Derivative Instruments

The Company's derivatives may include interest rate swaps, options, futures contracts, currency swaps and forwards, TBAs, Agency and Non-Agency Interest-Only Strips that are classified as derivatives, credit default swaps and total return swaps.

The following table summarizes the Company's derivative instruments at December 31, 2017 and December 31, 2016 (dollars in thousands):



			December 31, 2017							December 31, 2016
Derivative Instrument	Designation	Balance Sheet Location	Notional Amount		Fair Value⁽¹⁾			Accrued Interest Payable (receivable)		Notional Amount		Fair Value⁽¹⁾			Accrued Interest Payable (receivable)
Interest rate swaps, asset	Non-Hedge	Derivative assets, at fair value	$	—	$	—		$	—	$	2,298,300	$	20,466		$	1,145
Options, asset	Non-Hedge	Derivative assets, at fair value	320,000		100			—		—		—			—
Futures contracts, asset	Non-Hedge	Derivative assets, at fair value	480,000		628			—		56,900		71			—
Foreign currency forward contracts, asset	Non-Hedge	Derivative assets, at fair value	—		—			—		784		34			—
Total derivative instruments, assets					728			—				20,571			1,145
Interest rate swaps, liability	Non-Hedge	Derivative liability, at fair value	3,252,200		(4,191		)	—		5,046,300		(177,929		)	3,054
Options, liability	Non-Hedge	Derivative liability, at fair value	320,000		(50		)	—		—		—			—
Total return swap, liability	Non-Hedge	Derivative liability, at fair value	—		—			—		47,059		(1,673		)	(94		)
Futures contracts, liability	Non-Hedge	Derivative liability, at fair value	—		—			—		176,300		(2,487		)	—
Foreign currency forward contracts, liability	Non-Hedge	Derivative liability, at fair value	—		—			—		1,532		(69		)	—
Credit default swaps, liability	Non-Hedge	Derivative liability, at fair value	14,815		(95		)	—		—		—			—
TBA securities, liability	Non-Hedge	Derivative liability, at fair value	125,000		(10		)	—		—		—			—
Total derivative instruments, liabilities					(4,346		)	—				(182,158		)	2,960
Total derivative instruments, net					$	(3,618	)	$	—			$	(161,587	)	$	4,105

(1) Fair value excludes accrued interest.

The following tables summarize the effect of the Company's derivative positions, including Interest-Only Strips characterized as derivatives and TBAs, which are reported in "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations for the years ended December 31, 2017, December 31, 2016 and December 31, 2015 (dollars in thousands):



	Realized Gain (Loss), net
Period End	Other Settlements / Expirations			Variation Margin Settlement		Return (Recovery) of Basis			Mark-to-market adjustments			Contractual interest income (expense), net⁽¹⁾			Total
Year ended December 31, 2017
Interest rate swaps	$	(150,607	)	$	20,258	$	524		$	148,947		$	(14,606	)	$	4,516
Interest rate swaptions	(115		)	—		—			—			—			(115		)
Interest-Only Strips—accounted for as derivatives	526			—		(5,995		)	(902		)	7,438			1,067
Options	(1,453		)	—		—			(300		)	—			(1,753		)
Futures contracts	(9,130		)	—		—			3,044			—			(6,086		)
Foreign currency forwards	32			—		—			35			—			67
Total return swap	(552		)	—		—			1,673			469			1,590
Credit default swaps	(11		)	—		—			(22		)	—			(33		)
TBAs	4,049			—		—			(10		)	—			4,039
Total	$	(157,261	)	$	20,258	$	(5,471	)	$	152,465		$	(6,699	)	$	3,292

Year ended December 31, 2016
Interest rate swaps	$	(33,999	)	$	—	$	672		$	11,013		$	(27,903	)	$	(50,217	)
Interest rate swaptions	(1,035		)	—		—			1,631			—			596
Interest-Only Strips—accounted for as derivatives	1,317			—		(11,438		)	(4,726		)	14,148			(699		)
Options	4,756			—		—			—			—			4,756
Futures contracts	23,609			—		—			(1,781		)	—			21,828
Foreign currency forwards	(66		)	—		—			(56		)	—			(122		)
Foreign currency swaps	6,771			—		—			(7,168		)	283			(114		)
Total return swap	38			—		—			(1,673		)	1,121			(514		)
TBAs	6,126			—		—			(2,375		)	—			3,751
Total	$	7,517		$	—	$	(10,766	)	$	(5,135	)	$	(12,351	)	$	(20,735	)

Year ended December 31, 2015
Interest rate swaps	$	23,680		$	—	$	1,250		$	(68,843	)	$	(20,366	)	$	(64,279	)
Interest rate swaptions	(5,242		)	—		—			(1,486		)	—			(6,728		)
Interest-Only Strips—accounted for as derivatives	595			—		(17,265		)	(4,283		)	21,872			919
Options	(711		)	—		—			—			—			(711		)
Futures contracts	(527		)	—		—			105			—			(422		)
Foreign currency forwards	(901		)	—		—			323			—			(578		)
Foreign currency swaps	—			—		—			3,311			795			4,106
TBAs	1,524			—		—			(2,726		)	—			(1,202		)
Total	$	18,418		$	—	$	(16,015	)	$	(73,599	)	$	2,301		$	(68,895	)


(1)	Contractual interest income (expense), net on derivative instruments includes interest settlement paid or received.

At December 31, 2017 and December 31, 2016, the Company had cash pledged as collateral for its derivatives of approximately $63.3 million and approximately $206.6 million respectively, which is reported in "Due from counterparties" in the Consolidated Balance Sheets. Effective in January 2017, variation margin of CME cleared derivatives are treated as settlements of the derivative contract as opposed to cash collateral. The December 31, 2017 cash collateral balance of $63.3 million represents upfront cash collateral upon the Company entering into the derivative transaction and cash collateral for derivatives not cleared through the CME. As a result of the change in the CME rules, the $157.9 million of previously posted cash collateral is now recorded as a reduction in the derivative liability. The Company also held cash collateral against derivatives of $0 and approximately $470 thousand at December 31, 2017 and December 31, 2016, respectively, which is reported in "Due to counterparties" in the Consolidated Balance Sheets.

Interest rate swaps and interest rate swaptions

The Company enters into interest rate swaps and interest rate swaptions to mitigate its exposure to higher short-term interest rates in connection with its repurchase agreements. Interest rate swaps generally involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the interest rate swap without exchange of the underlying notional amount. Notwithstanding the foregoing, in order to manage its hedge position with regard to its liabilities, the Company on occasion will enter into interest rate swaps which involve the receipt of fixed-rate amounts from a counterparty in exchange for the Company making variable-rate payments over the life of the interest rate swap without exchange of the underlying notional amount. The Company also enters into forward starting swaps and interest rate swaptions to help mitigate the effects of changes in interest rates on a portion of its borrowings under repurchase agreements. Interest rate swaptions provide the Company 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. On occasion the Company may enter into a MAC interest rate swap in which it may receive or make a payment at the time of entering such interest rate swap to compensate for the out of the market nature of such interest rate swap. Similar to all other interest rate swaps, these interest rate swaps are also subject to margin requirements as previously described.

The Company has not elected to account for its interest rate swaps as "hedges" under GAAP, accordingly the change in fair value of the interest rate swaps not designated in hedging relationships are recorded together with periodic net interest settlement amounts in "Gain (loss) on derivatives instruments, net" in the Consolidated Statements of Operations.

Interest Rate Swaps

In April 2017, we restructured our hedge positions, effectively terminating fix-pay interest rate swaps with a notional value of approximately $3.2 billion and variable-pay interest rate swaps with a notional value of approximately $2.0 billion to effectively hedge our debt and reduce swap related interest expense.

The following tables summarize the average fixed pay rate, average floating receive rate and average maturity for the Company's interest rate swaps as of December 31, 2017 and December 31, 2016 (dollars in thousands):



	December 31, 2017
Remaining Interest Rate Swap Term	Notional Amount		Average Fixed Pay Rate		Average Floating Receive Rate		Average Maturity (Years)	Forward Starting ⁽¹⁾
Greater than 1 year and less than 3 years	$	600,000	1.6	%	1.5	%	1.8	—	%
Greater than 3 years and less than 5 years	960,000		2.0	%	1.4	%	4.3	—	%
Greater than 5 years	1,692,200		2.5	%	1.4	%	10.5	90.2	%
Total	$	3,252,200	2.2	%	1.4	%	7.1	46.9	%

(1) Represents the percentage of notional that is forward starting



	December 31, 2016
Remaining Interest Rate Swap Term	Notional Amount		Average Fixed Pay Rate		Average Floating Receive Rate		Average Maturity (Years)	Forward Starting⁽¹⁾
1 year or less	$	105,900	0.8	%	0.8	%	0.8	—	%
Greater than 1 year and less than 3 years	993,000		1.2	%	0.9	%	1.4	88.1	%
Greater than 3 years and less than 5 years	1,861,700		1.9	%	0.9	%	3.9	36.5	%
Greater than 5 years	1,701,600		3.1	%	0.9	%	10.5	6.5	%
Total	$	4,662,200	2.1	%	0.9	%	5.7	35.7	%

(1) Represents the percentage of notional that is forward starting

As of December 31, 2017 and December 31, 2016, the Company has entered into fixed pay forward starting swaps of approximately $1.5 billion and $1.7 billion respectively, which have weighted average forward starting dates of 4 months and 4.5 months, respectively.

There were no variable pay-rate interest rate swaps as of December 31, 2017. The following table summarizes the average variable pay rate, average fixed pay receive rate and average maturity for the Company's interest rate swaps as of December 31, 2016 (dollars in thousands):



	December 31, 2016
Remaining Interest Rate interest rate swap Term	Notional Amount		Fair Value—Asset (Liability), net			Average Variable Pay Rate		Average Fixed Received Rate		Average Maturity (Years)	Forward Starting
Greater than 3 years and less than 5 years	$	1,811,400	$	(24,112	)	0.9	%	1.4	%	3.7	—	%
Greater than 5 years	871,000		(18,749		)	0.9	%	2.2	%	12.3	—
Total	$	2,682,400	$	(42,861	)	0.9	%	1.7	%	6.5	—	%

Options

The Company may enter into options on U.S. Treasuries. As of December 31, 2017, the Company had long position options on U.S. Treasuries with a notional amount of $320.0 million and a fair value in an asset position of $100 thousand and short position options on U.S. Treasuries with a notional amount of $320.0 million and a fair value in a liability position of $50 thousand. As of December 31, 2016, the Company had no option contracts on U.S. Treasuries.

Futures Contracts

The Company may enter into Eurodollar, Volatility Index and U.S. Treasury futures. As of December 31, 2017, the Company had entered into contracts to sell or short positions for U.S. Treasuries with a notional amount of $480.0 million, a fair value in an asset position of $628 thousand and an expiration date of March 2018. As of December 31, 2016, the Company had entered into contracts to buy or long positions for U.S. Treasuries with a notional amount of $56.9 million, a fair value in an asset position of $71 thousand and an expiration date of March 2017. In addition, as of December 31, 2016, the Company had sale contracts or short positions for U.S. Treasuries with a notional amount of $176.3 million, a fair value in an liability position of $2.5 million and an expiration date of March 2017.

Currency Swaps and Forwards

The Company has invested in and, in the future, may invest in additional securities which are denominated in a currency or currencies other than U.S. dollars. Similarly, it has and may in the future, finance such assets in a currency or currencies other than U.S. dollars. In order to mitigate the impact to the Company, the Company may enter into derivative financial instruments, including foreign currency swaps and foreign currency forwards, to manage fluctuations in the valuation between U.S. dollars and such foreign currencies. Foreign currency swaps involve the payment of a foreign currency at fixed interest rate on a fixed notional amount and the receipt of U.S. dollars at a fixed interest rate on a fixed notional amount. Foreign currency forwards provide for the payment of a fixed amount of a foreign currency in exchange for a fixed amount of U.S. dollars at a date certain in the future. The carrying value of foreign currency swaps and forwards is included in "Derivative assets, at fair value" and "Derivative liability, at fair value" in the Consolidated Balance Sheets with changes in valuation included in "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations. The Company had no foreign currency swaps at December 31, 2017. The following is a summary of the Company's foreign currency forwards at December 31, 2016 (dollars and euros in thousands):



	December 31, 2016
Derivative Type	Notional Amount		Notional (USD Equivalent)		Maturity	Fair Value
Buy USD/Sell EUR currency forward	€	710	$	784	January 2017	$	34
Currency forwards, assets	€	710	$	784	n/a	$	34
Buy EUR/Sell USD currency forward	€	673	$	735	February 2017	$	(23	)
Buy EUR/Sell USD currency forward	€	710	$	797	January 2017	$	(46	)
Currency forwards, liabilities	€	1,383	$	1,532	n/a	$	(69	)
Total currency forwards	€	2,093	$	2,316	n/a	$	(35	)

To-be-announced securities

The Company purchased or sold TBAs during the years ended December 31, 2017 and 2016. As of December 31, 2016, the Company had no contracts to purchase ("long position") and sell ("short position") TBAs on a forward basis. The following is a summary of the Company's long and short TBA positions reported, as of December 31, 2017, reported in "Derivative assets, at fair value" and "Derivative liability, at fair value" in the Consolidated Balance Sheets (dollars in thousands):



	December 31, 2017
	Notional Amount		Fair Value
Purchase contracts, liability	$	125,000	$	(10	)
TBA securities, liability	125,000		(10		)
TBA securities, net	$	125,000	$	(10	)

The following table presents additional information about the Company's contracts to purchase and sell TBAs for the year ended December 31, 2017 (dollars in thousands):



	Notional Amount				Settlement, Termination,			Notional Amount
	December 31, 2016		Additions		Expiration or Exercise			December 31, 2017
Purchase of TBAs	$	—	$	5,843,200	$	(5,718,200	)	$	125,000
Sale of TBAs	$	—	$	5,718,200	$	(5,718,200	)	$	—

Interest-Only Strips

The Company also invests in Interest-Only Strips. In determining the classification of its holdings of Interest-Only Strips, the Company evaluates the securities to determine if the nature of the cash flows has been altered from that of the underlying mortgage collateral. Generally, Interest-Only Strips for which the security represents a strip off of a mortgage pass through security will be considered a hybrid instrument classified as a MBS investment in the Consolidated Balance Sheets utilizing the fair value option. Alternatively, those Interest-Only Strips, for which the underlying mortgage collateral has been included into a structured security that alters the cash flows from the underlying mortgage collateral, are accounted for as derivatives at fair value with changes recognized in "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations, along with any interest received. The carrying value of these Interest-Only Strips is included in "Mortgage-backed securities and other securities, at fair value" in the Consolidated Balance Sheets.

Total Return Swap

In 2016, the Company entered into a total return swap and in the future, may continue to enter into these types of credit derivatives. This swap transfers the total return of the referenced asset, including interim cash flows and capital appreciation or depreciation from a specified price to the Company. The total return swap has a referenced asset which is a security collateralized by residential loans with a notional amount of €51.0 million. The Company receives interest from the referenced asset equal to EURIBOR plus 2.75% and is required to pay the counterparty EURIBOR plus 0.50% through June 23, 2019, with the spread decreasing to 0.25% through December 2019, with the spread further decreasing to 0% through the maturity date of the referenced asset in December 2020. In 2017, the Company terminated its position realizing a loss of approximately $569 thousand, which is reported in "Gain (loss) on derivative instruments, net" for the year ended December 31, 2017. The Company had no total return swaps at December 31, 2017.

Credit Default Swaps

In 2017, the Company entered into credit default swaps and, in the future, may continue to enter into these type of credit derivatives. As of December 31, 2017, the Company had entered into credit default swaps with a notional amount of approximately $14.8 million, a fair value in a liability position of $95 thousand and a maturity date of May 2063. Under these instruments, the Company makes a monthly premium payment over the term of the contract in exchange for the counterparty making a payment to the Company for losses of the reference securities, upon the occurrence of a specified credit event.