Note 9 -Derivatives

We enter into derivative transactions to manage our interest rate risk exposure. These transactions include entering into interest rate swap contracts and interest rate swaptions as well as purchasing or selling Futures Contracts. These transactions are designed to lock in funding costs for repurchase agreements associated with our assets in such a way to help assure the realization of net interest margins. Such transactions are based on assumptions about prepayments which, if not realized, will cause transaction results to differ from expectations. Basis swap contracts allow us to exchange one floating interest rate basis for another, for example, 3 month LIBOR and Fed Funds Rates, thereby allowing us to diversify our floating rate basis exposures. We also utilize forward contracts for the purchase or sale of TBA Agency Securities.

We have agreements with our derivative counterparties that provide for the posting of collateral based on the fair values of our interest rate swap contracts, swaptions, basis swap contracts and TBA Agency Securities. Through this margin process, either we or our swap counterparty may be required to pledge cash or Agency Securities as collateral. Collateral requirements vary by counterparty and change over time based on the fair value, notional amount and remaining term of the contracts. Certain interest rate swap contracts provide for cross collateralization and cross default with repurchase agreements and other contracts with the same counterparty.

Interest rate swaptions generally provide us the option to enter into an interest rate swap agreement at a certain point of time in the future with a predetermined notional amount, stated term and stated rate of interest in the fixed leg and interest rate index on the floating leg.

Our Futures Contracts are traded on the CME which requires the use of daily mark-to-market collateral and the CME provides substantial credit support. The collateral requirements of the CME require us to pledge assets under a bi-lateral margin arrangement, including either cash or Agency Securities and these requirements may vary and change over time based on the market value, notional amount and remaining term of the Futures Contracts. In the event we are unable to meet a margin call under one of our Futures Contracts, the counterparty to such agreement may have the option to terminate or close-out all of the outstanding Futures Contracts with us. In addition, any close-out amount due to the counterparty upon termination of the counterparty’s transactions would be immediately payable by us pursuant to the applicable agreement.

TBA Agency Securities are forward contracts for the purchase (“long position”) or sale (“short position”) of Agency Securities at a predetermined price, face amount, issuer, coupon and stated maturity on an agreed-upon future date. The specific Agency Securities delivered into the contract upon the settlement date, published each month by the Securities Industry and Financial Markets Association, are not known at the time of the transaction. We may enter into TBA Agency Securities as a means of hedging against short-term changes in interest rates. We may also enter into TBA Agency Securities as a means of acquiring or disposing of Agency Securities and we may from time to time utilize TBA dollar roll transactions to finance Agency Security purchases. We estimate the fair value of TBA Agency Securities based on similar methods used to value our Agency Securities.

We did not have any TBA Agency Securities outstanding at March 31, 2016 and December 31, 2015.

The following tables present information about our derivatives at March 31, 2016 and December 31, 2015.

March 31, 2016



Derivative Type	Remaining / Underlying Term	Weighted Average Remaining Swap / Option Term (Months)	Weighted Average Rate		Notional Amount (3)		Asset Fair Value (1)		Liability Fair Value (1)
Interest rate swap contracts	13-24 Months	19	0.80	%	$	650,000	$	—	$	(2,532	)
Interest rate swap contracts	25-36 Months	25	1.29	%	400,000		—		(5,666		)
Interest rate swap contracts	37-48 Months	44	1.47	%	2,350,000		—		(71,913		)
Interest rate swap contracts	61-72 Months	70	2.04	%	275,000		—		(18,190		)
Interest rate swap contracts	73-84 Months	80	2.10	%	1,900,000		—		(101,528		)
Interest rate swap contracts	109-120 Months	119	2.27	%	750,000		—		(70,939		)
Interest rate swap contracts	121-132 Months	123	2.50	%	250,000		—		(27,917		)
Basis swap contracts (2)	0-60 Months	19	0.22	%	2,000,000		1,665		—
Total or Weighted Average					$	8,575,000	$	1,665	$	(298,685	)


(1)	See Note 5, “Fair Value of Financial Instruments” for additional discussion.


(2)	Weighted average rate is the spread over the pay index.


(3)	Notional amount includes $1,175,000 of forward starting interest rate swap contracts which become effective within 3 months.

December 31, 2015



Derivative Type	Remaining / Underlying Term	Weighted Average Remaining Swap / Option Term (Months)	Weighted Average Rate		Notional Amount		Asset Fair Value (1)		Liability Fair Value (1)
Interest rate swap contracts	13-24 Months	19	0.63	%	350,000		265		(87		)
Interest rate swap contracts	25-36 Months	27	1.16	%	700,000		192		(1,633		)
Interest rate swap contracts	37-48 Months	47	1.46	%	2,000,000		—		(18,120		)
Interest rate swap contracts	49-60 Months	49	1.53	%	350,000		—		(3,085		)
Interest rate swap contracts	73-84 Months	75	2.05	%	1,025,000		—		(26,047		)
Interest rate swap contracts	85-96 Months	86	2.11	%	1,375,000		—		(23,543		)
Interest rate swap contracts	109-120 Months	108	2.66	%	1,000,000		—		(92,927		)
Interest rate swap contracts	121-132 Months	123	2.30	%	2,000,000		—		(67,858		)
Basis swap contracts (2)	0-60 Months	22	0.22	%	2,000,000		542		(1		)
Total or Weighted Average					$	10,800,000	$	999	$	(233,301	)


(1)	See Note 5, “Fair Value of Financial Instruments” for additional discussion.

We have netting arrangements in place with all derivative counterparties pursuant to standard documentation developed by the International Swap and Derivatives Association. We are also required to post or hold cash collateral based upon the net underlying market value of our open positions with the counterparty.

The following tables present information about interest rate swap contracts and basis swap contracts and the potential effects of netting if we were to offset the assets and liabilities of these financial instruments on the accompanying condensed consolidated balance sheets. Currently, we present these financial instruments at their gross amounts and they are included in derivatives, at fair value on the accompanying condensed consolidated balance sheet at March 31, 2016.



March 31, 2016			Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet
Assets	Gross and Net Amounts of Assets Presented in the Condensed Consolidated Balance Sheet		Financial Instruments			Cash Collateral		Net Amount
Interest rate swap contracts	$	—	$	(298,685	)	$	304,396	$	5,711
Basis swap contracts	1,665		—			—		1,665
Totals	$	1,665	$	(298,685	)	$	304,396	$	7,376



March 31, 2016				Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet
Liabilities	Gross and Net Amounts of Liabilities Presented in the Condensed Consolidated Balance Sheet			Financial Instruments		Cash Collateral		Net Amount
Interest rate swap contracts	$	(298,685	)	$	298,685	$	—	$	—
Totals	$	(298,685	)	$	298,685	$	—	$	—

The following tables present information about interest rate swap contracts and Futures Contracts and the potential effects of netting if we were to offset the assets and liabilities of these financial instruments on the accompanying condensed consolidated balance sheets. Currently, we present these financial instruments at their gross amounts and they are included in derivatives, at fair value on the accompanying condensed consolidated balance sheet at December 31, 2015.



December 31, 2015			Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet
Assets	Gross and Net Amounts of Assets Presented in the Condensed Consolidated Balance Sheet		Financial Instruments			Cash Collateral		Net Amount
Interest rate swap contracts	$	457	$	(233,301	)	$	241,604	$	8,760
Basis swap contracts	542		—			—		542
Totals	$	999	$	(233,301	)	$	241,604	$	9,302



December 31, 2015				Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet
Liabilities	Gross and Net Amounts of Liabilities Presented in the Condensed Consolidated Balance Sheet			Financial Instruments		Cash Collateral		Net Amount
Interest rate swap contracts	$	(233,301	)	$	233,301	$	—	$	—
Totals	$	(233,301	)	$	233,301	$	—	$	—

The following table represents the location and information regarding our derivatives which are included in Other Income (Loss) in the accompanying condensed consolidated statements of operations for the quarters ended March 31, 2016 and March 31, 2015.



		Income (Loss) Recognized
		For the Quarter Ended
Derivatives	Location on condensed consolidated statements of operations	March 31, 2016			March 31, 2015
Interest rate swap contracts:
Realized gain (loss)	Realized loss on derivatives	$	(226,754	)	$	48,931
Interest income	Realized loss on derivatives	7,449			4,178
Interest expense	Realized loss on derivatives	(26,991		)	(44,919		)
Changes in fair value	Unrealized gain (loss) on derivatives	(89,989		)	(216,426		)
		$	(336,285	)	$	(208,236	)
Futures Contracts:
Realized loss	Realized loss on derivatives	—			(91		)
Changes in fair value	Unrealized gain (loss) on derivatives	—			88
		$	—		$	(3	)
Basis swap contracts:
Interest income	Realized loss on derivatives	472			—
Interest expense	Realized loss on derivatives	(281		)	—
Changes in fair value	Unrealized gain (loss) on derivatives	931			—
		$	1,122		$	—
Totals		$	(335,163	)	$	(208,239	)