Derivative Instruments

9 Months Ended

Sep. 30, 2024

Derivative Instruments and Hedging Activities Disclosure [Abstract]

In connection with the Company’s interest rate risk strategy, the Company may economically hedge a portion of its interest rate risk by entering into derivative financial instrument contracts in the form of interest rate swaps, swaptions, and U.S. Treasury futures. Swaps are used to lock in a fixed rate related to a portion of its current and anticipated payments on its secured financing 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. Interest rate swaptions provide the option to enter into an interest rate swap agreement for a predetermined notional amount, stated term and pay and receive interest rates in the future. The Company’s swaptions are not centrally cleared. U.S. Treasury futures are derivatives which track the prices of generic benchmark U.S. Treasury securities with identical maturity and are traded on an active exchange. It is generally the Company’s policy to close out any U.S. Treasury futures positions prior to delivering the underlying security. U.S. Treasury futures lock in a fixed rate related to a portion of its current and anticipated payments on its secured financing agreements.

The Company’s derivatives are recorded as either assets or liabilities in the Consolidated Statements of Financial Condition and measured at fair value. These derivative financial instrument contracts are not designated as hedges for GAAP; therefore, all changes in fair value are recognized in earnings. The Company elects to net the fair value of its derivative contracts by counterparty when appropriate. These contracts contain legally enforceable provisions that allow for netting or setting off of all individual derivative receivables and payables with each counterparty and therefore, the fair values of those derivative contracts are reported net by counterparty.

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 15 for further discussion of counterparty credit risk.

The weighted average pay rate on the Company’s interest rate swaps at September 30, 2024 was 3.56% and the weighted average receive rate was 4.96%. At September 30, 2024, the weighted average maturity on the Company’s interest rate swaps was less than one year.

The weighted average pay rate on the Company’s interest rate swap at December 31, 2023 was 3.26% and the weighted average receive rate was 5.40%. At December 31, 2023, the weighted average maturity on the Company’s interest rate swaps was less than one year.

The Company had no swap terminations during the quarter ended September 30, 2024 and 2023, respectively. The Company had a realized loss of $17 million related to the maturity of one swap during the nine months ended September 30, 2024. The Company paid $45 million to terminate interest rate swaps with a notional value of $2.5 billion during the nine months ended September 30, 2023. The terminated swaps had original maturities ranging from 2025 to 2028.

During the nine months ended September 30, 2024, the Company exercised three swaption contracts, each with $500 million notional, and entered into three one-year swaps, each with $500 million notional and a weighted average fixed pay rate of 3.56%.

During the nine months ended September 30, 2023, the Company entered into three swaption contracts for a one-year forward starting swaps with a total notional of $1.5 billion with a 3.56% strike rate. The underlying swap terms will allow the Company to pay a fixed rate of 3.56% and receive floating overnight SOFR rate. Additionally, during the nine months ended 2023, the Company terminated its existing $1.0 billion notional swaption contract for a one-year forward starting swap. The Company also entered and terminated three new swaptions contracts with $2.3 billion notional during the nine months ended September 30, 2023. The Company had net realized gains of $11 million on these swaption terminations.

During the quarter and nine months ended September 30, 2024, the Company entered into 1,391 short 5-year and 1,684 short 5-year U.S. Treasury futures contract with a notional of $139 million and $168 million, respectively, which it subsequently

covered for a net realized loss of $4.9 million. The Company had no outstanding U.S. Treasury futures contract at September 30, 2024. During the nine months ended September 30, 2023, the Company entered into 6,000 short 5-year and 1,875 short 2-year U.S. Treasury futures contract with a notional of $600 million and $375 million, respectively, which it subsequently covered and had no outstanding U.S. Treasury futures contract at September 30, 2023. The Company had a net realized loss of $6 million on covering these short U.S. Treasury futures contract. The Company also entered into 400 call options on 2-year and 5-year U.S. Treasury futures and subsequently covered them during the nine months ended September 30, 2023 for a realized loss of $187 thousand.

The Company also maintains collateral in the form of cash margin from its counterparties to its derivative contracts. In accordance with the Company's netting policy, the Company presents the fair value of its derivative contracts net of cash margin received. See Note 15 for additional details on derivative netting.

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 September 30, 2024 and December 31, 2023.


			September 30, 2024
			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	$	1,500,000	Derivatives, at fair value	$	—	Derivatives, at fair value	$	—
Swaptions	500,000		Derivatives, at fair value	97		Derivatives, at fair value	—
U.S. Treasury futures	—		Derivatives, at fair value	—		Derivatives, at fair value	—
Total	$	2,000,000		$	97		$	—


			December 31, 2023
			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	$	1,000,000	Derivatives, at fair value, net	$	—	Derivatives, at fair value, net	$	—
Swaptions	1,500,000		Derivatives, at fair value, net	—		Derivatives, at fair value, net	—

Total	$	2,500,000		$	—		$	—

The effect of the Company’s derivatives on the Consolidated Statements of Operations for the quarters and nine months ended September 30, 2024 and 2023, respectively, is presented below.


		Net gains (losses) on derivatives for the quarters ended
Derivative Instruments	Location on Consolidated Statements of Operations and Comprehensive Income		September 30, 2024		September 30, 2023
		(dollars in thousands)
Interest Rate Swaps	Net unrealized gains (losses) on interest rate swaps		$	(13,051)	$	(4,422)
Interest Rate Swaps	Net realized gains (losses) on interest rate swaps		—		—
Interest Rate Swaps	Periodic interest cost of interest rate swaps, net		6,789		4,894


Treasury futures	Net unrealized gains (losses) on derivatives		2,605		—
Treasury futures	Net realized gains (losses) on derivatives		(4,864)		—
Swaptions	Net unrealized gains (losses) on derivatives		(4,011)		4,439
Swaptions	Net realized gains (losses) on derivatives		—		—


Total			$	(12,532)	$	4,911


		Net gains (losses) on derivatives for the nine months ended
Derivative Instruments	Location on Consolidated Statements of Operations and Comprehensive Income		September 30, 2024		September 30, 2023
		(dollars in thousands)
Interest Rate Swaps	Net unrealized gains (losses) on interest rate swaps		$	6,429	$	6,510
Interest Rate Swaps	Net realized gains (losses) on interest rate swaps		(17,317)		(45,226)
Interest Rate Swaps	Periodic interest cost of interest rate swaps, net		19,237		11,871


Treasury futures	Net unrealized gains (losses) on derivatives		—		—
Treasury futures	Net realized gains (losses) on derivatives		(4,864)		(6,344)
Swaptions	Net unrealized gains (losses) on derivatives		(3,742)		2,950
Swaptions	Net realized gains (losses) on derivatives		—		10,613


Total			$	(257)	$	(19,626)

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. 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.