Financial Derivatives

3 Months Ended

Mar. 31, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company manages certain risks associated with its investments and borrowings, including interest rate, credit, liquidity, and foreign exchange rate risk primarily by managing the amount, sources, and duration of its investments and borrowings, and through the use of derivative financial instruments. The Company's derivative financial instruments are used to manage differences in the amount, timing, and duration of its known or expected cash receipts and its known or expected cash payments principally related to its investments and borrowings.

The following table details the fair value of the Company's holdings of financial derivatives as of March 31, 2023 and December 31, 2022:


	March 31, 2023		December 31, 2022
(In thousands)
Financial derivatives–assets, at fair value:
TBA securities purchase contracts	$	1,482	$	—
TBA securities sale contracts	42		7,985
Fixed payer interest rate swaps	80,708		116,768
Fixed receiver interest rate swaps	15,691		254
Credit default swaps on asset-backed securities	76		76
Credit default swaps on asset-backed indices	4,846		3,366
Credit default swaps on corporate bond indices	44		83
Futures	88		2,772
Forwards	—		77
Warrants	1,056		1,137
Total financial derivatives–assets, at fair value	104,033		132,518
Financial derivatives–liabilities, at fair value:
TBA securities purchase contracts	(15)		(2,007)
TBA securities sale contracts	(5,608)		—
Fixed payer interest rate swaps	(2,360)		(1,408)
Fixed receiver interest rate swaps	(10,851)		(48,882)
Credit default swaps on asset-backed indices	(33)		(33)
Credit default swaps on corporate bonds	(277)		(259)
Credit default swaps on corporate bond indices	(1,720)		(1,513)
Futures	(3,076)		(96)
Forwards	(305)		—
Total financial derivatives–liabilities, at fair value	(24,245)		(54,198)
Total	$	79,788	$	78,320

Interest Rate Swaps

The following tables provide information about the Company's fixed payer interest rate swaps as of March 31, 2023 and December 31, 2022:

March 31, 2023:


					Weighted Average
	Notional Amount		Fair Value		Pay Rate		Receive Rate		Remaining Years to Maturity
	(In thousands)
2023	$	334,060	$	6,655	0.55	%	4.92	%	0.33
2024	627,333		8,793		3.17		4.89		1.36
2025	216,224		5,263		2.98		4.87		2.12
2026	59,600		179		3.67		4.87		2.92
2027	209,841		6,731		2.78		4.87		4.20
2028	160,255		8,871		2.39		4.87		5.03
2029	54,428		3,504		2.45		4.97		6.07
2030	68,300		4,614		2.30		4.88		7.14
2031	161,009		20,352		1.71		4.92		8.21
2032	183,517		6,220		2.81		4.87		9.32
2033	253,370		2,738		3.09		4.87		9.92
2035	500		132		0.78		4.83		12.56
2036	1,100		239		1.45		4.92		12.89
2037	45,000		2,347		2.81		4.87		14.41
2040	500		159		0.90		4.83		17.57
2049	5,796		484		2.89		4.77		25.78
2050	500		191		0.98		4.83		27.58
2052	5,000		876		2.07		4.87		29.02
Total	$	2,386,333	$	78,348	2.52	%	4.89	%	4.46

December 31, 2022:


					Weighted Average
Maturity	Notional Amount		Fair Value		Pay Rate		Receive Rate		Remaining Years to Maturity
	(In thousands)
2023	$	664,398	$	13,576	0.64	%	4.51	%	0.38
2024	817,850		17,326		3.03		4.35		1.55
2025	382,793		11,747		2.89		4.32		2.51
2026	100		12		0.79		4.41		3.58
2027	264,500		8,218		3.01		4.30		4.53
2028	114,119		14,230		1.44		4.37		5.49
2029	54,428		4,485		2.45		4.65		6.31
2030	68,300		5,763		2.30		4.36		7.39
2031	161,009		23,799		1.71		4.48		8.46
2032	236,277		10,161		2.98		4.30		9.63
2035	500		142		0.78		4.33		12.81
2036	1,100		267		1.45		4.67		13.13
2037	45,000		3,578		2.81		4.30		14.66
2040	500		171		0.90		4.33		17.82
2049	5,796		630		2.89		3.74		26.02
2050	500		203		0.98		4.33		27.82
2052	5,000		1,052		2.07		4.30		29.27
Total	$	2,822,170	$	115,360	2.27	%	4.39	%	3.47

The following tables provide information about the Company's fixed receiver interest rate swaps as of March 31, 2023 and December 31, 2022:

March 31, 2023:


					Weighted Average
Maturity	Notional Amount		Fair Value		Pay Rate		Receive Rate		Remaining Years to Maturity
	(In thousands)
2024	$	427,234	$	1,102	4.87	%	5.17	%	1.00
2025	132,418		1,779		4.87		4.88		1.94
2026	419,686		(4,343)		4.87		3.41		2.96
2027	11,591		124		4.87		3.74		4.63
2028	188,179		6,252		4.87		4.14		4.94
2032	2,700		(133)		4.87		2.62		9.09
2033	29,052		561		4.87		3.45		9.89
2035	500		(135)		4.87		0.74		12.56
2040	500		(165)		4.87		0.84		17.57
2050	500		(202)		4.87		0.90		27.58
Total	$	1,212,360	$	4,840	4.87	%	4.30	%	2.68

December 31, 2022:


					Weighted Average
Maturity	Notional Amount		Fair Value		Pay Rate		Receive Rate		Remaining Years to Maturity
	(In thousands)
2023	$	41,407	$	(84)	4.74	%	2.00	%	0.22
2024	818,037		(25,569)		4.27		2.39		1.40
2025	328,775		(5,468)		4.30		3.48		2.84
2026	215,852		(11,312)		4.32		2.26		3.25
2027	311,007		(1,067)		4.30		3.67		4.89
2032	59,155		(4,596)		4.30		2.58		9.58
2035	500		(145)		4.30		0.74		12.81
2040	500		(175)		4.30		0.84		17.82
2050	500		(212)		4.30		0.90		27.82
Total	$	1,775,733	$	(48,628)	4.30	%	2.79	%	2.76

Credit Default Swaps

The following table provides information about the Company's credit default swaps as of March 31, 2023 and December 31, 2022:


	As of
	March 31, 2023					December 31, 2022
Type(1)	Notional		Fair Value		Weighted Average Remaining Term (Years)	Notional		Fair Value		Weighted Average Remaining Term (Years)
($ in thousands)
Asset:
Long:
Credit default swaps on asset-backed indices	$	248	$	3	14.75	$	253	$	4	14.99
Credit default swaps on corporate bond indices	2,067		44		0.72	2,037		40		0.97
Short:
Credit default swaps on asset-backed securities	(220)		76		12.36	(220)		76		12.61
Credit default swaps on asset-backed indices	(51,995)		4,843		34.56	(58,004)		3,362		35.70
Credit default swaps on corporate bond indices	—		—		—	(1,498)		43		0.97
Liability:
Long:
Credit default swaps on asset-backed indices	65		(33)		26.23	65		(33)		26.48
Short:
Credit default swaps on corporate bonds	(16,400)		(277)		3.81	(16,400)		(259)		4.06
Credit default swaps on corporate bond indices	(136,398)		(1,720)		5.18	(165,006)		(1,513)		4.94
	$	(202,633)	$	2,936	12.64	$	(238,773)	$	1,720	12.35

(1)Long notional represents contracts where the Company has written protection and short notional represents contracts where the Company has purchased protection.

Futures

The following table provides information about the Company's long and short positions in futures as of March 31, 2023 and December 31, 2022:


	As of
	March 31, 2023					December 31, 2022
Description	Notional Amount		Fair Value		Remaining Months to Expiration	Notional Amount		Fair Value		Remaining Months to Expiration
	(In thousands)					(In thousands)
Assets:
Long Contracts:
U.S. Treasury futures	$	1,900	$	88	2.73	$	—	$	—	—
Short Contracts:
U.S. Treasury futures	—		—		—	(267,300)		2,772		2.70
Liabilities:
Long Contracts:
U.S. Treasury futures	—		—		—	1,900		(65)		2.70
Short Contracts:
U.S. Treasury futures	(191,300)		(3,076)		2.81	(49,800)		(31)		3.00
Total, net	$	(189,400)	$	(2,988)	2.81	$	(315,200)	$	2,676	2.75

Warrants

The following table provides information about the Company's warrants contracts to purchase shares as of March 31, 2023 and December 31, 2022:


	March 31, 2023				December 31, 2022
Description	Number of Shares Underlying Warrant(1)	Fair Value		Remaining Years to Expiration	Number of Shares Underlying Warrant	Fair Value		Remaining Years to Expiration
	(In thousands)				(In thousands)
Warrants	3,115	$	1,056	0.53	3,105	$	1,137	0.77

(1)Excludes number of shares underlying warrant to purchase additional equity interest in a loan originator in which the Company currently holds an equity interest. The Company has the right to purchase 10% of the loan originator at the time of purchase for a pre-determined price. As of both March 31, 2023 and December 31, 2022, the fair value of the estimated fair value of such warrants was insignificant.

TBAs

The Company transacts in the forward settling TBA market. Pursuant to these TBA transactions, the Company agrees to purchase or sell, for future delivery, Agency RMBS with certain principal and interest terms and certain types of underlying collateral, but the particular Agency RMBS to be delivered is not identified until shortly before the TBA settlement date. TBAs are generally liquid, have quoted market prices, and represent the most actively traded class of MBS. The Company uses TBAs to mitigate interest rate risk, usually by taking short positions. The Company also invests in TBAs as a means of acquiring additional exposure to Agency RMBS, or for investment purposes, including holding long positions.

The Company does not usually take delivery of TBAs; rather, it settles the associated receivable and payable with its trading counterparties on a net basis. Transactions with the same counterparty for the same TBA that result in a reduction of the position are treated as extinguished.

As of March 31, 2023 and December 31, 2022, the Company had outstanding TBA purchase and sale contracts as follows:


	March 31, 2023								December 31, 2022
TBA Securities	Notional Amount(1)		Cost Basis(2)		Market Value(3)		Net Carrying Value(4)		Notional Amount(1)		Cost Basis(2)		Market Value(3)		Net Carrying Value(4)
(In thousands)
Purchase contracts:
Assets	$	86,380	$	80,854	$	82,336	$	1,482	$	—	$	—	$	—	$	—
Liabilities	23,955		23,743		23,728		(15)		163,127		157,096		155,089		(2,007)
	110,335		104,597		106,064		1,467		163,127		157,096		155,089		(2,007)
Sale contracts:
Assets	(77,947)		(72,266)		(72,224)		42		(691,568)		(652,049)		(644,064)		7,985
Liabilities	(346,854)		(320,447)		(326,055)		(5,608)		—		—		—		—
	(424,801)		(392,713)		(398,279)		(5,566)		(691,568)		(652,049)		(644,064)		7,985
Total TBA securities, net	$	(314,466)	$	(288,116)	$	(292,215)	$	(4,099)	$	(528,441)	$	(494,953)	$	(488,975)	$	5,978

(1)Notional amount represents the principal balance of the underlying Agency RMBS.

(2)Cost basis represents the forward price to be paid (received) for the underlying Agency RMBS.

(3)Market value represents the current market value of the underlying Agency RMBS (on a forward delivery basis) as of period end.

(4)Net carrying value represents the difference between the market value of the TBA contract as of period end and the cost basis, and is reported in Financial derivatives-assets, at fair value and Financial derivatives-liabilities, at fair value on the Condensed Consolidated Balance Sheet.

Gains and losses on the Company's derivative contracts for the three-month periods ended March 31, 2023 and 2022 are summarized in the tables below:


		Three-Month Period Ended March 31, 2023
Derivative Type	Primary Risk Exposure	Net Realized Gains (Losses) on Periodic Settlements of Interest Rate Swaps		Net Realized Gains (Losses) on Financial Derivatives Other Than Periodic Settlements of Interest Rate Swaps		Net Realized Gains (Losses) on Financial Derivatives		Change in Net Unrealized Gains (Losses) on Accrued Periodic Settlements of Interest Rate Swaps		Change in Net Unrealized Gains (Losses) on Financial Derivatives Other Than on Accrued Periodic Settlements of Interest Rate Swaps(1)		Change in Net Unrealized Gains (Losses) on Financial Derivatives(1)
(In thousands)
Interest rate swaps	Interest Rate	$	5,791	$	(31,075)	$	(25,284)	$	3,452	$	13,173	$	16,625
Credit default swaps on asset-backed securities	Credit			1		1				—		—
Credit default swaps on asset-backed indices	Credit			(275)		(275)				2,158		2,158
Credit default swaps on corporate bond indices	Credit			(1,348)		(1,348)				207		207
Credit default swaps on corporate bonds	Credit			(41)		(41)				(19)		(19)
Options	Credit			—		—				—		—
TBAs	Interest Rate			4,292		4,292				(10,077)		(10,077)
Futures	Interest Rate			(2,933)		(2,933)				(5,664)		(5,664)
Forwards	Currency			141		141				(382)		(382)
Warrants	Equity Market/Credit			—		—				(80)		(80)
Total		$	5,791	$	(31,238)	$	(25,447)	$	3,452	$	(684)	$	2,768

(1)Includes foreign currency remeasurement on financial derivatives in the amount of $5 thousand for the three-month period ended March 31, 2023, which is included on the Condensed Consolidated Statement of Operations in Other, net.


		Three-Month Period Ended March 31, 2022
Derivative Type	Primary Risk Exposure	Net Realized Gains (Losses) on Periodic Settlements of Interest Rate Swaps		Net Realized Gains (Losses) on Financial Derivatives Other Than Periodic Settlements of Interest Rate Swaps		Net Realized Gains (Losses) on Financial Derivatives		Change in Net Unrealized Gains (Losses) on Accrued Periodic Settlements of Interest Rate Swaps		Change in Net Unrealized Gains (Losses) on Financial Derivatives Other Than on Accrued Periodic Settlements of Interest Rate Swaps(1)		Change in Net Unrealized Gains (Losses) on Financial Derivatives(1)
(In thousands)
Interest rate swaps	Interest Rate	$	(1,702)	$	(2,149)	$	(3,851)	$	561	$	34,051	$	34,612
Credit default swaps on asset-backed securities	Credit			(4)		(4)				1		1
Credit default swaps on asset-backed indices	Credit			15		15				407		407
Credit default swaps on corporate bond indices	Credit			(177)		(177)				306		306
Credit default swaps on corporate bonds	Credit			(8)		(8)				16		16
Options	Credit			—		—				(30)		(30)
TBAs	Interest Rate			20,788		20,788				3,825		3,825
Futures	Interest Rate			6,659		6,659				5,260		5,260
Forwards	Currency			326		326				136		136
Warrants	Equity Market/Credit			(413)		(413)				766		766
Total		$	(1,702)	$	25,037	$	23,335	$	561	$	44,738	$	45,299

(1)Includes foreign currency remeasurement on financial derivatives in the amount of $(8) thousand for the three-month period ended March 31, 2022, which is included on the Condensed Consolidated Statement of Operations in Other, net.

The table below details the average notional values of the Company's financial derivatives, using absolute value of month end notional values, for the three-month period ended March 31, 2023 and the year ended December 31, 2022:


Derivative Type	Three-Month Period Ended March 31, 2023		Year Ended December 31, 2022
(In thousands)
Interest rate swaps	$	4,283,193	$	3,292,243
TBAs	721,556		796,003
Futures	300,675		186,446
Credit default swaps	254,288		130,819
Forwards	12,253		13,676
Options	—		13,846
Total return swaps	—		688
Warrants	3,110		3,378

From time to time the Company enters into credit derivative contracts for which the Company sells credit protection ("written credit derivatives"). As of March 31, 2023 and December 31, 2022, all of the Company's open written credit derivatives were credit default swaps on either mortgage/asset-backed indices (ABX and CMBX indices) or corporate bond indices (CDX), collectively referred to as credit indices, or on individual corporate bonds, for which the Company receives periodic payments at fixed rates from credit protection buyers, and is obligated to make payments to the credit protection buyer upon the occurrence of a "credit event" with respect to underlying reference assets.

Written credit derivatives held by the Company at March 31, 2023 and December 31, 2022 are summarized below:


Credit Derivatives	March 31, 2023		December 31, 2022
(In thousands)
Fair Value of Written Credit Derivatives, Net	$	14	$	11
Notional Value of Written Credit Derivatives (1)	2,380		2,355

(1)The notional value is the maximum amount that a seller of credit protection would be obligated to pay, and a buyer of credit protection would receive, upon occurrence of a "credit event." Movements in the value of credit default swap transactions may require the Company or the counterparty to post or receive collateral. Amounts due or owed under credit derivative contracts with an International Swaps and Derivatives Association, or "ISDA," counterparty may be offset against amounts due or owed on other credit derivative contracts with the same ISDA counterparty. As a result, the notional value of written credit derivatives involving a particular underlying reference asset or index has been reduced (but not below zero) by the notional value of any contracts where the Company has purchased credit protection on the same reference asset or index with the same ISDA counterparty.

A credit default swap on a credit index or a corporate bond typically terminates at the stated maturity date in the case of corporate indices or bonds, or, in the case of ABX and CMBX indices, the date that all of the reference assets underlying the index are paid off in full, retired, or otherwise cease to exist. Implied credit spreads may be used to determine the market value of such contracts and are reflective of the cost of buying/selling credit protection. Higher spreads would indicate a greater likelihood that a seller will be obligated to perform (i.e., make protection payments) under the contract. In situations where the credit quality of the underlying reference assets has deteriorated, the percentage of notional values that would be paid up front to enter into a new such contract ("points up front") is frequently used as an indication of credit risk. Credit protection sellers entering the market in such situations would expect to be paid points up front corresponding to the approximate fair value of the contract. As of March 31, 2023, the implied credit spread on the Company's outstanding written credit derivative was 227 basis points; as of December 31, 2022, implied credit spread on the Company's written credit derivative was 310 basis points. Excluded from these spread ranges are contracts outstanding for which the individual spread is greater than 2,000 basis points. The Company believes that these contracts would be quoted based on estimated points up front. The total fair value of contracts with individual implied credit spreads in excess of 2,000 basis points was $(33) thousand as of both March 31, 2023 and December 31, 2022, respectively. Estimated points up front on these contracts as of both March 31, 2023 and December 31, 2022 ranged between 46.3 and 88.8. Total net up-front payments (paid) or received relating to written credit derivatives outstanding as of both March 31, 2023 and December 31, 2022 were $0.8 million.