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Derivatives
 6 Months Ended
Jun. 30, 2022
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivatives DERIVATIVES
Types and Uses of Derivatives Instruments

Interest Rate Derivatives. During the three and six months ended June 30, 2022, the Company used short positions in U.S. Treasury futures and interest rate swaptions to mitigate the impact of changing interest rates on the fair value of its investments and its net interest earnings.

TBA Transactions. The Company purchases TBA securities as a means of investing in non-specified fixed-rate Agency RMBS and may also periodically sell TBA securities as a means of economically hedging its book value exposure to Agency RMBS. The Company holds long and short positions in TBA securities by executing a series of transactions, commonly referred to as “dollar roll” transactions, which effectively delay the settlement of a forward purchase (or sale) of a non-specified Agency RMBS by entering into an offsetting TBA position, net settling the paired-off positions in cash, and simultaneously entering into an identical TBA long (or short) position with a later settlement date. TBA securities purchased (or sold) for a forward settlement date are generally priced at a discount relative to TBA securities settling 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. The Company accounts for all TBAs (whether net long or net short positions, or collectively “TBA dollar roll positions”) as derivative instruments because it cannot assert that it is probable at inception and throughout the term of an individual TBA transaction that its settlement will result in physical delivery of the underlying Agency RMBS, or that the individual TBA transaction will not settle in the shortest period possible.
Gain (Loss) on Derivative Instruments, Net

The table below provides detail of the Company’s “gain (loss) on derivative instruments, net” by type of derivative for the periods indicated:
Three Months EndedSix Months Ended
June 30,June 30,
Type of Derivative Instrument2022202120222021
U.S. Treasury futures$150,475 $(63,184)$439,408 $32,464 
Interest rate swaptions26,502 (19,062)51,940 38,701 
Options on U.S. Treasury futures— (11,531)— 1,086 
TBA securities - long positions(70,565)40,837 (164,725)(17,390)
Gain (loss) on derivative instruments, net$106,412 $(52,940)$326,623 $54,861 

The table below shows the balances for each type of derivative instrument on the Company’s consolidated balance sheets as of the dates indicated:
Type of Derivative InstrumentBalance Sheet LocationPurposeJune 30, 2022December 31, 2021
Interest rate swaptionsDerivative assetsEconomic hedging$55,142 $3,202 
TBA securitiesDerivative assetsInvesting26,777 4,767 
Total derivatives assets$81,919 $7,969 
TBA securitiesDerivative liabilitiesInvesting$12,559 — 
Total derivatives liabilities$12,559 $— 

As of June 30, 2022, the Company had short positions in 5-year and 10-year U.S. Treasury futures contracts with a combined notional amount of $(4,350,000), which expire late in the third quarter of 2022, compared to a combined notional amount of $(3,890,000) as of December 31, 2021. Because the Company’s U.S. Treasury futures are net settled on a daily basis, the carrying value on the Company’s consolidated balance sheets nets to $0. The margin excess or deficit outstanding is recorded as a receivable or payable as of the date of the Company’s consolidated balance sheets.

The following table provides details on the Company’s interest rate swaptions held as of the dates indicated:
OptionUnderlying Payer Swap
CostFair ValueAverage Term to ExpirationNotional AmountAverage Fixed Pay Rate
As of June 30, 2022:$9,375 $55,142 1 month$500,000 1.60%
As of December 31, 2021$9,375 $3,202 7 months$500,000 1.60%
The following table summarizes information about the Company's long positions in TBA securities as of the dates indicated:
June 30, 2022December 31, 2021
Implied market value (1)
$3,178,541 $1,531,188 
Implied cost basis (2)
3,164,322 1,526,421 
Net carrying value (3)
$14,219 $4,767 
(1) Implied market value represents the estimated fair value of the underlying Agency MBS as of the dates indicated.
(2) Implied cost basis represents the forward price to be paid for the underlying Agency MBS as of the dates indicated.
(3) Net carrying value is the amount included on the consolidated balance sheets within “derivative assets” and “derivative liabilities” and represents the difference between the implied market value and the implied cost basis of the TBA securities as of the dates indicated.

Volume of Activity

The tables below summarize changes in the Company’s derivative instruments for the six months ended June 30, 2022:
Type of Derivative InstrumentBeginning
Notional Amount-Long (Short)		AdditionsSettlements,
Terminations,
or Pair-Offs		Ending
Notional Amount-Long (Short)
Interest rate swaptions$500,000 $— $— $500,000 
U.S. Treasury futures(3,890,000)(9,130,000)8,670,000 (4,350,000)
TBA securities1,530,000 14,957,000 (13,164,000)3,323,000 

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. Please see Note 4 for information related to the Company’s repurchase agreements, which are also subject to underlying agreements with master netting or similar arrangements. 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, 2022 and December 31, 2021:
Offsetting of Assets
Gross Amount of Recognized AssetsGross Amount Offset in the Balance SheetNet Amount of Assets Presented in the Balance Sheet
Gross Amount Not Offset in the Balance Sheet (1)
Net Amount
Financial Instruments Received as CollateralCash Received as Collateral
June 30, 2022
Interest rate swaptions$55,142 $— $55,142 $— $(55,142)$— 
TBA securities26,777 — 26,777 (8,093)— 18,684 
Derivative assets$81,919 $— $81,919 $(8,093)$(55,142)$18,684 
December 31, 2021
Interest rate swaptions$3,202 $— $3,202 $— $(481)$2,721 
TBA securities4,767 — 4,767 — (1,353)3,414 
Derivative assets$7,969 $— $7,969 $— $(1,834)$6,135 
Offsetting of Liabilities
Gross Amount of Recognized LiabilitiesGross Amount Offset in the Balance SheetNet Amount of Liabilities Presented in the Balance Sheet
Gross Amount Not Offset in the Balance Sheet (1)
Net Amount
Financial Instruments Posted as CollateralCash Posted as Collateral
June 30, 2022
TBA securities$12,559 $— $12,559 $(8,093)$(4,466)$— 
Derivative liabilities$12,559 $— $12,559 $(8,093)$(4,466)$— 
December 31, 2021
Derivative liabilities$— $— $— $— $— $— 
(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 fair value of financial instruments pledged as collateral for derivatives and repurchase agreements, which is shown parenthetically, and the total cash pledged or received as collateral which is disclosed in “cash collateral posted to/by counterparties.”