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DERIVATIVE INSTRUMENTS
 6 Months Ended
Jun. 30, 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 June 30, 2016 and December 31, 2015:
 
Derivatives Instruments
Balance Sheet Location
  
June 30, 2016
    
December 31, 2015
  
Assets:
    
(dollars in thousands)
  
Interest rate swaps
Interest rate swaps, at fair value
  
$
146,285
    
$
19,642
  
TBA derivatives
Other derivatives, at fair value
    
137,490
      
9,622
  
Futures contracts
Other derivatives, at fair value
    
-
      
12,444
  
       
$
283,775
    
$
41,708
  
                   
Liabilities:
                  
Interest rate swaps
Interest rate swaps, at fair value
  
$
3,208,986
    
$
1,677,571
  
TBA derivatives
Other derivatives, at fair value
    
-
      
17,185
  
Futures contracts
Other derivatives, at fair value
    
154,017
      
32,778
  
 
   
  
$
3,363,003
    
$
1,727,534
  
 
The following table summarizes certain characteristics of the Company’s interest rate swaps at June 30, 2016 and December 31, 2015:
June 30, 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
  
$
1,152,401
      
1.63
%
    
0.53
%
    
2.61
  
3 - 6 years
    
12,025,000
      
1.88
%
    
0.74
%
    
4.00
  
6 - 10 years
    
9,570,550
      
2.43
%
    
0.81
%
    
7.73
  
Greater than 10 years
    
3,434,400
      
3.70
%
    
0.55
%
    
18.87
  
Total / Weighted Average
  
$
26,182,351
      
2.28
%
    
0.74
%
    
7.04
  
                                 
                                 
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)
Notional amount includes $200.0 million in forward starting receive fixed swaps and $500.0 million in forward starting pay fixed swaps as of June 30, 2016 and December 31, 2015, respectively.
(2)  Excludes forward starting swaps. 
(3)  Weighted average fixed rate on forward starting receive fixed swaps was 1.38% as of June 30, 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 June 30, 2016 and December 31, 2015, respectively.
The following table summarizes certain characteristics of the Company’s TBA derivatives as of June 30, 2016 and December 31, 2015:
 
June 30, 2016
  
Purchase and sale contracts for derivative TBAs
Notional
  
Implied Cost Basis
  
Implied Market Value
  
Net Carrying Value
  
(dollars in thousands)
  
Purchase contracts
  
$
12,739,000
    
$
13,246,011
    
$
13,383,501
    
$
137,490
  
                                 
                                 
                                 
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 June 30, 2016 and December 31, 2015:
 
 
June 30, 2016
  
 
Notional - Long Positions
  
Notional - Short Positions
  
Weighted Average Years to Maturity
  
 
(dollars in thousands)
      
2-year swap equivalent Eurodollar contracts
  
$
-
    
$
(6,200,000
)
    
2.00
  
U.S. Treasury futures - 5 year
    
-
      
(1,447,200
)
    
4.42
  
U.S. Treasury futures - 10 year and greater
    
-
      
(655,600
)
    
6.88
  
Total
  
$
-
    
$
(8,302,800
)
    
2.81
  
                         
                         
                         
                         
 
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 June 30, 2016 and December 31, 2015, respectively.
 
June 30, 2016
    
Amounts Eligible for Offset
      
 
Gross Amounts
  
Financial Instruments
  
Cash Collateral
  
Net Amounts
  
Assets:
(dollars in thousands)
  
Interest rate swaps, at fair value
  
$
146,285
    
$
(146,285
)
  
$
-
    
$
-
  
TBA derivatives, at fair value
    
137,490
      
-
      
-
      
137,490
  
Futures contracts, at fair value
    
-
      
-
      
-
      
-
  
 
                                
Liabilities:
                                
Interest rate swaps, at fair value
  
$
3,208,986
    
$
(146,285
)
  
$
(1,878,983
)
  
$
1,183,718
  
TBA derivatives, at fair value
    
-
      
-
      
-
      
-
  
Futures contracts, at fair value
    
154,017
      
-
      
(154,017
)
    
-
  
 
                                
 
                                
 
                                
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:
            
June 30, 2016
  
$
(130,762
)
  
$
(60,064
)
  
$
(373,220
)
June 30, 2015
  
$
(144,465
)
  
$
-
    
$
700,792
  
Six Months Ended:
                        
June 30, 2016
  
$
(278,237
)
  
$
(60,064
)
  
$
(1,404,940
)
June 30, 2015
  
$
(302,704
)
  
$
(226,462
)
  
$
234,590
  
 
(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 June 30, 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)
  
$
98,371
    
$
60,758
    
$
159,129
  
Net interest rate swaptions
    
-
      
-
      
-
  
Futures
    
8,314
      
(85,563
)
    
(77,249
)
 
                  
$
81,880
  
                         
                         
Quarter Ended June 30, 2015
  
Derivative Instruments
Realized Gain (Loss)
  
Unrealized Gain (Loss)
  
Amount of Gain/(Loss) Recognized in
Net Gains (Losses) on Trading Assets
  
(dollars in thousands)
  
Quarter Ended June 30, 2015
                        
Net TBA derivatives (1)
  
$
(50,801
)
  
$
(106,974
)
  
$
(157,775
)
Net interest rate swaptions
    
(7,600
)
    
7,033
      
(567
)
Futures
    
(9,230
)
    
53,351
      
44,121
  
 
                  
$
(114,221
)
 
 
Six Months Ended June 30, 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)
  
$
318,363
    
$
145,052
    
$
463,415
  
Net interest rate swaptions
    
-
      
-
      
-
  
Futures
    
(122,680
)
    
(133,683
)
    
(256,363
)
 
                  
$
207,052
  
                         
Six Months Ended June 30, 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)
  
$
(106,445
)
  
$
10,213
    
$
(96,232
)
Net interest rate swaptions
    
(29,491
)
    
24,116
      
(5,375
)
Futures
    
(14,737
)
    
(4,775
)
    
(19,512
)
 
                  
$
(121,119
)
 
(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 June 30, 2016 was approximately $3.0 billion, which represents the maximum amount the Company would be required to pay upon termination. This amount is fully collateralized.