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DERIVATIVE FINANCIAL INSTRUMENTS
 12 Months Ended
Dec. 31, 2020
Derivative Financial Instruments [Abstract]  
Derivative Financial Instruments

NOTE 4. DERIVATIVE AND OTHER HEDGING INSTRUMENTS

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

(in thousands)

 

 

 

 

 

 

Derivative and Other Hedging Instruments

 

Balance Sheet Location

December 31, 2020

December 31, 2019

Assets

 

 

 

 

 

 

Interest rate swaps

 

Derivative assets, at fair value

$

7

$

-

Payer swaptions (long positions)

 

Derivative assets, at fair value

 

17,433

 

-

TBA securities

 

Derivative assets, at fair value

 

3,559

 

-

Total derivative assets, at fair value

 

 

$

20,999

$

-

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Interest rate swaps

 

Derivative liabilities, at fair value

$

24,711

$

20,146

Payer swaptions (short positions)

 

Derivative liabilities, at fair value

 

7,730

 

-

TBA securities

 

Derivative liabilities, at fair value

 

786

 

512

Total derivative liabilities, at fair value

 

 

$

33,227

$

20,658

 

 

 

 

 

 

 

Margin Balances Posted to (from) Counterparties

 

 

 

 

 

 

Futures contracts

 

Restricted cash

$

489

$

1,338

TBA securities

 

Restricted cash

 

284

 

246

TBA securities

 

Other liabilities

 

(2,520)

 

-

Interest rate swaption contracts

 

Other liabilities

 

(3,563)

 

-

Interest rate swap contracts

 

Restricted cash

 

19,761

 

17,450

Total margin balances on derivative contracts

 

 

$

14,451

$

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 December 31, 2020 and 2019.

($ in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

Average

 

Weighted

 

Weighted

 

 

 

 

 

 

Contract

 

Average

 

Average

 

 

 

 

 

 

Notional

 

Entry

 

Effective

 

 

Open

Expiration Year

 

Amount

 

Rate

 

Rate

 

 

Equity(1)

Eurodollar Futures Contracts (Short Positions)

 

 

 

 

 

 

 

 

 

2021

$

50,000

 

1.03%

 

0.18%

 

$

(424)

U.S. Treasury Note Futures Contracts (Short Position)(2)

 

 

 

 

 

 

 

 

 

March 2021 5-year T-Note futures

 

 

 

 

 

 

 

 

 

 

(Mar 2021 - Mar 2026 Hedge Period)

$

69,000

 

0.72%

 

0.67%

 

$

(186)

($ 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)

U.S. 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

($ in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

Net

 

 

 

 

 

 

Fixed

 

Average

 

 

Estimated

 

Average

 

 

Notional

 

Pay

 

Receive

 

 

Fair

 

Maturity

 

 

Amount

 

Rate

 

Rate

 

 

Value

 

(Years)

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

Expiration > 3 to ≤ 5 years

$

620,000

 

1.29%

 

0.22%

 

$

(23,760)

 

3.6

Expiration > 5 years

$

200,000

 

0.67%

 

0.23%

 

$

(944)

 

6.4

 

$

820,000

 

1.14%

 

0.23%

 

$

(24,704)

 

4.3

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 December 31, 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)

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payer Swaptions (long positions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

≤ 1 year

$

3,450

$

5

 

2.5

 

 

500,000

 

0.95%

 

3 Month

 

4.0

> 1 year ≤ 2 years

 

13,410

 

17,428

 

17.4

 

 

675,000

 

1.49%

 

3 Month

 

12.8

 

 

$

16,860

$

17,433

 

11.0

 

$

1,175,000

 

1.26%

 

3 Month

 

9.0

Payer Swaptions (short positions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

≤ 1 year

$

(4,660)

$

(7,730)

 

5.4

 

$

507,700

 

1.49%

 

3 Month

 

12.8

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

($ in thousands)

 

 

 

 

 

 

 

 

 

 

Notional

 

 

 

 

 

Net

 

 

Amount

 

Cost

 

Market

 

Carrying

 

 

Long (Short)(1)

 

Basis(2)

 

Value(3)

 

Value(4)

December 31, 2020

 

 

 

 

 

 

 

 

30-Year TBA securities:

 

 

 

 

 

 

 

 

 

2.0%

$

465,000

$

479,531

$

483,090

$

3,559

 

3.0%

 

(328,000)

 

(342,896)

 

(343,682)

 

(786)

Total

$

137,000

$

136,635

$

139,408

$

2,773

December 31, 2019

 

 

 

 

 

 

 

 

30-Year TBA securities:

 

 

 

 

 

 

 

 

 

4.5%

$

(300,000)

$

(315,426)

$

(315,938)

$

(512)

Total

$

(300,000)

$

(315,426)

$

(315,938)

$

(512)

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

 

The table below presents the effect of the Company’s derivative and other hedging instruments on the statements of operations for the years ended December 31, 2020, 2019 and 2018.

(in thousands)

 

 

 

 

 

 

 

 

2020

 

2019

 

2018

Eurodollar futures contracts (short positions)

$

(8,337)

$

(13,860)

$

7,170

U.S. Treasury Note futures contracts (short position)

 

(4,707)

 

(5,175)

 

5,507

Fed Funds futures contracts (short positions)

 

-

 

177

 

-

Interest rate swaps

 

(66,212)

 

(26,582)

 

8,609

Receiver swaptions

 

-

 

-

 

105

Payer swaptions (long positions)

 

98

 

(1,379)

 

(1,607)

Payer swaptions (short positions)

 

(3,070)

 

-

 

-

TBA securities (short positions)

 

(6,719)

 

(6,264)

 

4,327

TBA securities (long positions)

 

9,950

 

1,907

 

200

U.S. Treasury securities (short positions)

 

(95)

 

-

 

-

Total

$

(79,092)

$

(51,176)

$

24,311

Credit Risk-Related Contingent Features

 

The use of derivatives and other hedging instruments 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.