DERIVATIVE INSTRUMENTS

3 Months Ended

Mar. 31, 2016

DERIVATIVE INSTRUMENTS

9.       DERIVATIVE INSTRUMENTS

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 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, notional amount and remaining term of the derivative contract. In the event of a default by the counterparty, the Company could have difficulty obtaining its Residential Investment Securities pledged as collateral as well as receiving payments in accordance with the terms of the derivative contracts.

The table below summarizes fair value information about our derivative assets and liabilities as of March 31, 2016 and December 31, 2015:

Derivatives Instruments	Balance Sheet Location	March 31, 2016		December 31, 2015
Assets:		(dollars in thousands)
Interest rate swaps	Interest rate swaps, at fair value	$	93,312	$	19,642
TBA derivatives	Other derivatives, at fair value		76,732		9,622
Futures contracts	Other derivatives, at fair value		717		12,444
		$	170,761	$	41,708
Liabilities:
Interest rate swaps	Interest rate swaps, at fair value	$	2,782,961	$	1,677,571
TBA derivatives	Other derivatives, at fair value		-		17,185
Futures contracts	Other derivatives, at fair value		69,171		32,778
		$	2,852,132	$	1,727,534

The following table summarizes certain characteristics of the Company's interest rate swaps at March 31, 2016 and December 31, 2015:

March 31, 2016
Maturity	Current Notional (1)		Weighted Average Pay Rate (2) (3)			Weighted Average Receive Rate(2)			Weighted Average Years to Maturity (2)
(dollars in thousands)
0 - 3 years	$	4,290,419		1.79	%		0.47	%		1.87
3 - 6 years		11,925,000		1.87	%		0.73	%		4.22
6 - 10 years		10,227,550		2.49	%		0.76	%		7.88
Greater than 10 years		3,434,400		3.54	%		0.59	%		18.64
Total / Weighted Average	$	29,877,369		2.26	%		0.69	%		6.76
December 31, 2015
Maturity	Current Notional (1)		Weighted Average Pay Rate (2) (3)			Weighted Average Receive Rate(2)			Weighted Average Years to Maturity (2)
(dollars in thousands)
0 - 3 years	$	3,240,436		1.85	%		0.36	%		1.80
3 - 6 years		11,675,000		1.82	%		0.55	%		4.25
6 - 10 years		11,635,250		2.44	%		0.57	%		7.92
Greater than 10 years		3,634,400		3.70	%		0.43	%		19.37
Total / Weighted Average	$	30,185,086		2.26	%		0.53	%		7.02

(1) There were no forward starting pay fixed swaps as of March 31, 2016. Notional amount includes $500.0 million in forward starting pay fixed swaps as of December 31, 2015.

(2) Excludes forward starting swaps.

(3) There were no forward starting pay fixed swaps as of March 31, 2016. Weighted average fixed rate on forward starting pay fixed swaps was 1.44% as of December 31, 2015.

There were no swaptions outstanding as of March 31, 2016 and December 31, 2015, respectively.

The following table summarizes certain characteristics of the Company's TBA derivatives as of March 31, 2016 and December 31, 2015:

March 31, 2016
Purchase and sale contracts for derivative TBAs	Notional		Implied Cost Basis		Implied Market Value		Net Carrying Value
(dollars in thousands)
Purchase contracts	$	14,273,000	$	14,847,792	$	14,924,524	$	76,732
December 31, 2015
Purchase and sale contracts for derivative TBAs	Notional		Implied Cost Basis		Implied Market Value		Net Carrying Value
(dollars in thousands)
Purchase contracts	$	13,761,000	$	14,177,338	$	14,169,775	$	(7,563	)

The following table summarizes certain characteristics of the Company's futures derivatives as of March 31, 2016 and December 31, 2015:

	March 31, 2016
	Notional - Long Positions		Notional - Short Positions			Weighted Average Years to Maturity
	(dollars in thousands)
2-year swap equivalent Eurodollar contracts	$	-	$	(4,375,000	)		2.00
U.S. Treasury futures - 5 year		-		(1,847,200	)		4.42
U.S. Treasury futures - 10 year and greater		-		(655,600	)		6.75
Total	$	-	$	(6,877,800	)		3.10
	December 31, 2015
	Notional - Long Positions		Notional - Short Positions			Weighted Average Years to Maturity
	(dollars in thousands)
2-year swap equivalent Eurodollar contracts	$	-	$	(7,000,000	)		2.00
U.S. Treasury futures - 5 year		-		(1,847,200	)		4.42
U.S. Treasury futures - 10 year and greater		-		(655,600	)		6.92
Total	$	-	$	(9,502,800	)		2.81

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 potentially be offset on our Consolidated Statements of Financial Condition as of March 31, 2016 and December 31, 2015, respectively.

March 31, 2016			Amounts Eligible for Offset
	Gross Amounts		Financial Instruments			Cash Collateral			Net Amounts
Assets:	(dollars in thousands)
Interest rate swaps, at fair value	$	93,312	$	(93,312	)	$	-		$	-
TBA derivatives, at fair value		76,732		-			-			76,732
Futures contracts, at fair value		717		(110	)		-			607
Liabilities:
Interest rate swaps, at fair value	$	2,782,961	$	(93,312	)	$	(1,617,530	)	$	1,072,119
TBA derivatives, at fair value		-		-			-			-
Futures contracts, at fair value		69,171		(110	)		(69,061	)		-
December 31, 2015			Amounts Eligible for Offset
	Gross Amounts		Financial Instruments			Cash Collateral			Net Amounts
Assets:	(dollars in thousands)
Interest rate swaps, at fair value	$	19,642	$	(18,040	)	$	-		$	1,602
TBA derivatives, at fair value		9,622		(7,367	)		-			2,255
Futures contracts, at fair value		12,443		(10,868	)		-			1,575
Liabilities:
Interest rate swaps, at fair value	$	1,677,571	$	(18,040	)	$	(913,576	)	$	745,955
TBA derivatives, at fair value		17,185		(7,367	)		-			9,818
Futures contracts, at fair value		32,778		(10,868	)		(21,910	)		-

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)
	Realized Gains (Losses) on Interest Rate Swaps(1)			Realized Gains (Losses) on Termination of Interest Rate Swaps			Unrealized Gains (Losses) on Interest Rate Swaps
	(dollars in thousands)
Quarters Ended:
March 31, 2016	$	(147,475	)	$	-		$	(1,031,720	)
March 31, 2015	$	(158,239	)	$	(226,462	)	$	(466,202	)

^{(1) Interest expense related to the Company's interest rate swaps is recorded in Realized gains (losses) on interest rate swaps on the Consolidated Statements of Comprehensive Income (Loss).}

The effect of other derivative contracts on the Company's Consolidated Statements of Comprehensive Income (Loss) is as follows:

Quarter Ended March 31, 2016
Derivative Instruments	Realized Gain (Loss)			Unrealized Gain (Loss)			Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Trading Assets
(dollars in thousands)
Net TBA derivatives (1)	$	219,993		$	84,295		$	304,288
Net interest rate swaptions	$	-		$	-		$	-
Futures	$	(130,994	)	$	(48,120	)	$	(179,114	)
							$	125,174
Quarter Ended March 31, 2015
Derivative Instruments	Realized Gain (Loss)			Unrealized Gain (Loss)			Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Trading Assets
(dollars in thousands)
Net TBA derivatives (1)	$	(55,644	)	$	117,188		$	61,544
Net interest rate swaptions	$	(21,891	)	$	17,083		$	(4,808	)
Futures	$	(5,506	)	$	(58,126	)	$	(63,632	)
							$	(6,896	)

^{(1) Includes options on TBA contracts.}

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 (NYSE). 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 March 31, 2016 was approximately $2.6 billion, which represents the maximum amount the Company would be required to pay upon termination. This amount is fully collateralized.