Derivative Instruments and Hedging Activities

The Company enters into derivative instruments in connection with its risk management activities. These derivative instruments include interest rate swaps, swaptions and futures. The Company may also purchase or sell short TBAs purchase put or call options on U.S. Treasury futures or invest in other types of mortgage derivative securities.

Derivatives Not Designated as Hedging Instruments

The following table presents the fair value of derivative instruments that were not designated as hedging instruments and their location in our consolidated balance sheets at December 31, 2015 and December 31, 2014, respectively (dollar amounts in thousands):



	Balance Sheet Location	December 31, 2015		December 31, 2014
TBA securities⁽¹⁾	Derivative assets	$	226,929	$	284,971
U.S. Treasury futures	Derivative assets	—		379
Options on U.S. Treasury futures	Derivative assets	15		92
Interest rate swap futures	Derivative assets	706		—
Swaptions	Derivative assets	821		2,273
Eurodollar futures	Derivative liabilities	1,242		900
Interest rate swap futures	Derivative liabilities	—		331
Interest rate swaps⁽²⁾	Derivative liabilities	258		232


(1)	Open TBA purchases and sales involving the same counterparty, same underlying deliverable and the same settlement date are reflected in our accompanying consolidated financial statements on a net basis. There was no netting of TBA sales against TBA purchases as of December 31, 2015 and December 31, 2014.


(2)	Includes interest rate swaps in our Agency IO portfolio.

The tables below summarize the activity of derivative instruments not designated as hedges for the years ended December 31, 2015 and 2014, respectively (dollar amounts in thousands).



	Notional Amount For the Year Ended December 31, 2015
	December 31, 2014			Additions		Settlement, Expiration or Exercise			December 31, 2015
TBA securities	$	273,000		$	3,801,000	$	(3,852,000	)	$	222,000
U.S. Treasury futures	2,300			150,200		(152,500		)	—
Interest rate swap futures	(190,100		)	1,165,200		(1,112,300		)	(137,200		)
Eurodollar futures	(2,961,000		)	2,925,000		(2,733,000		)	(2,769,000		)
Options on U.S. Treasury futures	21,000			375,000		(368,000		)	28,000
Swaptions	180,000			9,000		(30,000		)	159,000
Interest rate swaps	10,000			—		—			10,000



	Notional Amount For the Year Ended December 31, 2014
	December 31, 2013			Additions		Settlement, Expiration or Exercise			December 31, 2014
TBA securities	$	188,000		$	2,575,000	$	(2,490,000	)	$	273,000
U.S. Treasury futures	(11,900		)	130,500		(116,300		)	2,300
Interest rate swap futures	(242,700		)	996,500		(943,900		)	(190,100		)
Eurodollar futures	(3,360,000		)	3,134,000		(2,735,000		)	(2,961,000		)
Options on U.S. Treasury futures	40,000			48,200		(67,200		)	21,000
Swaptions	100,000			150,000		(70,000		)	180,000
Interest rate swaps	—			10,000		—			10,000

The following table presents the components of realized and unrealized gains and losses related to our derivative instruments that were not designated as hedging instruments included in other income (loss) in our consolidated statements of operations for the years ended December 31, 2015, 2014 and 2013:



	Years Ended December 31,
	2015						2014						2013
	Realized Gains (Losses)			Unrealized Gains (Losses)			Realized Gains (Losses)			Unrealized Gains (Losses)			Realized Gains (Losses)			Unrealized Gains (Losses)
TBA	$	5,244		$	(2,253	)	$	13,708		$	2,472		$	(12,393	)	$	(629	)
Eurodollar futures ⁽¹⁾	(2,321		)	(342		)	(2,146		)	533			(3,591		)	2,366
Interest rate swaps	—			(26		)	259			(232		)	—			—
Swaptions	—			(658		)	—			(1,068		)	—			1,153
U.S. Treasury and Interest rate swap futures and options	(9,631		)	579			(8,831		)	(3,332		)	5,418			2,866
Total	$	(6,708	)	$	(2,700	)	$	2,990		$	(1,627	)	$	(10,566	)	$	5,756


(1)	At December 31, 2015, the Eurodollar futures consist of 2,769 contracts with expiration dates ranging between March 2016 and September 2017.

The use of TBAs exposes the Company to market value risk, as the market value of the securities that the Company is required to purchase pursuant to a TBA transaction may decline below the agreed-upon purchase price. Conversely, the market value of the securities that the Company is required to sell pursuant to a TBA transaction may increase above the agreed upon sale price. At December 31, 2015 and 2014, our consolidated balance sheets include TBA-related liabilities of $228.0 million and $283.5 million included in payable for securities purchased, respectively. Open TBA purchases and sales involving the same counterparty, same underlying deliverable and the same settlement date are reflected in our consolidated financial statements on a net basis.

Derivatives Designated as Hedging Instruments

The Company’s interest rate swaps, except interest swaps included in its Agency IO portfolio, are used to hedge the variable cash flows associated with borrowings made under our financing arrangements including FHLBI advances and are designated as cash flow hedges. There were no costs incurred at the inception of the Company's interest rate swaps, under which the Company agrees to pay a fixed rate of interest and receive a variable interest rate based on one month LIBOR, on the notional amount of the interest rate swaps.

The Company documents its risk-management policies, including objectives and strategies, as they relate to its hedging activities, and upon entering into hedging transactions, documents the relationship between the hedging instrument and the hedged liability contemporaneously. The Company assesses, both at inception of a hedge and on an on-going basis, whether or not the hedge is “highly effective” when using the matched term basis.

The Company discontinues hedge accounting on a prospective basis and recognizes changes in the fair value through earnings when: (i) it is determined that the derivative is no longer effective in offsetting cash flows of a hedged item (including forecasted transactions); (ii) it is no longer probable that the forecasted transaction will occur; or (iii) it is determined that designating the derivative as a hedge is no longer appropriate. The Company’s derivative instruments are carried on the Company’s balance sheets at fair value, as assets, if their fair value is positive, or as liabilities, if their fair value is negative. For the Company’s derivative instruments that are designated as “cash flow hedges,” changes in their fair value are recorded in accumulated other comprehensive income (loss), provided that the hedges are effective. A change in fair value for any ineffective amount of the Company’s derivative instruments would be recognized in earnings. The Company has not recognized any change in the value of its existing derivative instruments designated as cash flow hedges through earnings as a result of ineffectiveness of any of its hedges.

The following table presents the fair value of derivative instruments designated as hedging instruments and their location in the Company’s consolidated balance sheets at December 31, 2015 and December 31, 2014, respectively (dollar amounts in thousands):



	Balance Sheet Location	December 31, 2015		December 31, 2014
Interest rate swaps	Derivative assets	$	304	$	1,135

The Company has netting arrangements by counterparty with respect to its interest rate swaps. Contracts in a liability position of $0.3 million have been netted against the asset position of $0.3 million and contracts in a liability position of $0.2 million have been netted against the asset position of $1.3 million in the accompanying consolidated balance sheets at December 31, 2015 and December 31, 2014, respectively.

The following table presents the impact of the Company’s interest rate swaps designated as hedging instruments on the Company’s accumulated other comprehensive income (loss) for the years ended December 31, 2015, 2014 and 2013 (dollar amounts in thousands):



	Years Ended December 31,
	2015			2014			2013
Accumulated other comprehensive income (loss) for derivative instruments:
Balance at beginning of the period	$	1,135		$	2,041		$	(1,744	)
Unrealized (loss) gain on interest rate swaps	(831		)	(906		)	3,785
Balance at end of the period	$	304		$	1,135		$	2,041

The Company estimates that over the next 12 months, approximately $0.3 million of the net unrealized gains on the interest rate swaps will be reclassified from accumulated other comprehensive income (loss) into earnings.

The following table details the impact of the Company’s interest rate swaps designated as hedging instruments included in interest expense for the years ended December 31, 2015, 2014 and 2013, respectively (dollar amounts in thousands):



	Years Ended December 31,
	2015		2014		2013
Interest Rate Swaps:
Interest expense-investment securities	$	1,619	$	1,848	$	1,737

The following table presents information about the Company’s interest rate swaps, including interest rate swaps in its Agency IO portfolio as of December 31, 2015 and December 31, 2014, respectively (dollar amounts in thousands):



	December 31, 2015				December 31, 2014
Maturity	Notional Amount		Weighted Average Fixed Pay Interest Rate		Notional Amount		Weighted Average Fixed Pay Interest Rate
Within 30 Days	$	—	—	%	$	—	—	%
Over 30 days to 3 months	—		—	%	—		—	%
Over 3 months to 6 months	—		—	%	—		—	%
Over 6 months to 12 months	—		—	%	135,000		0.45	%
Over 12 months to 24 months	215,000		0.83	%	—		—	%
Over 24 months to 36 months	—		—	%	215,000		0.83	%
Over 36 months to 48 months	—		—	%	—		—	%
Over 48 months to 60 months	10,000		2.25	%	10,000		2.25	%
Total	$	225,000	0.90	%	$	360,000	0.73	%

The use of derivatives exposes the Company to counterparty credit risks in the event of a default by a counterparty. If a counterparty defaults under the applicable derivative agreement, the Company may be unable to collect payments to which it is entitled under its derivative agreements, and may have difficulty collecting the assets it pledged as collateral against such derivatives. The Company currently has in place with all counterparties bi-lateral margin agreements requiring a party to post collateral to the Company for any valuation deficit. This arrangement is intended to limit the Company’s exposure to losses in the event of a counterparty default.

The Company is required to pledge assets under a bi-lateral margin arrangement, including either cash or Agency RMBS, as collateral for its interest rate swaps, futures contracts and TBAs, whose collateral requirements vary by counterparty and change over time based on the market value, notional amount, and remaining term of the agreement. In the event the Company is unable to meet a margin call under one of its agreements, thereby causing an event of default or triggering an early termination event under one of its agreements, the counterparty to such agreement may have the option to terminate all of such counterparty’s outstanding transactions with the Company. In addition, under this scenario, any close-out amount due to the counterparty upon termination of the counterparty’s transactions would be immediately payable by the Company pursuant to the applicable agreement. The Company believes it was in compliance with all margin requirements under its agreements as of December 31, 2015 and 2014. The Company had $6.3 million and $11.4 million of restricted cash related to margin posted for its agreements as of December 31, 2015 and 2014, respectively. The restricted cash held by third parties is included in receivables and other assets in the accompanying consolidated balance sheets.