derivative contract. In the case of market agreed coupon (“MAC”) interest rate swaps, the Company may make or receive a payment at the time of entering into such interest rate swaps, which represents fair value of these swaps, to compensate for the out of market nature of such interest rate swaps. Subsequent changes in fair value from inception of these interest rate swaps are reflected within Unrealized gains (losses) on interest rate swaps in the Consolidated Statements of Comprehensive Income (Loss). Similar to other interest rate swaps, the Company may have to pledge cash or assets as collateral for the MAC interest rate swap transactions. In the event of a default by the counterparty, the Company could have difficulty obtaining its pledged collateral as well as receiving payments in accordance with the terms of the derivative contracts.
Derivatives are recognized as either assets or liabilities at fair value in the Consolidated Statements of Financial Condition with changes in fair value recognized in the Consolidated Statements of Comprehensive Income (Loss). The changes in the estimated fair value are presented within Net gains (losses) on other derivatives and financial instruments with the exception of interest rate swaps which are separately presented. None of the Company’s derivative transactions have been designated as hedging instruments for accounting purposes. 
The Company also maintains collateral in the form of cash on margin with counterparties to its interest rate swaps and other derivatives. In accordance with a clearing organization’s rulebook, the Company presents the fair value of centrally cleared interest rate swaps net of variation margin pledged under such transactions. At September 30, 2021 and December 31, 2020, ($0.2) billion and $1.5 billion, respectively, of variation margin was reported as an adjustment to interest rate swaps, at fair value.
Interest Rate Swap Agreements – Interest rate swap agreements are the primary instruments used to mitigate interest rate risk.  In particular, the Company uses interest rate swap agreements to manage its exposure to changing interest rates on its repurchase agreements by economically hedging cash flows associated with these borrowings. The Company may enter into interest rate swap agreements where the floating leg is linked to the London Interbank Offered Rate (“LIBOR”), the overnight index swap rate or another index. Interest rate swap agreements may or may not be cleared through a derivatives clearing organization (“DCO”). Uncleared interest rate swaps are fair valued using internal pricing models and compared to the counterparty market values. Centrally cleared interest rate swaps, including MAC interest rate swaps, are generally fair valued using the DCO’s market values. If an interest rate swap is terminated, the realized gain (loss) on the interest rate swap would be equal to the difference between the cash received or paid and fair value.
Swaptions – Swaptions are purchased or sold to mitigate the potential impact of increases or decreases in interest rates.  Interest rate swaptions provide the option to enter into an interest rate swap agreement for a predetermined notional amount, stated term and pay and receive interest rates in the future.  The Company’s swaptions are not centrally cleared.  The premium paid or received for swaptions is reported as an asset or liability in the Consolidated Statements of Financial Condition. If a swaption expires unexercised, the realized gain (loss) on the swaption would be equal to the premium received or paid. If the Company
sells or exercises a swaption, the realized gain (loss) on the swaption would be equal to the difference between the cash received or the fair value of the underlying interest rate swap received and the premium paid. The fair value of swaptions are estimated using internal pricing models and compared to the counterparty market values.
TBA Dollar Rolls – TBA dollar roll transactions are accounted for as a series of derivative transactions. The fair value of TBA derivatives is based on methods similar to those used to value Agency mortgage-backed securities.
MBS Options – MBS options are generally options on TBA contracts, which help manage mortgage market risks and volatility while providing the potential to enhance returns.  MBS options are over-the-counter traded instruments and those written on current-coupon mortgage-backed securities are typically the most liquid.  MBS options are measured at fair value using internal pricing models and compared to the counterparty market value at the valuation date.
Futures Contracts – Futures contracts are derivatives that track the prices of specific assets or benchmark rates. Short sales of futures contracts help to mitigate the potential impact of changes in interest rates on the portfolio performance. The Company maintains margin accounts which are settled daily with Futures Commission Merchants (“FCMs”). The margin requirement varies based on the market value of the open positions and the equity retained in the account. Futures contracts are fair valued based on exchange pricing.
Forward Purchase Commitments – The Company may enter into forward purchase commitments with counterparties whereby the Company commits to purchasing residential mortgage loans at a particular price, provided the residential mortgage loans close with the counterparties. The counterparties are required to deliver the committed loans on a “best efforts” basis.
Credit Derivatives – The Company may enter into credit derivatives referencing a commercial mortgage-backed securities index, such as the CMBX index, and synthetic total return swaps.

The table below summarizes fair value information about our derivative assets and liabilities at September 30, 2021 and December 31, 2020:
Derivatives InstrumentsSeptember 30, 2021December 31, 2020
Assets(dollars in thousands)
Interest rate swaptions$123,506 $74,470 
TBA derivatives1,776 96,109 
Futures contracts199,728 506 
Purchase commitments3,702 49 
Credit derivatives (1)
2,683 — 
Total derivative assets$331,395 $171,134 
Liabilities 
Interest rate swaps$754,248 $1,006,492 
TBA derivatives155,515 — 
Futures contracts108 19,413 
Purchase commitments2,263 — 
Credit derivatives (1)
— 7,440 
Total derivative liabilities$912,134 $1,033,345 
(1) The maximum potential amount of future payments is the notional amount of credit derivatives in which the Company sold protection of $425.0 million and $504.0 million at September 30, 2021 and December 31, 2020, respectively, plus any coupon shortfalls on the underlying tranche. As of September 30, 2021 and December 31, 2020 the credit derivative tranches referencing the basket of bonds had a range of ratings between AAA to AA and AAA to A, respectively.
    
The following table summarizes certain characteristics of the Company’s interest rate swaps at September 30, 2021 and December 31, 2020:
September 30, 2021
Maturity
Current Notional (1)(2)
Weighted Average Pay RateWeighted Average Receive Rate
Weighted Average Years to Maturity (3)
(dollars in thousands)
0 - 3 years
$31,311,750 0.24 %0.06 %1.30
3 - 6 years
2,780,000 0.21 %0.06 %3.72
6 - 10 years
9,131,000 1.43 %0.10 %9.29
Greater than 10 years
1,556,000 3.83 %0.10 %19.74
Total / Weighted average$44,778,750 0.60 %0.07 %3.72
December 31, 2020
Maturity
Current Notional (1)(2)
Weighted Average
Pay Rate		Weighted Average Receive Rate
Weighted Average Years to Maturity (3)
(dollars in thousands)
0 - 3 years
$23,680,150 0.27 %0.11 %1.96
3 - 6 years
3,600,000 0.18 %0.09 %4.21
6 - 10 years
5,565,500 1.40 %0.62 %7.76
Greater than 10 years
1,484,000 3.06 %0.36 %20.52
Total / Weighted average$34,329,650 0.92 %0.37 %3.94
(1) As of September 30, 2021, 19%, 54% and 27% of the Company’s interest rate swaps were linked to LIBOR, the Federal funds rate and the Secured Overnight Financing Rate, respectively. As of December 31, 2020, 17%, 72% and 11% of the Company’s interest rate swaps were linked to LIBOR, the Federal funds rate and the Secured Overnight Financing Rate, respectively.
(2) There were no forward starting swaps at September 30, 2021 and December 31, 2020.
(3) At September 30, 2021 and December 31, 2020, the weighted average years to maturity of payer interest rate swaps is offset by the weighted average years to maturity of receiver interest rate swaps. As such, the net weighted average years to maturity for each maturity bucket may fall outside of the range listed.






The following table presents swaptions outstanding at September 30, 2021 and December 31, 2020.
September 30, 2021
Current Underlying NotionalWeighted Average Underlying Fixed RateWeighted Average Underlying Floating RateWeighted Average Underlying Years to MaturityWeighted Average Months to Expiration
(dollars in thousands)
Long pay$4,050,0001.87%3M LIBOR10.1117.57
Long receive$2,000,0001.47%3M LIBOR11.2014.45
December 31, 2020
Current Underlying NotionalWeighted Average Underlying Fixed RateWeighted Average Underlying Floating RateWeighted Average Underlying Years to MaturityWeighted Average Months to Expiration
(dollars in thousands)
Long pay$8,050,0001.27%3M LIBOR10.405.42
Long receive$250,0001.66%3M LIBOR10.020.13

The following table summarizes certain characteristics of the Company’s TBA derivatives at September 30, 2021 and December 31, 2020:
September 30, 2021
Purchase and sale contracts for derivative TBAsNotionalImplied Cost BasisImplied Market ValueNet Carrying Value
(dollars in thousands)
Purchase contracts$23,201,000 $23,776,374 $23,622,635 $(153,739)
December 31, 2020
Purchase and sale contracts for derivative TBAsNotionalImplied Cost BasisImplied Market ValueNet Carrying Value
(dollars in thousands)
Purchase contracts$19,635,000 $20,277,088 $20,373,197 $96,109 
The following table summarizes certain characteristics of the Company’s futures derivatives at September 30, 2021 and December 31, 2020:
 
September 30, 2021
 Notional - Long
Positions		Notional - Short
Positions		Weighted Average
Years to Maturity
 (dollars in thousands)
U.S. Treasury futures - 2 year
$— $(1,067,000)2.00
U.S. Treasury futures - 5 year
— (3,274,000)4.41
U.S. Treasury futures - 10 year and greater
— (10,976,500)7.17
Total$— $(15,317,500)6.22
December 31, 2020
 Notional - Long
Positions		Notional - Short
Positions		Weighted Average
Years to Maturity
 (dollars in thousands)
U.S. Treasury futures - 5 year
— (1,240,000)4.40
U.S. Treasury futures - 10 year and greater
— (9,183,800)6.90
Total$— $(10,423,800)6.60
 

The Company presents derivative contracts on a gross basis on the Consolidated Statements of Financial Condition. Derivative contracts may contain legally enforceable provisions that allow for netting or setting off receivables and payables with each counterparty.
The following tables present information about derivative assets and liabilities that are subject to such provisions and can be offset on our Consolidated Statements of Financial Condition at September 30, 2021 and December 31, 2020, respectively.
September 30, 2021
 Amounts Eligible for Offset 
 Gross AmountsFinancial InstrumentsCash CollateralNet Amounts
Assets(dollars in thousands)
Interest rate swaptions, at fair value$123,506 $— $— $123,506 
TBA derivatives, at fair value1,776 (1,659)— 117 
Futures contracts, at fair value199,728 (108)— 199,620 
Purchase commitments3,702 — — 3,702 
Credit derivatives2,683 — — 2,683 
Liabilities 
Interest rate swaps, at fair value$754,248 $— $(78,167)$676,081 
TBA derivatives, at fair value155,515 (1,659)(2,060)151,796 
Futures contracts, at fair value108 (108)— — 
Purchase commitments2,263 — — 2,263 
December 31, 2020
 Amounts Eligible for Offset 
 Gross AmountsFinancial InstrumentsCash CollateralNet Amounts
Assets(dollars in thousands)
Interest rate swaptions, at fair value$74,470 $— $— $74,470 
TBA derivatives, at fair value96,109 — — 96,109 
Futures contracts, at fair value506 (506)— — 
Purchase commitments49 — — 49 
Liabilities 
Interest rate swaps, at fair value$1,006,492 $— $(108,757)$897,735 
Futures contracts, at fair value19,413 (506)(18,907)— 
Credit derivatives7,440 — (7,440)— 
The effect of interest rate swaps on the Consolidated Statements of Comprehensive Income (Loss) is as follows:
Location on Consolidated Statements of Comprehensive Income (Loss)
 Net Interest Component of Interest Rate SwapsRealized Gains (Losses) on Termination of Interest Rate SwapsUnrealized Gains (Losses) on Interest Rate Swaps
For the three months ended(dollars in thousands)
September 30, 2021$(54,411)$(1,196,417)$1,380,946 
September 30, 2020$(62,529)$(427)$170,327 
For the nine months ended
September 30, 2021$(217,245)$(1,196,417)$2,012,141 
September 30, 2020$(141,070)$(1,919,720)$(1,162,768)






The effect of other derivative contracts on the Company’s Consolidated Statements of Comprehensive Income (Loss) is as follows:
Three Months Ended September 30, 2021
Derivative InstrumentsRealized Gain (Loss)Unrealized Gain (Loss)Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives and Financial Instruments
(dollars in thousands)
Net TBA derivatives$155,569 $(182,845)$(27,276)
Net interest rate swaptions(24,265)(44,602)(68,867)
Futures(229,534)279,293 49,759 
Purchase commitments— 920 920 
Credit derivatives2,616 (2,320)296 
Total
$(45,168)
 
Three Months Ended September 30, 2020
Derivative InstrumentsRealized Gain (Loss)Unrealized Gain (Loss)
Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives and Financial Instruments
(dollars in thousands)
Net TBA derivatives$276,849 $(100,680)$176,169 
Net interest rate swaptions(9,836)3,263 (6,573)
Futures(19,989)10,337 (9,652)
Purchase commitments— (51)(51)
Credit derivatives1,531 7,892 9,423 
Total$169,316 
Nine Months Ended September 30, 2021
Derivative InstrumentsRealized Gain (Loss)Unrealized Gain (Loss)Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives
(dollars in thousands)
Net TBA derivatives$(122,275)$(249,847)$(372,122)
Net interest rate swaptions(69,262)28,528 (40,734)
Futures250,013 218,527 468,540 
Purchase commitments— 1,389 1,389 
Credit derivatives7,024 8,634 15,658 
Total$72,731 
Nine Months Ended September 30, 2020
Derivative InstrumentsRealized Gain (Loss)Unrealized Gain (Loss)Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives
(dollars in thousands)
Net TBA derivatives$798,459 $13,651 $812,110 
Net interest rate swaptions11,730 50,762 62,492 
Futures(299,220)(350)(299,570)
Purchase commitments— (1,194)(1,194)
Credit derivatives4,659 (31,839)(27,180)
Total$546,658 
Certain of the Company’s derivative contracts are subject to International Swaps and Derivatives Association Master Agreements or other similar agreements which may contain provisions that grant counterparties certain rights with respect to the applicable agreement upon the occurrence of certain events such as (i) a decline in stockholders’ equity 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.
Upon the occurrence of any one of items (i) through (iv), or another default under the agreement, the counterparty to the applicable agreement has a right to terminate the agreement 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 September 30, 2021 was approximately $612.7 million, which represents the maximum amount the Company would be required to pay upon termination. This amount is fully collateralized.