The Company is party to interest rate hedging instruments that are intended to economically hedge changes, attributable to changes in benchmark interest rates, in certain MBS fair values and future interest cash flows on the Company’s short-term financing arrangements. Interest rate hedging instruments may include centrally cleared interest rate swaps, exchange-traded instruments, such as U.S. Treasury note futures, Eurodollar futures, interest rate swap futures and options on futures, and non-exchange-traded instruments such as options on agency MBS. While the Company uses its interest rate hedging instruments to economically hedge a portion of its interest rate risk, it has not designated such contracts as hedging instruments for financial reporting purposes.

The Company exchanges cash “variation margin” with the counterparties to its interest rate hedging instruments at least on a daily basis based upon daily changes in fair value as measured by the Chicago Mercantile Exchange (“CME”), the central clearinghouse through which those instruments are cleared. In addition, the CME requires market participants to deposit and maintain an “initial margin” amount which is determined by the CME and is generally intended to be set at a level sufficient to protect the CME from the maximum estimated single-day price movement in that market participant’s contracts. However, futures commission merchants may require “initial margin” in excess of the CME’s requirement. Receivables recognized for the right to reclaim cash initial margin posted in respect of interest rate hedging instruments are included in the line item “deposits” in the accompanying consolidated balance sheets.

The daily exchange of variation margin associated with a centrally cleared or exchange-traded hedging instrument is legally characterized as the daily settlement of the instrument itself, as opposed to a pledge of collateral. Accordingly, the Company accounts for the daily receipt or payment of variation margin associated with its interest rate swaps and futures as a direct reduction to the carrying value of the derivative asset or liability, respectively. The carrying amount of interest rate swaps and futures reflected in the Company’s consolidated balance sheets is equal to the unsettled fair value of such instruments; because variation margin is exchanged on a one-day lag, the unsettled fair value of such instruments generally represents the change in fair value that occurred on the last day of the reporting period.

The Company’s agency MBS investment portfolio may include net purchase (or “net long”) positions in TBA securities, which are primarily the result of executing sequential series of “dollar roll” transactions. The Company executes dollar roll transactions as a means of investing in and financing non-specified fixed-rate agency MBS. Such transactions involve effectively delaying (or “rolling”) the settlement of a forward purchase of a TBA agency MBS by entering into an offsetting sale with the same counterparty prior to the settlement date, net settling the “paired-off” positions in cash, and contemporaneously entering, with the same counterparty, another forward purchase of a TBA agency MBS of the same characteristics for a later settlement date. 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 the dollar roll “price drop,” reflects compensation for the net interest income (interest income less financing costs) that is foregone as a result of relinquishing beneficial ownership of the MBS for the duration of the dollar roll (also known as “dollar roll income”). By executing a sequential series of dollar roll transactions, the Company is able to create the economic experience of investing in an agency MBS, financed with a repurchase agreement, over a period of time. Forward purchases and sales of TBA securities are accounted for as derivative instruments in the Company’s financial statements. Accordingly, dollar roll income is recognized as a component of “investment and derivative gain (loss), net” along with all other periodic changes in the fair value of TBA commitments.

In addition to transacting in net long positions in TBA securities for investment purposes, the Company may also, from time to time, transact in net sale (or “net short”) positions in TBA securities for the purpose of economically hedging a portion of the sensitivity of the fair value of the Company’s investments in agency MBS to changes in interest rates.

In addition to TBA transactions, the Company may, from time to time, enter into commitments to purchase or sell specified agency MBS that do not qualify as regular-way security trades. Such commitments are also accounted for as derivative instruments.

Under the terms of commitments to purchase or sell TBAs or specified agency MBS, the daily exchange of variation margin may occur based on changes in the fair value of the underlying agency MBS if a party to the transaction demands it. Receivables recognized for the right to reclaim cash collateral posted by the Company in respect of agency MBS purchase or sale commitments is included in the line item “deposits” in the accompanying consolidated balance sheets. Liabilities recognized for the obligation to return cash collateral received by the Company in respect of agency MBS purchase or sale commitments is included in the line item “other liabilities” in the accompanying consolidated balance sheets.

The following table presents the fair value of the Company’s derivative instruments as of the dates indicated:


	September 30, 2022					December 31, 2021
	Assets		Liabilities			Assets		Liabilities
Interest rate swaps	$	260	$	—		$	—	$	(107	)
10-year U.S. Treasury note futures		—		—			16		—
Options on U.S. Treasury note futures		—		—			4		—
TBA commitments		4,162		(139	)		230		(121	)
Total	$	4,422	$	(139	)	$	250	$	(228	)

The Company’s LIBOR based interest rate swap agreements represent agreements to make semiannual interest payments based upon a fixed interest rate and receive quarterly variable interest payments based upon the prevailing three-month LIBOR as of the preceding reset date. The Company’s Secured Overnight Financing Rate (“SOFR”) based interest rate swap agreements represent agreements to make annual interest payments based upon a fixed interest rate and receive annual variable interest payments based upon the daily SOFR over the preceding annual period.

The following table presents information about the Company’s interest rate swap agreements that were in effect as of September 30, 2022:


			Weighted-average:
	Notional Amount		Fixed Pay Rate			Variable Receive Rate			Net Receive (Pay) Rate			Remaining Life (Years)		Fair Value
Years to maturity:
Less than 3 years	$	125,000		1.82	%		2.78	%		0.96	%		1.6	$	52
3 to less than 10 years		70,000		2.53	%		3.11	%		0.58	%		5.4		208
Total / weighted-average	$	195,000		2.07	%		2.90	%		0.83	%		3.0	$	260

The following table presents information about the Company’s interest rate swap agreements that were in effect as of December 31, 2021:


			Weighted-average:
	Notional Amount		Fixed Pay Rate			Variable Receive Rate			Net Receive (Pay) Rate			Remaining Life (Years)		Fair Value
Years to maturity:
Less than 3 years	$	50,000		0.71	%		0.13	%		(0.58	)%		1.8	$	(5	)
3 to less than 10 years		100,000		0.90	%		0.13	%		(0.77	)%		6.6		(102	)
Total / weighted-average	$	150,000		0.84	%		0.13	%		(0.71	)%		5.0	$	(107	)

The Company may purchase (“long”) or sell (“short”) exchange-traded U.S. Treasury note futures with the objective of economically hedging a portion of its interest rate risk. Upon the maturity date of these futures contracts, the Company has the option to either net settle each contract in cash in an amount equal to the difference between the then-current fair value of the underlying U.S. Treasury note and the contractual sale price inherent to the futures contract, or to physically settle the contract by purchasing or delivering the underlying U.S. Treasury note.

As of September 30, 2022, the Company had no outstanding positions of U.S. Treasury note futures. As of December 31, 2021, the Company held long positions of 10-year U.S. Treasury note futures with an aggregate notional amount of $25,000 with a maturity date in March 2022.

The Company may purchase or sell exchange-traded options on U.S. Treasury note futures contracts with the objective of economically hedging a portion of the sensitivity of its investments in agency MBS to significant changes in interest rates. The Company may purchase put or call options which provide the Company with the right to sell to a counterparty or purchase from a counterparty U.S. Treasury note futures, and the Company may also write put or call options that provide a counterparty with the option to sell to the Company or buy from the Company U.S. Treasury note futures. The options may be exercised at any time prior to their expiry, and if exercised, may be net settled in cash or through physical receipt or delivery of the underlying futures contracts.

As of September 30, 2022, the Company had no outstanding options on U.S. Treasury note futures contracts.

The following tables present information about the Company’s TBA commitments as of the dates indicated:


	September 30, 2022
	Notional Amount: Net Purchase (Sale) Commitment			Contractual Forward Price			Market Price			Fair Value
3.5% 30-year MBS sale commitments	$	(60,000	)	$	(56,803	)	$	(53,897	)	$	2,906
4.0% 30-year MBS sale commitments		(100,000	)		(93,359	)		(92,680	)		679
4.5% 30-year MBS sale commitments		(95,000	)		(90,859	)		(90,421	)		438
Total TBA commitments, net	$	(255,000	)	$	(241,021	)	$	(236,998	)	$	4,023


	December 31, 2021
	Notional Amount: Net Purchase (Sale) Commitment			Contractual Forward Price			Market Price			Fair Value
2.5% 30-year MBS purchase commitments	$	225,000		$	229,043		$	229,148		$	105
2.5% 30-year MBS sale commitments		(225,000	)		(229,152	)		(229,148	)		4
Total TBA commitments, net	$	—		$	(109	)	$	—		$	109

The following tables provide information about the derivative gains and losses recognized within the periods indicated:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Interest rate derivatives:
Interest rate swaps:
Net interest income (expense) (1)	$	258		$	(379	)	$	(315	)	$	(2,276	)
Unrealized (losses) gains, net		(1,420	)		(3,951	)		5,277			3,597
Gains (losses) realized upon early termination, net		5,238			1,149			8,687			(122	)
Total interest rate swap gains (losses), net		4,076			(3,181	)		13,649			1,199
U.S. Treasury note futures, net		—			872			(782	)		3,582
Options on U.S. Treasury note futures, net		—			—			(4	)		(20	)
Total interest rate derivative gains (losses), net		4,076			(2,309	)		12,863			4,761
TBA commitments:
TBA dollar roll (expense) income (2)		(421	)		1,064			682			3,678
Other gains (losses) on TBA commitments, net		2,998			(2,082	)		(1,971	)		(12,204	)
Total gains (losses) on TBA commitments, net		2,577			(1,018	)		(1,289	)		(8,526	)
Total derivative gains (losses), net	$	6,653		$	(3,327	)	$	11,574		$	(3,765	)

(1)

Represents the periodic net interest settlement incurred during the period (often referred to as “net interest carry”). Also includes “price alignment interest” income earned or expense incurred on cumulative variation margin paid or received, respectively, associated with centrally cleared interest rate swap agreements.

(2)

Represents the price discount of forward-settling TBA purchases (sales) relative to a contemporaneously executed “spot” TBA sale (purchase), which economically equates to net interest income (expense) that is earned (incurred) ratably over the period beginning on the settlement date of the sale (purchase) and ending on the settlement date of the forward-settling purchase (sale).

The following tables summarize the volume of activity, in terms of notional amount, related to derivative instruments for the periods indicated:


	For the Three Months Ended September 30, 2022
	Beginning of Period		Additions		Scheduled Settlements			Early Terminations			End of Period
Interest rate swaps	$	230,000	$	90,000	$	—		$	(125,000	)	$	195,000
TBA commitments, net		155,000		535,000		(435,000	)		—			255,000


	For the Three Months Ended September 30, 2021
	Beginning of Period		Additions		Scheduled Settlements			Early Terminations			End of Period
Interest rate swaps	$	525,000	$	—	$	—		$	(310,000	)	$	215,000
10-year U.S. Treasury note futures		45,000		—		(45,000	)		—			—
TBA commitments, net		—		1,125,000		(1,100,000	)		—			25,000


	For the Nine Months Ended September 30, 2022
	Beginning of Period		Additions		Scheduled Settlements			Early Terminations			End of Period
Interest rate swaps	$	150,000	$	235,000	$	—		$	(190,000	)	$	195,000
10-year U.S. Treasury note futures		25,000		50,000		(50,000	)		(25,000	)		—
Purchased call options on 10-year U.S. Treasury note futures		25,000		—		(25,000	)		—			—
TBA commitments, net		—		1,290,000		(1,035,000	)		—			255,000


	For the Nine Months Ended September 30, 2021
	Beginning of Period		Additions		Scheduled Settlements			Early Terminations			End of Period
Interest rate swaps	$	275,000	$	450,000	$	—		$	(510,000	)	$	215,000
2-year U.S. Treasury note futures		—		50,000		(50,000	)		—			—
10-year U.S. Treasury note futures		—		540,100		(365,000	)		(175,100	)		—
Purchased call options on 10-year U.S. Treasury note futures		—		65,200		(65,200	)		—			—
TBA commitments, net		—		2,490,000		(2,465,000	)		—			25,000

Cash Collateral Posted and Received for Derivative and Other Financial Instruments