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Derivative Instruments
 12 Months Ended
Dec. 31, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments Derivative Instruments
The Company's derivatives may include interest rate swaps, options, futures contracts, 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, 2019 and December 31, 2018 (dollars in thousands):
 
 
 
 
 
December 31, 2019
 
December 31, 2018
Derivative Instrument
Accounting Designation
 
Consolidated Balance Sheets Location
 
Notional
Amount
 
Fair
Value
 
Notional
Amount
 
Fair
Value
Interest rate swaps, asset
Non-Hedge
 
Derivative assets, at fair value
 
$
2,701,000

 
$
3,017

 
$
1,128,400

 
$
2,057

Credit default swaps, asset
Non-Hedge
 
Derivative assets, at fair value
 
60,100

 
948

 
50,000

 
549

TBA securities, asset
Non-Hedge
 
Derivative assets, at fair value
 
1,000,000

 
1,146

 
—

 
—

Total derivative instruments, assets
 
 
 
 
 

 
5,111

 
 

 
2,606

Interest rate swaps, liability
Non-Hedge
 
Derivative liability, at fair value
 
1,255,000

 
(501
)
 
2,727,800

 
(5,473
)
Futures contracts, liability
Non-Hedge
 
Derivative liability, at fair value
 
—

 
—

 
300,400

 
(4,657
)
Credit default swaps, liability
Non-Hedge
 
Derivative liability, at fair value
 
90,900

 
(3,795
)
 
—

 
—

TBA securities, liability
Non-Hedge
 
Derivative liability, at fair value
 
1,000,000

 
(2,074
)
 
—

 
—

Total derivative instruments, liabilities
 
 
 
 
 

 
(6,370
)
 
 

 
(10,130
)
Total derivative instruments, net
 
 
 
 
 

 
$
(1,259
)
 
 
 
$
(7,524
)
The following tables summarize the effects 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, 2019, December 31, 2018 and December 31, 2017 (dollars in thousands):

 
Realized Gain (Loss), net
 
 
 
 
 
 
 
 
Description
Other Settlements / Expirations
 
Variation Margin Settlement
 
Return
(Recovery) of
Basis
 
Mark-to-Market
 
Contractual interest
income (expense),
net
 
Total
Year ended December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
$
(4,978
)
 
$
(108,169
)
 
$
5,769

 
$
5,140

 
$
3,732

 
$
(98,506
)
Interest rate swaptions
(332
)
 
—

 
—

 
—

 
—

 
(332
)
Interest-Only Strips—accounted for as derivatives
—

 
—

 
(2,688
)
 
(508
)
 
3,277

 
81

Options
1,378

 
—

 
—

 
—

 
—

 
1,378

Futures contracts
(12,862
)
 
—

 
—

 
4,657

 
—

 
(8,205
)
Credit default swaps
(178
)
 
—

 
—

 
1,029

 
—

 
851

TBAs
1,934

 
—

 
—

 
(928
)
 
—

 
1,006

Total
$
(15,038
)
 
$
(108,169
)
 
$
3,081

 
$
9,390

 
$
7,009

 
$
(103,727
)
 
 
 
 
 
 
 
 
 
 
 
 
Year ended December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
$
163

 
$
76,979

 
$
2,465

 
$
(5,147
)
 
$
3,693

 
$
78,153

Interest-Only Strips—accounted for as derivatives
—

 
—

 
(3,661
)
 
(655
)
 
4,511

 
195

Options
(871
)
 
—

 
—

 
300

 
—

 
(571
)
Futures contracts
6,112

 
—

 
—

 
(5,285
)
 
—

 
827

Credit default swaps
(241
)
 
—

 
—

 
396

 
—

 
155

TBAs
(800
)
 
—

 
—

 
10

 
—

 
(790
)
Total
$
4,363

 
$
76,979

 
$
(1,196
)
 
$
(10,381
)
 
$
8,204

 
$
77,969

 
 
 
 
 
 
 
 
 
 
 
 
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


At December 31, 2019 and December 31, 2018, the Company had cash pledged as collateral for its derivatives which represents upfront cash collateral upon the Company entering into an interest rate swap transaction and cash collateral for other derivatives of approximately $55.4 million and approximately $38.0 million respectively, which is reported in "Due from 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. The Company generally enters into MAC (Market Agreed Coupon) interest rate swaps 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. At December 31, 2019, the Company had made upfront cash collateral payments of $52.6 million, which is classified in "Due from counterparties" in the Consolidated Balance Sheets. 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
The following tables provide additional information on our fixed pay interest rate swaps and the variable pay interest rate swap as of December 31, 2019 and December 31, 2018 (dollars in thousands):
 
December 31, 2019
Fixed Pay Interest Rate Swap Remaining Term
Notional
Amount
 
Average Fixed Pay
Rate
 
Average Floating Receive
Rate
 
Average
Maturity (Years)
1 year or less
$
200,000

 
1.8
%
 
1.9
%
 
0.4
Greater than 3 years and less than 5 years
622,400

 
2.6
%
 
1.9
%
 
4.1
Greater than 5 years
1,728,600

 
2.1
%
 
2.0
%
 
8.9
Total
$
2,551,000

 
2.2
%
 
2.0
%
 
7.1
 
December 31, 2019
Variable Pay Interest Rate Swap Remaining Term
Notional Amount
 
Average 
Variable Pay Rate
 
Average Fixed Receive Rate
 
Average Maturity (Years)
Greater than 1 years and less than 3 years
$
810,000

 
2.0
%
 
2.0
%
 
1.6
Greater than 3 years and less than 5 years
550,000

 
1.9
%
 
1.6
%
 
5
Greater than 5 years
45,000

 
1.9
%
 
2.3
%
 
19.5
Total
$
1,405,000

 
2.0
%
 
1.9
%
 
3.5

 
December 31, 2018
Fixed Pay Interest Rate Swap Remaining Term
Notional
Amount
 
Average Fixed Pay
Rate
 
Average Floating Receive
Rate
 
Average
Maturity
(Years)
1 year or less
$
400,000

 
1.5
%
 
2.8
%
 
0.5
Greater than 1 year and less than 3 years
200,000

 
1.8
%
 
2.6
%
 
1.4
Greater than 3 years and less than 5 years
1,104,700

 
2.3
%
 
2.5
%
 
3.8
Greater than 5 years
1,423,100

 
2.5
%
 
2.5
%
 
9.9
Total
$
3,127,800

 
2.3
%
 
2.6
%
 
6.0

 
 
December 31, 2018
Variable Pay Interest Rate Swap Remaining Term
 
Notional Amount
 
Average 
Variable Pay Rate
 
Average Fixed Receive Rate
 
Average Maturity (Years)
Greater than 5 years
 
$
728,400

 
2.5
%
 
2.4
%
 
8.3
Total
 
$
728,400

 
2.5
%
 
2.4
%
 
8.3


As of December 31, 2019 and December 31, 2018, the Company had no variable pay or fixed pay forward starting swaps.
Futures Contracts
The Company may enter into Eurodollar, Volatility Index and U.S. Treasury futures. As of December 31, 2019, the Company had no open futures contracts. As of December 31, 2018, the Company had entered into contracts to sell or short positions for U.S. Treasuries with a notional amount of $300.4 million, with a fair value in a liability position of $4.7 million and an expiration date of March 2019.
To-Be-Announced Securities
The Company purchased or sold TBAs during the years ended December 31, 2019 and December 31, 2018. There were no open TBA positions as of December 31, 2018. The following is a summary of the Company's TBA positions as of December 31, 2019, reported in "Derivative assets, at fair value" and "Derivative liability, at fair value" in the Consolidated Balance Sheets (dollars in thousands):
 
December 31, 2019
 
Notional
Amount
 
Fair
Value
Purchase contracts, asset
$
1,000,000

 
$
1,146

Purchase contracts, liability
(1,000,000
)
 
(2,074
)
TBA securities, net
$
—

 
$
(928
)

The following tables present additional information about the Company's contracts to purchase and sell TBAs for the year ended December 31, 2019 (dollars in thousands):
 
Notional Amount
 
 
 
Settlement, Termination,
 
Notional Amount
 
December 31, 2018
 
Additions
 
 Expiration or Exercise
 
December 31, 2019
Purchase of TBAs
$
—

 
$
3,200,000

 
$
(2,200,000
)
 
$
1,000,000

Sale of TBAs
$
—

 
$
3,200,000

 
$
(2,200,000
)
 
$
1,000,000


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 an 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 "Agency mortgage-backed securities, at fair value" in the Consolidated Balance Sheets.
Credit Default Swaps

In 2019, the Company entered into credit default swaps and, in the future, may continue to enter into these types of credit derivatives. Under these instruments, the buyer makes a monthly premium payment over the term of the contract in exchange for the seller making a payment for losses of the reference securities, upon the occurrence of a specified credit event.