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DERIVATIVE FINANCIAL INSTRUMENTS
 6 Months Ended
Jun. 30, 2020
Derivative Financial Instruments [Abstract]  
Derivative Financial Instruments

NOTE 4. DERIVATIVE AND OTHER HEDGING INSTRUMENTS

 

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

 

The table below summarizes fair value information about our derivative and other hedging instruments assets and liabilities as of June 30, 2020 and December 31, 2019.

(in thousands)

 

 

 

 

 

 

Derivative Instruments and Related Accounts

 

Balance Sheet Location

June 30, 2020

December 31, 2019

Assets

 

 

 

 

 

 

Payer swaptions - long

 

Derivative assets, at fair value

$

7,825

$

-

TBA securities

 

Derivative assets, at fair value

 

406

 

-

Total derivative assets, at fair value

 

 

$

8,231

$

-

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Interest rate swaps

 

Derivative liabilities, at fair value

$

29,940

$

20,146

Payer swaptions - short

 

Derivative liabilities, at fair value

 

3,289

 

-

TBA securities

 

Derivative liabilities, at fair value

 

-

 

512

U.S. Treasury securities - short

 

Obligation to return securities borrowed

 

139,843

 

-

Total derivative liabilities, at fair value

 

 

$

173,072

$

20,658

 

 

 

 

 

 

 

Margin Balances Posted to (from) Counterparties

 

 

 

 

 

 

Futures contracts

 

Restricted cash

$

655

$

1,338

TBA securities

 

Restricted cash

 

-

 

246

TBA securities

 

Other liabilities

 

(730)

 

-

Interest rate swaption contracts

 

Restricted cash

 

1,348

 

-

Interest rate swap contracts

 

Restricted cash

 

23,149

 

17,450

Total margin balances on derivative contracts

 

 

$

24,422

$

19,034

Eurodollar, Fed Funds and T-Note futures are cash settled futures contracts on an interest rate, with gains and losses credited or charged to the Company’s cash accounts on a daily basis. A minimum balance, or “margin”, is required to be maintained in the account on a daily basis. The tables below present information related to the Company’s Eurodollar and T-Note futures positions at June 30, 2020 and December 31, 2019.

($ in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2020

 

 

 

Average

 

Weighted

 

Weighted

 

 

 

 

 

 

Contract

 

Average

 

Average

 

 

 

 

 

 

Notional

 

Entry

 

Effective

 

 

Open

Expiration Year

 

Amount

 

Rate

 

Rate

 

 

Equity(1)

Eurodollar Futures Contracts (Short Positions)

 

 

 

 

 

 

 

 

 

2020

$

50,000

 

3.25%

 

0.28%

 

$

(742)

2021

 

50,000

 

1.03%

 

0.19%

 

 

(419)

Total / Weighted Average

$

50,000

 

1.77%

 

0.22%

 

$

(1,161)

Treasury Note Futures Contracts (Short Position)(2)

 

 

 

 

 

 

 

 

 

September 2020 5-year T-Note futures

 

 

 

 

 

 

 

 

 

 

(Sep 2020 - Sep 2025 Hedge Period)

$

69,000

 

0.81%

 

0.75%

 

$

(190)

($ in thousands)

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

 

Average

 

Weighted

 

Weighted

 

 

 

 

 

Contract

 

Average

 

Average

 

 

 

 

 

Notional

 

Entry

 

Effective

 

 

Open

Expiration Year

 

Amount

 

Rate

 

Rate

 

 

Equity(1)

Eurodollar Futures Contracts (Short Positions)

 

 

 

 

 

 

 

 

 

2020

$

500,000

 

2.97%

 

1.67%

 

$

(6,505)

Total / Weighted Average

$

500,000

 

2.97%

 

1.67%

 

$

(6,505)

Treasury Note Futures Contracts (Short Position)(2)

 

 

 

 

 

 

 

 

 

March 2020 5 year T-Note futures

 

 

 

 

 

 

 

 

 

 

(Mar 2020 - Mar 2025 Hedge Period)

$

69,000

 

1.96%

 

2.06%

 

$

302

(1) Open equity represents the cumulative gains (losses) recorded on open futures positions from inception.

(2) T-Note futures contracts were valued at a price of $ 125.74at June 30, 2020 and $ 118.61at December 31, 2019. The notional contract values of the short positions were $ 86.8million and $81.8 million at June 30, 2020 and December 31, 2019, respectively.

 

Under our interest rate swap agreements, we typically pay a fixed rate and receive a floating rate based on the LIBOR ("payer swaps"). The floating rate we receive under our swap agreements has the effect of offsetting the repricing characteristics of our repurchase agreements and cash flows on such liabilities. We are typically required to post collateral on our interest rate swap agreements. The table below presents information related to the Company’s interest rate swap positions at June 30, 2020 and December 31, 2019.

($ in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

Net

 

 

 

 

 

 

Fixed

 

Average

 

 

Estimated

 

Average

 

 

Notional

 

Pay

 

Receive

 

 

Fair

 

Maturity

 

 

Amount

 

Rate

 

Rate

 

 

Value

 

(Years)

June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

Expiration > 3 to ≤ 5 years

$

620,000

 

1.29%

 

0.46%

 

$

(27,018)

 

4.1

Expiration > 5 years

 

200,000

 

0.67%

 

0.31%

 

 

(2,922)

 

7.0

 

$

820,000

 

1.14%

 

0.42%

 

$

(29,940)

 

4.8

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

Expiration > 1 to ≤ 3 years

$

360,000

 

2.05%

 

1.90%

 

$

(3,680)

 

2.3

Expiration > 3 to ≤ 5 years

 

910,000

 

2.03%

 

1.93%

 

 

(16,466)

 

4.4

 

$

1,270,000

 

2.03%

 

1.92%

 

$

(20,146)

 

3.8

The table below presents information related to the Company’s interest rate swaption positions at June 30,2020. There were no open swaption positions at December 31, 2019.

($ in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Option

 

Underlying Swap

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

Average

 

Weighted

 

 

 

 

 

 

 

Average

 

 

 

 

Average

 

Adjustable

 

Average

 

 

 

 

 

Fair

 

Months to

 

 

Notional

 

Fixed

 

Rate

 

Term

Expiration

 

Cost

 

Value

 

Expiration

 

 

Amount

 

Rate

 

(LIBOR)

 

(Years)

June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payer Swaptions - long

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

≤ 1 year

$

3,450

$

231

 

8.5

 

$

500,000

 

0.95%

 

3 Month

 

4.0

 

>1 year ≤ 2 years

 

8,100

 

7,594

 

23.2

 

 

582,000

 

1.50%

 

3 Month

 

10.0

 

 

$

11,550

$

7,825

 

16.4

 

$

1,082,000

 

1.25%

 

3 Month

 

7.2

Payer Swaptions - short

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

≤ 1 year

$

(2,400)

$

(3,289)

 

11.2

 

$

436,200

 

1.50%

 

3 Month

 

10.0

The following table summarizes our contracts to purchase and sell TBA securities as of June 30, 2020 and December 31, 2019.

($ in thousands)

 

 

 

 

 

 

 

 

 

 

Notional

 

 

 

 

 

Net

 

 

Amount

 

Cost

 

Market

 

Carrying

 

 

Long (Short)(1)

 

Basis(2)

 

Value(3)

 

Value(4)

June 30, 2020

 

 

 

 

 

 

 

 

15-Year TBA securities:

 

 

 

 

 

 

 

 

 

2.0%

$

200,000

$

206,094

$

206,500

$

406

Total

$

200,000

$

206,094

$

206,500

$

406

December 31, 2019

 

 

 

 

 

 

 

 

30-Year TBA securities:

 

 

 

 

 

 

 

 

 

4.5%

$

(300,000)

$

(315,426)

$

(315,938)

$

(512)

Total

$

(300,000)

$

(315,426)

$

(315,938)

$

(512)

(1) Notional amount represents the par value (or principal balance) of the underlying Agency RMBS.

(2) Cost basis represents the forward price to be paid (received) for the underlying Agency RMBS.

(3) Market value represents the current market value of the TBA securities (or of the underlying Agency RMBS) as of period-end.

(4) Net carrying value represents the difference between the market value and the cost basis of the TBA securities as of period-end and is reported in derivative assets (liabilities) at fair value in our balance sheets.

 

The following table summarizes our U.S. Treasury short positions as of June 30, 2020. There were no U.S. Treasury short positions as of December 31, 2019.

($ in thousands)

 

 

 

 

 

 

 

 

Face

 

Cost

 

Fair

 

 

Amount

 

Basis

 

Value

Maturity

 

 

 

 

 

 

5 Years

$

(140,000)

$

(139,712)

$

(139,843)

Total

$

(140,000)

$

(139,712)

$

(139,843)

Gain (Loss) From Derivative and Other Hedging Instruments, Net

 

The table below presents the effect of the Company’s derivative financial instruments on the statements of operations for the six and three months ended June 30, 2020 and 2019.

(in thousands)

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

Three Months Ended June 30,

 

 

2020

 

2019

 

2020

 

2019

Eurodollar futures contracts (short positions)

$

(8,318)

$

(14,329)

$

(101)

$

(4,287)

T-Note futures contracts (short position)

 

(4,724)

 

(5,199)

 

(385)

 

(3,523)

Interest rate swaps

 

(68,202)

 

(26,404)

 

(7,579)

 

(24,109)

Payer swaptions - short

 

(889)

 

-

 

(889)

 

-

Payer swaptions - long

 

(4,201)

 

(1,063)

 

(1,612)

 

(685)

Net TBA securities

 

(5,244)

 

(6,325)

 

1,846

 

(1,684)

U.S. Treasury securities - short position

 

(131)

 

-

 

(131)

 

-

Total

$

(91,709)

$

(53,320)

$

(8,851)

$

(34,288)

Credit Risk-Related Contingent Features

 

The use of derivatives creates exposure to credit risk relating to potential losses that could be recognized in the event that the counterparties to these instruments fail to perform their obligations under the contracts. We minimize this risk by limiting our counterparties for instruments which are not centrally cleared on a registered exchange to major financial institutions with acceptable credit ratings and monitoring positions with individual counterparties. In addition, we may be required to pledge assets as collateral for our derivatives, whose amounts vary over time based on the market value, notional amount and remaining term of the derivative contract. In the event of a default by a counterparty, we may not receive payments provided for under the terms of our derivative agreements, and may have difficulty obtaining our assets pledged as collateral for our derivatives. The cash and cash equivalents pledged as collateral for our derivative instruments are included in restricted cash on our balance sheets. It is the Company's policy not to offset assets and liabilities associated with open derivative contracts. However, the Chicago Mercantile Exchange (“CME”) rules characterize variation margin transfers as settlement payments, as opposed to adjustments to collateral. As a result, derivative assets and liabilities associated with centrally cleared derivatives for which the CME serves as the central clearing party are presented as if these derivatives had been settled as of the reporting date.