DERIVATIVE INSTRUMENTS HEDGING AND NON-HEDGING ACTIVITIES

The Company enters into a variety of derivative instruments in connection with its risk management activities. The Company's primary objective for executing these derivatives and non-derivative instruments is to mitigate the Company's economic exposure to future events that are outside its control. The Company's derivative financial instruments are utilized principally to manage market risk and cash flow volatility associated with interest rate risk (including associated prepayment risk) related to certain assets and liabilities. As part of its risk management activities, the Company may, at times, enter into various forward contracts, including short securities, Agency to-be-announced securities, or TBAs, options, futures, swaps, swaptions and caps. In executing on the Company's risk management strategy, the Company has entered into interest rate swap, swaption agreements, TBA’s and futures contracts. Amounts receivable and payable under interest rate swap agreements are accounted for as unrealized gain (loss) on derivative contracts, net in the condensed consolidated statement of operations.

The following summarizes the Company's significant asset and liability derivatives, the risk exposure for these derivatives and the Company's risk management activities used to mitigate certain of these risks. While the Company uses derivative instruments to achieve the Company's risk management activities, it is possible that these instruments will not effectively mitigate all or a substantial portion of the Company's market rate risk. In addition, the Company might elect, at times, not to enter into certain hedging arrangements in order to maintain compliance with REIT requirements.

Balance Sheet Presentation

The following tables present the gross fair value and notional amounts of the Company’s derivative financial instruments as of September 30, 2017 and December 31, 2016:



	September 30, 2017
	Derivative Assets					Derivative Liabilities
	Contracts	Fair value		Notional		Contracts	Fair value			Notional
Eurodollar Futures	—	$	—	$	—	11,590	$	(529,075	)	$	11,590,000,000
Total	—	$	—	$	—	11,590	$	(529,075	)	$	11,590,000,000



	December 31, 2016
	Derivative Assets					Derivative Liabilities
	Contracts	Fair value		Notional		Contracts	Fair value		Notional
Eurodollar Futures	10,501	$	8,053,813	$	10,501,000,000	—	$	—	$	—
Total	10,501	$	8,053,813	$	10,501,000,000	—	$	—	$	—

Offsetting of Financial Assets and Liabilities

The Company’s repurchase agreements are governed by underlying agreements that provide for a right of setoff in the event of default of either counterparty to the agreement. The Company also has in place with its counterparties ISDA Master Agreements (“Master Agreements”) for its derivative contracts. In accordance with the Master Agreements with each counterparty, if on any date amounts would otherwise be payable in the same currency and in respect of the same transaction by each party to the other, then, on such date, each party’s obligation to make payment of any such amount will be automatically satisfied and discharged and, if the aggregate amount that would otherwise have been payable by one party exceeds the aggregate amount that would otherwise have been payable by the other party, it is replaced by an obligation upon the party by whom the larger aggregate amount would have been payable to pay to the other party the excess of the larger aggregate amount over the smaller aggregate amount. The Company has pledged financial collateral as restricted cash to its counterparties for its derivative contracts and repurchase agreements. See Note 2 for specific details on the terms of restricted cash with counterparties and Note 9 for the amounts of restricted cash outstanding.

Under GAAP, if the Company has a valid right of setoff, it may offset the related asset and liability and report the net amount. The Company presents repurchase agreements subject to Master Agreements or similar agreements on a gross basis, and derivative assets and liabilities subject to such arrangements on a net basis, based on derivative type and counterparty, in its condensed consolidated balance sheets. Separately, the company presents cash collateral subject to such arrangements on a net basis, based on counterparty, in its condensed consolidated balance sheets. However, the Company does not offset financial assets and liabilities with the associated cash collateral on its condensed consolidated balance sheets.

The below tables provide a reconciliation of these assets and liabilities that are subject to Master Agreements or similar agreements and can be potentially offset on the Company’s condensed consolidated balance sheets as of September 30, 2017 and December 31, 2016:

As of September 30, 2017 the Company did not have any assets subject to Master Agreements or similar agreements.



	December 31, 2016
							Gross amounts not offset in the Balance Sheet (1)
Description	Gross amounts of recognized assets		Gross amounts offset in the Balance Sheet		Net amounts of assets presented in the Balance Sheet		Financial instruments		Cash collateral (Received)/ Pledged		Net amount
Futures	$	8,053,813	$	—	$	8,053,813	$	—	$	—	$	8,053,813
Total	$	8,053,813	$	—	$	8,053,813	$	—	$	—	$	8,053,813



	September 30, 2017
									Gross amounts not offset in the Balance Sheet (1)
Description	Gross amounts of recognized liabilities			Gross amounts offset in the Balance Sheet		Net amounts of liabilities presented in the Balance Sheet			Financial instruments		Cash collateral (Received)/ Pledged		Net Amount
Futures	$	(529,075	)	$	—	$	(529,075	)	$	—	$	529,075	$	—
Repurchase agreements	$	(1,237,661,000	)	$	—	$	(1,237,661,000	)	$	—	$	—	$	(1,237,661,000	)
Total	$	(1,238,190,075	)	$	—	$	(1,238,190,075	)	$	—	$	529,075	$	(1,237,661,000	)

December 31, 2016

Gross amounts not offset

in the Balance Sheet (1)



Description	Gross amounts of recognized liabilities			Gross amounts offset in the Balance Sheet		Net amounts of liabilities presented in the Balance Sheet			Financial instruments		Cash collateral (Received)/ Pledged		Net Amount
Repurchase agreements	$	(804,811,000	)	$	—	$	(804,811,000	)	$	—	$	—	$	(804,811,000	)
Total	$	(804,811,000	)	$	—	$	(804,811,000	)	$	—	$	—	$	(804,811,000	)

(1) Amounts presented are limited in total to the net amount of assets or liabilities presented in the condensed consolidated balance sheets by instrument. Excess cash collateral or financial assets that are pledged to counterparties may exceed the financial liabilities subject to Master Agreements or similar agreements, or counterparties may have pledged excess cash collateral to the Company that exceed the corresponding financial assets. These excess amounts are excluded from the tables above.

Income Statement Presentation

The Company has not applied hedge accounting to its current derivative portfolio held to mitigate the interest rate risk associated with its debt portfolio. As a result, the Company is subject to volatility in its earnings due to movement in the unrealized gains and losses associated with its interest rate swaps, swaptions and any other derivative instruments.

The following table summarizes the underlying hedged risks and the amount of gains and losses on derivative instruments reported net in the condensed consolidated statement of operations as realized gain (loss) on derivative contracts, net and unrealized gain (loss) on derivative contracts, net for the three and nine months ended September 30, 2017 and September 30, 2016:



	Three Months Ended September 30, 2017
Primary underlying risk	Amount of realized gain (loss)			Amount of unrealized appreciation (depreciation)		Total
Interest rate:
Futures	$	(1,636,725	)	$	307,263	$	(1,329,462	)
Total	$	(1,636,725	)	$	307,263	$	(1,329,462	)



	Three Months Ended September 30, 2016
Primary underlying risk	Amount of realized gain (loss)			Amount of unrealized appreciation (depreciation)		Total
Interest rate:
Futures	$	(820,974	)	$	3,340,600	$	2,519,626
Total	$	(820,974	)	$	3,340,600	$	2,519,626



	Nine Months Ended September 30, 2017
Primary underlying risk	Amount of realized gain (loss)		Amount of unrealized appreciation (depreciation)			Total
Interest rate:
Futures	$	2,049,400	$	(8,583,100	)	$	(6,533,700	)
Total	$	2,049,400	$	(8,583,100	)	$	(6,533,700	)

Nine Months Ended September 30, 2016

Primary underlying risk

Amount of
realized
gain (loss)

Amount of
unrealized
appreciation (depreciation)

Total



Interest rate:
Futures	$	(3,167,877	)	$	(7,172,338	)	$	(10,340,215	)
Total	$	(3,167,877	)	$	(7,172,338	)	$	(10,340,215	)