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Derivative and Other Hedging Instruments
 9 Months Ended
Sep. 30, 2016
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative and Other Hedging Instruments
Derivative and Other Hedging Instruments
In connection with our risk management strategy, we hedge a portion of our interest rate risk by entering into derivative and other hedging instrument contracts. The principal instruments that we use are interest rate swaps and interest rate swaptions and U.S. Treasury securities and U.S. Treasury futures contracts, primarily through short sales. We may also utilize TBA securities, purchase or write put or call options on TBA securities or invest in mortgage and other types of derivatives, such as interest and principal-only securities. We also enter into TBA contracts as a means of investing in and financing agency securities (thereby increasing our "at risk" leverage) or as a means of disposing of or reducing our exposure to agency securities (thereby reducing our "at risk" leverage). Our risk management strategy attempts to manage the overall risk of the portfolio, reduce fluctuations in our net book value and generate additional income distributable to stockholders. For additional information regarding our derivative instruments and our overall risk management strategy, please refer to the discussion of derivative and other hedging instruments in Note 3.
Prior to September 30, 2011, our interest rate swaps were typically designated as cash flow hedges under ASC 815; however, as of September 30, 2011, we elected to discontinue hedge accounting for our interest rate swaps in order to increase our funding flexibility. For the three and nine months ended September 30, 2016, we reclassified $7 million and $38 million, respectively, and for the three and nine months ended September 30, 2015 $24 million and $79 million, respectively, of net deferred losses from accumulated OCI into interest expense related to our de-designated interest rate swaps and recognized an equal, but offsetting, amount in other comprehensive income. Our total net periodic interest costs on our swap portfolio were $58 million and $247 million for the three and nine months ended September 30, 2016, respectively, and $131 million and $369 million for the three and nine months ended September 30, 2015, respectively. The difference between our total net periodic interest costs on our swap portfolio and the amount recorded in interest expense related to our de-designated hedges is reported in gain (loss) on derivative instruments and other securities, net in our accompanying consolidated statements of comprehensive income (totaling $51 million and $209 million for the three and nine months ended September 30, 2016, respectively, and $107 million and $290 million for the three and nine months ended September 30, 2015, respectively). As of September 30, 2016, the remaining net deferred loss in accumulated OCI related to de-designated interest rate swaps was $1 million.

Derivative and Other Hedging Instrument Assets (Liabilities), at Fair Value

The table below summarizes fair value information about our derivative and other hedging instrument assets and liabilities as of September 30, 2016 and December 31, 2015 (in millions):

Derivative and Other Hedging Instruments
 
Balance Sheet Location
 
September 30, 2016
 
December 31, 2015
Interest rate swaps
 
Derivative assets, at fair value
 
$
5

 
$
31

Swaptions
 
Derivative assets, at fair value
 
6

 
17

TBA securities
 
Derivative assets, at fair value
 
50

 
29

U.S. Treasury futures - short
 
Derivative assets, at fair value
 
—

 
4

Total derivative assets, at fair value
 
 
 
$
61

 
$
81

 
 
 
 
 
 
 
Interest rate swaps
 
Derivative liabilities, at fair value
 
$
(942
)
 
$
(920
)
TBA securities
 
Derivative liabilities, at fair value
 
(4
)
 
(15
)
U.S. Treasury futures - short
 
Derivative liabilities, at fair value
 
(1
)
 
—

Total derivative liabilities, at fair value
 
 
 
$
(947
)
 
$
(935
)
 
 
 
 
 
 
 
U.S. Treasury securities - long
 
U.S. Treasury securities, at fair value
 
$
45

 
$
25

U.S. Treasury securities - short
 
Obligation to return securities borrowed under reverse repurchase agreements, at fair value
 
(5,424
)
 
(1,696
)
Total U.S. Treasury securities, net at fair value
 
 
 
$
(5,379
)
 
$
(1,671
)


The following tables summarize our interest rate swap agreements outstanding as of September 30, 2016 and December 31, 2015 (dollars in millions):
 
 
September 30, 2016
Payer Interest Rate Swaps
 
Notional
Amount 1
 
Average
Fixed
Pay Rate 2
 
Average
Receive
Rate 3
 
Net
Estimated
Fair Value
 
Average
Maturity
(Years)
≤ 3 years
 
$
19,025

 
1.05%
 
0.79%
 
$
(64
)
 
1.4
> 3 to ≤ 5 years
 
5,050

 
1.55%
 
0.76%
 
(89
)
 
3.5
> 5 to ≤ 7 years
 
7,075

 
2.23%
 
0.76%
 
(405
)
 
5.8
> 7 to ≤ 10 years
 
1,825

 
2.46%
 
0.83%
 
(158
)
 
8.6
> 10 years
 
1,175

 
3.20%
 
0.80%
 
(221
)
 
14.0
Total payer interest rate swaps
 
$
34,150

 
1.52%
 
0.78%
 
$
(937
)
 
3.5
   ________________________
1.
Notional amount includes forward starting swaps of $2.2 billion with an average forward start date of 0.5 years and an average maturity of 6.8 years from September 30, 2016.
2.
Average fixed pay rate includes forward starting swaps. Excluding forward starting swaps, the average fixed pay rate was 1.40% as of September 30, 2016.
3.
Average receive rate excludes forward starting swaps.


 
 
December 31, 2015
Payer Interest Rate Swaps
 
Notional
Amount 1
 
Average
Fixed
Pay Rate 2
 
Average
Receive
Rate 3
 
Net
Estimated
Fair Value
 
Average
Maturity
(Years)
≤ 3 years
 
$
14,775

 
1.06%
 
0.40%
 
$
(23
)
 
1.6
> 3 to ≤ 5 years
 
9,950

 
2.03%
 
0.40%
 
(203
)
 
4.0
> 5 to ≤ 7 years
 
7,175

 
2.47%
 
0.44%
 
(230
)
 
6.1
> 7 to ≤ 10 years
 
7,450

 
2.57%
 
0.39%
 
(342
)
 
8.3
> 10 years
 
1,175

 
3.20%
 
0.39%
 
(91
)
 
14.7
Total payer interest rate swaps
 
$
40,525

 
1.89%
 
0.40%
 
$
(889
)
 
4.6
   ________________________
1.
Notional amount includes forward starting swaps of $4.5 billion with an average forward start date of 0.7 years and an average maturity of 5.5 years from December 31, 2015.
2.
Average fixed pay rate includes forward starting swaps. Excluding forward starting swaps, the average fixed pay rate was 1.75% as of December 31, 2015.
3.
Average receive rate excludes forward starting swaps.
The following table summarizes our interest rate payer swaption agreements outstanding as of September 30, 2016 and December 31, 2015 (dollars in millions):
Payer Swaptions
 
Option
 
Underlying Payer Swap
Years to Expiration
 
Cost
 
Fair
Value
 
Average
Months to
Expiration
 
Notional
Amount
 
Average Fixed Pay
Rate
 
Average
Receive
Rate
(LIBOR)
 
Average
Term
(Years)
September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total ≤ 1 year
 
$
44

 
$
6

 
5
 
$
700

 
3.10%
 
3M
 
7.0
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total ≤ 1 year
 
$
74

 
$
17

 
4
 
$
2,150

 
3.51%
 
3M
 
7.0
The following table summarizes our U.S. Treasury securities as of September 30, 2016 and December 31, 2015 (in millions):
 
 
September 30, 2016
 
December 31, 2015
Maturity
 
Face Amount Net Long / (Short)
 
Cost Basis
 
Market Value
 
Face Amount Net Long / (Short)
 
Cost Basis
 
Market Value
5 years
 
$
(1,670
)
 
$
(1,683
)
 
$
(1,688
)
 
$
(250
)
 
$
(249
)
 
$
(249
)
7 years
 
(2,941
)
 
(2,930
)
 
(2,959
)
 
(354
)
 
(353
)
 
(352
)
10 years
 
(700
)
 
(697
)
 
(732
)
 
(1,085
)
 
(1,078
)
 
(1,070
)
Total U.S. Treasury securities, net
 
$
(5,311
)
 
$
(5,310
)
 
$
(5,379
)
 
$
(1,689
)
 
$
(1,680
)
 
$
(1,671
)

The following table summarizes our U.S. Treasury futures as of September 30, 2016 and December 31, 2015 (in millions):
 
 
September 30, 2016
 
December 31, 2015
Maturity
 
Notional 
Amount - Long (Short) 1
 
Cost
Basis 2
 
Market
Value 3
 
Net Carrying Value 4
 
Notional 
Amount - Long (Short) 1
 
Cost
Basis 2
 
Market
Value 3
 
Net Carrying Value 4
5 years
 
$
(730
)
 
$
(886
)
 
$
(887
)
 
$
(1
)
 
$
(730
)
 
$
(866
)
 
$
(864
)
 
$
2

10 years
 
(1,230
)
 
(1,612
)
 
(1,612
)
 
—

 
(1,130
)
 
(1,424
)
 
(1,422
)
 
2

Total U.S. Treasury futures
 
$
(1,960
)
 
$
(2,498
)
 
$
(2,499
)
 
$
(1
)
 
$
(1,860
)
 
$
(2,290
)
 
$
(2,286
)
 
$
4

_____________________
1.
Notional amount represents the par value (or principal balance) of the underlying U.S. Treasury security.
2.
Cost basis represents the forward price to be paid / (received) for the underlying U.S. Treasury security.
3.
Market value represents the current market value of U.S. Treasury futures as of period-end.
4.
Net carrying value represents the difference between the market value and the cost basis of U.S. Treasury futures as of period-end and is reported in derivative assets / (liabilities), at fair value in our consolidated balance sheets.
The following tables summarize our TBA securities as of September 30, 2016 and December 31, 2015 (in millions):
 
 
September 30, 2016
 
December 31, 2015
TBA Securities by Coupon
 
Notional 
Amount - Long (Short) 1
 
Cost
Basis 2
 
Market
Value 3
 
Net Carrying Value 4
 
Notional 
Amount - Long (Short) 1
 
Cost
Basis 2
 
Market
Value 3
 
Net Carrying Value 4
15-Year TBA securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2.5%
 
$
1,839

 
$
1,891

 
$
1,899

 
$
8

 
$
(80
)
 
$
(81
)
 
$
(80
)
 
$
1

3.0%
 
293

 
306

 
307

 
1

 
225

 
233

 
232

 
(1
)
3.5%
 
95

 
100

 
100

 
—

 
136

 
143

 
142

 
(1
)
Total 15-Year TBAs
 
2,227

 
2,297

 
2,306

 
9

 
281

 
295

 
294

 
(1
)
30-Year TBA securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.0% 5
 
7,031

 
7,276

 
7,303

 
27

 
3,914

 
3,911

 
3,916

 
5

3.5%
 
3,156

 
3,322

 
3,327

 
5

 
1,497

 
1,536

 
1,539

 
3

4.0%
 
2,368

 
2,537

 
2,542

 
5

 
1,575

 
1,658

 
1,665

 
7

4.5%
 
99

 
108

 
108

 
—

 
28

 
30

 
30

 
—

Total 30-Year TBAs
 
12,654

 
13,243

 
13,280

 
37

 
7,014

 
7,135

 
7,150

 
15

Total net TBA securities
 
$
14,881

 
$
15,540

 
$
15,586

 
$
46

 
$
7,295

 
$
7,430

 
$
7,444

 
$
14

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2016
 
December 31, 2015
TBA Securities by Issuer
 
Notional 
Amount - Long (Short) 1
 
Cost
Basis 2
 
Market
Value 3
 
Net Carrying Value 4
 
Notional 
Amount - Long (Short) 1
 
Cost
Basis 2
 
Market
Value 3
 
Net Carrying Value 4
Fannie Mae
 
$
12,760

 
$
13,328

 
$
13,365

 
$
37

 
$
6,033

 
$
6,145

 
$
6,159

 
$
14

Freddie Mac
 
1,648

 
1,723

 
1,729

 
6

 
689

 
703

 
703

 
—

Ginnie Mae
 
473

 
489

 
492

 
3

 
573

 
582

 
582

 
—

TBA securities, net
 
$
14,881

 
$
15,540

 
$
15,586

 
$
46

 
$
7,295

 
$
7,430

 
$
7,444

 
$
14

_____________________
1.
Notional amount represents the par value (or principal balance) of the underlying agency security.
2.
Cost basis represents the forward price to be paid / (received) for the underlying agency security.
3.
Market value represents the current market value of the TBA contract (or of the underlying agency security) as of period-end.
4.
Net carrying value represents the difference between the market value and the cost basis of the TBA contract as of period-end and is reported in derivative assets / (liabilities), at fair value in our consolidated balance sheets.
5.
Includes $2.6 billion of forward purchases of agency MBS specified pools as of September 30, 2016.
Gain (Loss) From Derivative Instruments and Other Securities, Net
The tables below summarize changes in our derivative and other hedge portfolio and their effect on our consolidated statements of comprehensive income for the three and nine months ended September 30, 2016 and 2015 (in millions):

 
 
Three Months Ended September 30, 2016
Derivative and Other Hedging Instruments
 
Notional Amount
Long/(Short)
June 30, 2016
 
Additions
 
Settlement, Termination,
Expiration or
Exercise
 
Notional Amount
Long/(Short) September 30, 2016
 
 
Amount of
Gain/(Loss)
Recognized in
Income on
Derivatives 1
TBA securities, net
 
$
6,756

 
37,881

 
(29,756
)
 
$
14,881

 
 
$
67

Interest rate swaps
 
$
(35,125
)
 
(2,400
)
 
3,375

 
$
(34,150
)
 
 
153

Payer swaptions
 
$
(1,050
)
 
—

 
350

 
$
(700
)
 
 
(1
)
U.S. Treasury securities - short position
 
$
(2,930
)
 
(2,696
)
 
270

 
$
(5,356
)
 
 
14

U.S. Treasury securities - long position
 
$
62

 
90

 
(107
)
 
$
45

 
 
1

U.S. Treasury futures contracts - short position
 
$
(1,960
)
 
(1,960
)
 
1,960

 
$
(1,960
)
 
 
15

 
 
 
 
 
 
 
 
 
 
 
$
249

  ________________________________
1.
Excludes a net loss of $2 million from debt of consolidated VIEs, a net loss of $6 million from interest and principal-only securities and other miscellaneous net gain of $1 million recognized in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income.

 
 
Three Months Ended September 30, 2015
Derivative and Other Hedging Instruments
 
Notional Amount
Long/(Short)
June 30, 2015
 
Additions
 
Settlement, Termination,
Expiration or
Exercise
 
Notional Amount
 Long/(Short) September 30, 2015
 
 
Amount of
Gain/(Loss)
Recognized in
Income on
Derivatives 1
TBA securities, net
 
$
6,941

 
33,403

 
(33,216
)
 
$
7,128

 
 
$
213

Interest rate swaps
 
$
(44,925
)
 
(1,450
)
 
1,200

 
$
(45,175
)
 
 
(966
)
Payer swaptions
 
$
(5,450
)
 
—

 
1,800

 
$
(3,650
)
 
 
(23
)
U.S. Treasury securities - short position
 
$
(2,250
)
 
(4,335
)
 
5,284

 
$
(1,301
)
 
 
(25
)
U.S. Treasury securities - long position
 
$
5,192

 
4,704

 
(9,121
)
 
$
775

 
 
29

U.S. Treasury futures contracts - short position
 
$
(730
)
 
(730
)
 
730

 
$
(730
)
 
 
(23
)
 
 
 
 
 
 
 
 
 
 
 
$
(795
)
  ______________________
1.
Excludes a net gain of $7 million from debt of consolidated VIEs and a net gain of $10 million from interest and principal-only securities recognized in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income.
 
 
Nine Months Ended September 30, 2016
Derivative and Other Hedging Instruments
 
Notional Amount
Long/(Short)
December 31, 2015
 
Additions
 
Settlement, Termination,
Expiration or
Exercise
 
Notional Amount
Long/(Short) September 30, 2016
 
 
Amount of
Gain/(Loss)
Recognized in
Income on
Derivatives 1
TBA securities, net
 
$
7,295

 
75,906

 
(68,320
)
 
$
14,881

 
 
$
391

Interest rate swaps
 
$
(40,525
)
 
(5,950
)
 
12,325

 
$
(34,150
)
 
 
(1,208
)
Payer swaptions
 
$
(2,150
)
 
—

 
1,450

 
$
(700
)
 
 
(12
)
U.S. Treasury securities - short position
 
$
(1,714
)
 
(5,329
)
 
1,687

 
$
(5,356
)
 
 
(142
)
U.S. Treasury securities - long position
 
$
25

 
495

 
(475
)
 
$
45

 
 
7

U.S. Treasury futures contracts - short position
 
$
(1,860
)
 
(5,880
)
 
5,780

 
$
(1,960
)
 
 
(106
)
 
 
 
 
 
 
 
 
 
 
 
$
(1,070
)
  ________________________________
1.
Excludes a net loss of $8 million from debt of consolidated VIEs, a net gain of $5 million from interest and principal-only securities and other miscellaneous net gains of $15 million recognized in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income.

 
 
Nine Months Ended September 30, 2015
Derivative and Other Hedging Instruments
 
Notional Amount
Long/(Short)
December 31, 2014
 
Additions
 
Settlement, Termination,
Expiration or
Exercise
 
Notional Amount
 Long/(Short) September 30, 2015
 
 
Amount of
Gain/(Loss)
Recognized in
Income on
Derivatives 1
TBA securities, net
 
$
14,412

 
97,270

 
(104,554
)
 
$
7,128

 
 
$
337

Interest rate swaps
 
$
(43,700
)
 
(4,950
)
 
3,475

 
$
(45,175
)
 
 
(1,278
)
Payer swaptions
 
$
(6,800
)
 
(500
)
 
3,650

 
$
(3,650
)
 
 
(27
)
Receiver swaptions
 
$
4,250

 
—

 
(4,250
)
 
$
—

 
 
4

U.S. Treasury securities - short position
 
$
(5,392
)
 
(10,732
)
 
14,823

 
$
(1,301
)
 
 
(89
)
U.S. Treasury securities - long position
 
$
2,411

 
31,915

 
(33,551
)
 
$
775

 
 
(35
)
U.S. Treasury futures contracts - short position
 
$
(730
)
 
(2,190
)
 
2,190

 
$
(730
)
 
 
(28
)
 
 
 
 
 
 
 
 
 
 
 
$
(1,116
)
  ______________________
1.
Excludes a net gain of $16 million from debt of consolidate VIEs, a net gain of $14 million from interest and principal-only securities and other miscellaneous net losses of $4 million recognized in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income.