Derivative Instruments

3 Months Ended

Mar. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments

Derivative Instruments

In connection with the Company’s interest rate risk management strategy, the Company economically hedges a portion of its interest rate risk by entering into derivative financial instrument contracts in the form of interest rate swaps, swaptions, and Treasury futures. The Company’s swaps are used to lock in a fixed rate related to a portion of its current and anticipated payments on its repurchase agreements. The Company typically agrees to pay a fixed rate of interest, or pay rate, in exchange for the right to receive a floating rate of interest, or receive rate, over a specified period of time. Treasury futures are derivatives which track the prices of specific Treasury securities and are traded on an active exchange. It is generally the Company’s policy

to close out any Treasury futures positions prior to delivering the underlying security. The Company uses Treasury futures to lock in a fixed rate related to a portion of its current and anticipated payments on its repurchase agreements.

The use of derivatives 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 contracts. In the event of a default by the counterparty, the Company could have difficulty obtaining its RMBS or cash pledged as collateral for these derivative instruments. The Company periodically monitors the credit profiles of its counterparties to determine if it is exposed to counterparty credit risk. See Note 14 for further discussion of counterparty credit risk.

The table below summarizes the location and fair value of the derivatives reported in the Consolidated Statements of Financial Condition after counterparty netting and posting of cash collateral as of March 31, 2020 and December 31, 2019. The Company did not have any derivative instruments as of March 31, 2020.

			March 31, 2020
			Derivative Assets			Derivative Liabilities
Derivative Instruments	Notional Amount Outstanding		Location on Consolidated Statements of Financial Condition	Net Estimated Fair Value/Carrying Value		Location on Consolidated Statements of Financial Condition	Net Estimated Fair Value/Carrying Value
			(dollars in thousands)
Interest Rate Swaps	$	—	Derivatives, at fair value, net	$	—	Derivatives, at fair value, net	$	—
Treasury Futures	—		Derivatives, at fair value, net	—		Derivatives, at fair value, net	—
Total	$	—		$	—		$	—

			December 31, 2019
			Derivative Assets			Derivative Liabilities
Derivative Instruments	Notional Amount Outstanding		Location on Consolidated Statements of Financial Condition	Net Estimated Fair Value/Carrying Value		Location on Consolidated Statements of Financial Condition	Net Estimated Fair Value/Carrying Value
			(dollars in thousands)
Interest Rate Swaps	$	4,111,300	Derivatives, at fair value, net	$	—	Derivatives, at fair value, net	$	—
Treasury Futures	619,700		Derivatives, at fair value, net	3,611		Derivatives, at fair value, net	—
Total	$	4,731,000		$	3,611		$	—

The effect of the Company’s derivatives on the Consolidated Statements of Operations is presented below.

		Net gains (losses) on derivatives for the quarters ended
Derivative Instruments	Location on Consolidated Statements of Operations and Comprehensive Income	March 31, 2020			March 31, 2019
		(dollars in thousands)
Interest Rate Swaps	Net unrealized gains (losses) on derivatives	$	204,611		$	(94,075	)
Interest Rate Swaps	Net realized gains (losses) on derivatives (1)	(470,352		)	(102,584		)
Treasury Futures	Net unrealized gains (losses) on derivatives	(3,611		)	5,325
Treasury Futures	Net realized gains (losses) on derivatives	(34,700		)	(12,579		)
Swaptions	Net unrealized gains (losses) on derivatives	—			(565		)
Swaptions	Net realized gains (losses) on derivatives	—			(160		)
Total		$	(304,052	)	$	(204,638	)

(1) Includes loss on termination of interest rate swaps of $464 million and $108 million during the quarters ended March 31, 2020 and 2019, respectively.

The company paid $464 million to terminate interest rate swaps with a notional value of $4.1 billion during the quarter ended March 31, 2020. The terminated swaps had original maturities from 2023 to 2048. During the quarter ended March 31, 2019, the company paid $108 million to terminate interest rate swaps with a notional of $1.5 billion. The terminated swaps had original maturities of 2028.

The Company did not have any interest rate swaps as of March 31, 2020. The weighted average pay rate on the Company’s interest rate swaps at December 31, 2019 was 2.62% and the weighted average receive rate was 1.94%. The weighted average maturity on the Company’s interest rate swaps at December 31, 2019 was 6 years.

When the Company enters into derivative contracts, they are typically 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, or 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. Certain of the Company’s interest rate swaps are cleared through a registered commodities exchange. Each of the Company’s International Swaps and Derivative Association, or ISDA, and clearing exchange agreements contains provisions under which the Company is required to fully collateralize its obligations under the interest rate swap agreements if at any point the fair value of the swap represents a liability greater than the minimum transfer amount contained within the agreements. The Company is also required to post initial collateral upon execution of certain of its swap transactions. If the Company breaches any of these provisions, it will be required to settle its obligations under the agreements at their termination values, which approximates fair value. The Company uses clearing exchange market prices to determine the fair value of its interest rate swaps.