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Derivatives (Notes)

6 Months Ended

Jun. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVES

The Company is a party to certain types of financial instruments that are accounted for as derivative instruments. Please refer to Note 1 for information related to the Company’s accounting policy for its derivative instruments.

Types and Uses of Derivatives Instruments

Interest Rate Derivatives. Changing interest rates impact the fair value of the Company’s investments as well as the interest rates on the Company’s repurchase agreement borrowings used to finance its investments. The Company primarily uses interest rate swaps as economic hedges to mitigate declines in book value and to protect some portion of the Company's earnings from rising interest rates. The Company may also periodically utilizes other types of interest rate derivatives, such as interest rate swaptions and Eurodollar and U.S. Treasury futures as economic hedges.

TBA Transactions. The Company also holds long positions in TBA securities by executing a series of transactions which effectively delay the settlement of a forward purchase of a non-specified Agency RMBS by entering into an offsetting TBA short position, net settling the paired-off positions in cash, and simultaneously entering into an identical TBA long position with a later settlement date. These long positions in TBA securities (“dollar roll positions”) are viewed by management as economically equivalent to investing in and financing non-specified fixed-rate Agency RMBS. TBA securities purchased for a forward settlement month are generally priced at a discount relative to TBA securities sold for settlement in the current month. This discount, often referred to as “drop income” represents the economic equivalent of net interest income (interest income less implied financing cost) on the underlying Agency security from trade date to settlement date.

Periodically, the Company may also hold short positions in TBA securities for the purpose of economically hedging a portion of the impact of changing interest rates on the fair value of the Company’s fixed-rate Agency RMBS. The Company did not hold any short positions in TBA securities as of June 30, 2019 or December 31, 2018.

The table below summarizes information about the fair value by type of derivative instrument on the Company’s consolidated balance sheets as of the dates indicated:



Type of Derivative Instrument	Balance Sheet Location	Purpose	June 30, 2019			December 31, 2018
Interest rate swaps ⁽¹⁾	Derivative assets	Economic hedging	$	—		$	324
TBA securities	Derivative assets	Trading	342			6,239
			$	342		$	6,563

Eurodollar futures	Derivative liabilities	Economic hedging	$	(102	)	$	—
TBA securities	Derivative liabilities	Trading	(105		)	—
U.S. Treasury futures	Derivative liabilities	Economic hedging	—			(1,218		)
			$	(207	)	$	(1,218	)

(1)

Amounts shown as of June 30, 2019 and December 31, 2018 are net of $(50,907) paid and $8,424 received, respectively, in variation margin which is recorded on the Company’s consolidated balance sheets within “restricted cash”. As of June 30, 2019, all of the Company’s interest rate swap agreements are centrally cleared through the CME. Please refer to Note 1 for information regarding the exchange of variation margin being legally considered as settlement of the derivative as opposed to a pledge of collateral. The amount shown as of December 31, 2018 is the unsettled fair value of the instruments subject to bilateral agreements and not centrally cleared through the CME as of that date.

The table below provides detail of the Company’s “(loss) gain on derivative instruments, net” by type of derivative for the periods indicated:



	Three Months Ended						Six Months Ended
	June 30,						June 30,
Type of Derivative Instrument	2019			2018			2019			2018
Interest rate swaps	$	(124,213	)	20,571			$	(195,978	)	68,814
Eurodollar futures	(102		)	170			(102		)	2,075
U.S. Treasury futures	—			—			(109		)	—
Options on U.S. Treasury futures	—			891			—			891
TBA dollar roll positions	6,780			(965		)	16,956			(13,052		)
TBA economic hedges	—			—			—			293
(Loss) gain on derivative instruments, net	$	(117,535	)	$	20,667		$	(179,233	)	$	59,021

Interest Rate Swaps

The following tables present information about the Company’s interest rate swaps as of the dates indicated:



	June 30, 2019
			Weighted-Average:
Years to Maturity:	Notional Amount ⁽¹⁾		Pay Rate ⁽²⁾		Life Remaining (in Years)
< 3 years	$	1,150,000	1.76	%	1.3
>3 and < 6 years	910,000		2.15	%	3.5
>6 and < 10 years	1,320,000		2.14	%	9.5
>10 years	120,000		2.84	%	28.2
Total	$	3,500,000	2.04	%	5.9

	December 31, 2018
			Weighted-Average:
Years to Maturity:	Notional Amount ⁽¹⁾		Pay Rate ⁽²⁾		Life Remaining (in Years)
< 3 years	$	1,560,000	1.96	%	1.4
>3 and < 6 years	1,230,000		2.23	%	4.4
>6 and < 10 years	1,505,000		2.80	%	8.3
>10 years	220,000		2.81	%	21.9
Total	$	4,515,000	2.35	%	5.5


(1)	The notional amounts include $0 and $775,000 of forward starting pay-fixed interest rate swaps as of June 30, 2019 and December 31, 2018, respectively.


(2)	Excluding forward starting pay-fixed interest rate swaps, the weighted average pay rate was 2.04% and 2.29% as of June 30, 2019 and December 31, 2018, respectively.

TBA Securities

The following table summarizes information about the Company's TBA securities as of the dates indicated:



	June 30, 2019		December 31, 2018
Implied market value ⁽¹⁾	$	374,688	$	888,469
Implied cost basis ⁽²⁾	374,451		882,230
Net carrying value ⁽³⁾	$	237	$	6,239


(1)	Implied market value represents the estimated fair value of the underlying Agency MBS as if settled as of the date indicated.


(2)	Implied cost basis represents the forward price to be paid for the underlying Agency MBS as if settled as of the date indicated.


(3)	Net carrying value is the amount included on the consolidated balance sheets within “derivative assets (liabilities)” and represents the difference between the implied market value and the implied cost basis of the TBA security as of the date indicated.

Volume of Activity

The tables below summarize changes in the Company’s derivative instruments for the periods indicated:



Type of Derivative Instrument	Notional Amount as of December 31, 2018		Additions		Settlements, Terminations, or Pair-Offs			Notional Amount as of June 30, 2019
Interest rate swaps	$	4,515,000	$	2,955,000	$	(3,970,000	)	$	3,500,000
Eurodollar futures	—		3,000,000		—			3,000,000
TBA dollar roll positions	860,000		4,830,000		(5,320,000		)	370,000
U.S. Treasury futures	50,000		—		(50,000		)	—

Offsetting

The Company's derivatives are subject to underlying agreements with master netting or similar arrangements, which provide for the right of offset in the event of default or in the event of bankruptcy of either party to the transactions. The Company reports its derivative assets and liabilities subject to these arrangements on a gross basis. The following tables present information regarding those derivative assets and liabilities subject to such arrangements as if the Company had presented them on a net basis as of June 30, 2019 and December 31, 2018:



	Offsetting of Assets
	Gross Amount of Recognized Assets		Gross Amount Offset in the Balance Sheet		Net Amount of Assets Presented in the Balance Sheet		Gross Amount Not Offset in the Balance Sheet ⁽¹⁾					Net Amount
	Gross Amount of Recognized Assets		Gross Amount Offset in the Balance Sheet		Net Amount of Assets Presented in the Balance Sheet		Financial Instruments Received as Collateral		Cash Received as Collateral			Net Amount
June 30, 2019
TBA securities	342		—		342		—		—			342
Derivative assets	$	342	$	—	$	342	$	—	$	—		$	342
December 31, 2018
Interest rate swaps	$	324	$	—	$	324	$	—	$	—		$	324
TBA securities	6,239		—		6,239		—		(1,719		)	4,520
Derivative assets	$	6,563	$	—	$	6,563	$	—	$	(1,719	)	$	4,844



	Offsetting of Liabilities
	Gross Amount of Recognized Liabilities		Gross Amount Offset in the Balance Sheet		Net Amount of Liabilities Presented in the Balance Sheet		Gross Amount Not Offset in the Balance Sheet ⁽¹⁾					Net Amount
	Gross Amount of Recognized Liabilities		Gross Amount Offset in the Balance Sheet		Net Amount of Liabilities Presented in the Balance Sheet		Financial Instruments Posted as Collateral		Cash Posted as Collateral			Net Amount
June 30, 2019
TBA securities	105		—		105		—		(47		)	58
Eurodollar Futures	102		—		102		—		—			102
Derivative liabilities	$	207	$	—	$	207	$	—	$	(47	)	$	160

December 31, 2018
U.S. Treasury futures	1,218		—		1,218		—		(1,218		)	—
Derivative liabilities	$	1,218	$	—	$	1,218	$	—	$	(1,218	)	$	—

(1)

Amounts disclosed for collateral received by or posted to the same counterparty include cash and the fair value of MBS up to and not exceeding the net amount of the derivative asset or liability presented in the balance sheet. The fair value of the total collateral received by or posted to the same counterparty may exceed the amounts presented. Please refer to the consolidated balance sheets for the total cash posted as collateral, which is recorded as "restricted cash", and the total fair value of financial instruments pledged as collateral for derivatives and repurchase agreements, which is shown parenthetically.

Please see Note 3 for information related to the Company’s repurchase agreements which are also subject to underlying agreements with master netting or similar arrangements.