Capstead generally pledges its Mortgage securities and similar investments as collateral under uncommitted repurchase arrangements, the terms and conditions of which are negotiated on a transaction-by-transaction basis with commercial banks and other financial institutions, referred to as counterparties, when each borrowing is initiated or renewed. Repurchase arrangements involve the sale and a simultaneous agreement to repurchase the transferred assets or similar assets at a future date. The amount borrowed generally is equal to the fair value of the assets pledged less an agreed-upon discount, referred to as a "haircut." At June 30, 2011, haircuts for pledged Agency Securities averaged 4.6 percent of the fair value of the pledged assets, exclusive of monthly principal and interest remittance receivables.

Repurchase arrangements entered into by the Company are accounted for as financings and require the repurchase of the transferred securities at the end of each arrangement's term, typically 30 to 90 days. The Company maintains the beneficial interest in the specific securities pledged during the term of the repurchase arrangement and receives the related principal and interest payments. Interest rates on these borrowings are fixed based on prevailing rates corresponding to the terms of the borrowings, and interest is paid at the termination of the repurchase arrangement at which time the Company may enter into a new repurchase arrangement at prevailing market rates with the same counterparty or repay that counterparty and negotiate financing with a different counterparty. In response to declines in fair value of pledged securities due to changes in market conditions or the publishing of monthly security paydown factors, lenders typically require the Company to post additional securities as collateral, pay down borrowings or establish cash margin accounts with the counterparties in order to re-establish the agreed-upon collateral requirements, referred to as margin calls. The maturity of structured financings is directly affected by prepayments on the related mortgage pass-through securities pledged as collateral and these financings are subject to redemption by the residual bondholders.

Repurchase arrangements and similar borrowings, classified by type of collateral and remaining maturities, and related weighted average interest rates as of the indicated quarter-end were as follows (dollars in thousands):

To help mitigate exposure to higher short-term interest rates, Capstead uses currently-paying and forward-starting, one- and three-month LIBOR-indexed, pay-fixed, receive-variable, interest rate swap agreements that typically require interest payments for two-year terms. These derivatives are designated as cash flow hedges of the variability of the underlying benchmark interest rate of current and forecasted 30- to 90-day repurchase arrangements. This hedge relationship establishes a relatively stable fixed rate on related borrowings because the variable-rate payments received on the swap agreements largely offset interest accruing on the related borrowings, leaving the fixed-rate payments to be paid on the swap agreements as the Company's effective borrowing rate, subject to certain adjustments including the effects of measured hedge ineffectiveness and changes in spreads between variable rates on the swap agreements and actual borrowing rates. Capstead's swap agreements hedging short-term interest rates, with an average expiration of 15 months, had the following characteristics at June 30, 2011 (dollars in thousands):

Interest rate swap agreements are measured at fair value on a recurring basis primarily using Level Two Inputs in accordance with "Fair Value Measurements and Disclosures" ("ASC 820"). In determining fair value estimates for these derivatives, the Company utilizes the standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts based on expected future interest rates derived from observable market interest rate curves. The Company also incorporates both its own nonperformance risk and its counterparties' nonperformance risk in determining the fair value of its interest rate swap derivatives. In considering the effect of nonperformance risk, the Company considered the impact of netting and credit enhancements, such as collateral postings and guarantees, and has concluded that counterparty risk is not significant to the overall valuation of these agreements. The following tables include fair value and other related disclosures regarding all derivatives held as of and for the indicated periods (in thousands):


	Location in Balance Sheet	June 30, 2011			*December 31,* *2010*


*Balance sheet-related*
Interest rate swap agreements in a gain position (an asset) related to:
Repurchase arrangements and similar borrowings	(a)	$	551			$ 734
Unsecured borrowings (see NOTE 7)	(a)		8,805			8,863

			9,356			9,597

Interest rate swap agreements in a loss position (a liability) related to repurchase arrangements and similar borrowings	(a)		(19,962	)		(16,337	)
Related net interest payable	(b)		(11,589	)		(9,847	)

		$	(22,195	)		$(16,587)

(a)

The fair value of derivatives with realized and unrealized gains are aggregated and recorded as an asset on the face of the balance sheet separately from the fair value of derivatives with realized and unrealized losses that are recorded as a liability. The amount of unrealized losses that will be recognized in the statement of income over the next twelve months in the form of fixed- and variable-rate swap payments in excess of current market rates totaled $20.7 million at June 30, 2011.

(b)

Included in "Accounts payable and accrued expenses" on the face of the balance sheet.


	Location of Gain or (Loss) Recognized in *Net Income*	*Quarter Ended* *June 30*						Six Months Ended June 30
	Location of Gain or (Loss) Recognized in *Net Income*	*2011*			*2010*			*2011*			*2010*


*Income statement-related*
Components of effect on interest expense:
Amount of loss reclassified from AOCI:
Effective portion of active positions		$	(7,467	)	$	(6,892	)	$	(13,579	)	$	(15,747	)
Effective portion of terminated positions ^(a)			–			–			–			(31	)

			(7,467	)		(6,892	)		(13,579	)		(15,778	)
Amount of gain (loss) recognized (ineffective portion)			109			383			(49	)		249

Increase in interest expense and decrease in Net income as a result of the use of derivatives	(b)	$	(7,358	)	$	(6,509	)	$	(13,628	)	$	(15,529	)

*Other comprehensive income-related*
Amount of loss recognized in other comprehensive income (loss) (effective portion)		$	(16,883	)	$	(10,111	)	$	(17,561	)	$	(25,223	)

(a)

In March 2008 a swap agreement with a $100 million notional amount was terminated for a realized loss of $2.3 million which was amortized to earnings over the original two-year term of the derivative (through January 2010).

(b)

Included in "Interest expense: Repurchase arrangements and similar borrowings" on the face of the statement of income.