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 and certain forward purchase commitments 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 and terms of the derivative contract. In the case of MAC interest rate swaps, the Company may make or receive a payment at the time of entering into such interest rate swap to compensate for the out of market nature of such interest rate swap. Similar to other interest rate swaps, the Company may have to pledge cash or assets as collateral for the MAC interest rate swap transactions. 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 at March 31, 2018 and December 31, 2017:



Derivatives Instruments	Balance Sheet Location	March 31, 2018		December 31, 2017
Assets:		(dollars in thousands)
Interest rate swaps	Interest rate swaps, at fair value	$	69,109	$	30,272
Interest rate swaptions	Other derivatives, at fair value	113,701		36,150
TBA derivatives	Other derivatives, at fair value	47,064		29,067
Futures contracts	Other derivatives, at fair value	—		218,361
Purchase commitments	Other derivatives, at fair value	428		35
		$	230,302	$	313,885
Liabilities:
Interest rate swaps	Interest rate swaps, at fair value	$	427,838	$	569,129
TBA derivatives	Other derivatives, at fair value	21,855		21,776
Futures contracts	Other derivatives, at fair value	122,436		12,285
Purchase commitments	Other derivatives, at fair value	262		157
Credit derivatives ⁽¹⁾	Other derivatives, at fair value	8,550		4,507
		$	580,941	$	607,854

(1) The maximum potential amount of future payments is the notional amount of $285.0 million and $125.0 million at March 31, 2018 and December 31, 2017, respectively.

The following table summarizes certain characteristics of the Company’s interest rate swaps at March 31, 2018 and December 31, 2017:



March 31, 2018
Maturity	Current Notional ⁽¹⁾		Weighted Average Pay Rate		Weighted Average Receive Rate		Weighted Average Years to Maturity
(dollars in thousands)
0 - 3 years	$	38,344,000	1.64	%	2.19	%	1.77
3 - 6 years	13,254,550		2.17	%	2.12	%	4.67
6 - 10 years	10,547,000		2.32	%	2.02	%	8.11
Greater than 10 years	3,826,400		3.65	%	1.94	%	18.22
Total / Weighted Average	$	65,971,950	2.00	%	2.13	%	4.52

December 31, 2017
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	$	6,532,000	1.56	%	1.62	%	2.08
3 - 6 years	14,791,800		2.12	%	1.57	%	4.51
6 - 10 years	10,179,000		2.35	%	1.58	%	8.04
Greater than 10 years	3,826,400		3.65	%	1.51	%	18.47
Total / Weighted Average	$	35,329,200	2.22	%	1.58	%	6.72

(1) There were no forward starting swaps at March 31, 2018. Notional amount includes $8.1 billion of forward starting pay fixed swaps at December 31, 2017.

(2) Excludes forward starting swaps.

(3) Weighted average fixed rate on forward starting pay fixed swaps was 1.86% at December 31, 2017.

The following table presents swaptions outstanding at March 31, 2018 and December 31, 2017.



March 31, 2018	Current Underlying Notional		Weighted Average Underlying Pay Rate		Weighted Average Underlying Receive Rate	Weighted Average Underlying Years to Maturity	Weighted Average Months to Expiration
(dollars in thousands)
Long	$	6,000,000	2.72	%	3M LIBOR	10.33	3.88

December 31, 2017	Current Underlying Notional		Weighted Average Underlying Pay Rate		Weighted Average Underlying Receive Rate	Weighted Average Underlying Years to Maturity	Weighted Average Months to Expiration
(dollars in thousands)
Long	$	6,000,000	2.62	%	3M LIBOR	9.97	4.49

The following table summarizes certain characteristics of the Company’s TBA derivatives at March 31, 2018 and December 31, 2017:



March 31, 2018
Purchase and sale contracts for derivative TBAs	Notional			Implied Cost Basis			Implied Market Value			Net Carrying Value
(dollars in thousands)
Purchase contracts	$	8,954,000		$	9,107,423		$	9,132,632		$	25,209

December 31, 2017
Purchase and sale contracts for derivative TBAs	Notional			Implied Cost Basis			Implied Market Value			Net Carrying Value
(dollars in thousands)
Purchase contracts	$	15,828,000		$	16,381,826		$	16,390,251		$	8,425
Sale contracts	(250,000		)	(254,804		)	(255,938		)	(1,134		)
Net TBA derivatives	$	15,578,000		$	16,127,022		$	16,134,313		$	7,291

The following table summarizes certain characteristics of the Company’s futures derivatives at March 31, 2018 and December 31, 2017:



	March 31, 2018
	Notional - Long Positions		Notional - Short Positions			Weighted Average Years to Maturity
	(dollars in thousands)
U.S. Treasury futures - 5 year	$	—	$	(4,597,400	)	4.42
U.S. Treasury futures - 10 year and greater	—		(9,154,500		)	6.99
Total	$	—	$	(13,751,900	)	6.13

	December 31, 2017
	Notional - Long Positions		Notional - Short Positions			Weighted Average Years to Maturity
	(dollars in thousands)
2-year swap equivalent Eurodollar contracts	$	—	$	(17,161,000	)	2.00
U.S. Treasury futures - 5 year	—		(4,217,400		)	4.41
U.S. Treasury futures - 10 year and greater	—		(4,914,500		)	7.01
Total	$	—	$	(26,292,900	)	3.32

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 at March 31, 2018 and December 31, 2017, respectively.



	March 31, 2018
			Amounts Eligible for Offset
	Gross Amounts		Financial Instruments			Cash Collateral			Net Amounts
Assets:	(dollars in thousands)
Interest rate swaps, at fair value	$	69,109	$	(40,470	)	$	—		$	28,639
Interest rate swaptions, at fair value	113,701		—			—			113,701
TBA derivatives, at fair value	47,064		(21,855		)	—			25,209
Purchase commitments	428		—			—			428
Liabilities:
Interest rate swaps, at fair value	$	427,838	$	(40,470	)	$	(6,856	)	$	380,512
TBA derivatives, at fair value	21,855		(21,855		)	—			—
Futures contracts, at fair value	122,436		—			(122,436		)	—
Purchase commitments	262		—			—			262
Credit derivatives	8,550		—			(6,460		)	2,090

	December 31, 2017
			Amounts Eligible for Offset
	Gross Amounts		Financial Instruments			Cash Collateral			Net Amounts
Assets:	(dollars in thousands)
Interest rate swaps, at fair value	$	30,272	$	(27,379	)	$	—		$	2,893
Interest rate swaptions, at fair value	36,150		—			—			36,150
TBA derivatives, at fair value	29,067		(12,551		)	—			16,516
Futures contracts, at fair value	218,361		(12,285		)	—			206,076
Purchase commitments	35		—			—			35
Liabilities:
Interest rate swaps, at fair value	$	569,129	$	(27,379	)	$	—		$	541,750
TBA derivatives, at fair value	21,776		(12,551		)	—			9,225
Futures contracts, at fair value	12,285		(12,285		)	—			—
Purchase commitments	157		—			—			157
Credit derivatives	4,507		—			(3,520		)	987

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 or Maturity of Interest Rate Swaps		Unrealized Gains (Losses) on Interest Rate Swaps
	(dollars in thousands)
Three Months Ended:
March 31, 2018	$	(48,160	)	$	834	$	977,285
March 31, 2017	$	(104,156	)	$	—	$	149,184


(1)	Interest expense related to 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:



Three Months Ended March 31, 2018
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	$	(277,901	)	$	17,917		$	(259,984	)
Net interest rate swaptions	(21,434		)	67,221			45,787
Futures	495,013			(328,512		)	166,501
Purchase commitments	—			366			366
Credit derivatives	1,513			(1,328		)	185
Total							$	(47,145	)

Three Months Ended March 31, 2017
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	$	(60,314	)	$	83,080		$	22,766
Futures	973			(23,704		)	(22,731		)
Purchase commitments	—			265			265
Total							$	300

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.

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, 2018 was approximately $402.7 million, which represents the maximum amount the Company would be required to pay upon termination. This amount is fully collateralized.