XML 28 R16.htm IDEA: XBRL DOCUMENT v3.21.2
Derivative Instruments
 6 Months Ended
Jun. 30, 2021
Derivative Instruments [Abstract]  
Derivative Instruments
Note 8 — Derivative Instruments

Interest Rate Swap Agreements, Swaptions, TBAs and U.S. Treasury Futures

In order to help mitigate exposure to higher short-term interest rates in connection with borrowings under its repurchase agreements, the Company enters into interest rate swap agreements and swaption agreements. Interest rate swap agreements establish an economic fixed rate on related borrowings because the variable-rate payments received on the interest rate swap agreements largely offset interest accruing on the related borrowings, leaving the fixed-rate payments to be paid on the interest rate swap agreements as the Company’s effective borrowing rate, subject to certain adjustments including changes in spreads between variable rates on the interest rate swap agreements and actual borrowing rates. A swaption is an option granting its owner the right but not the obligation to enter into an underlying swap. The Company’s interest rate swap agreements and swaptions have not been designated as qualifying hedging instruments for GAAP purposes.

In order to help mitigate duration risk and manage basis risk and the pricing risk under the Company’s financing facilities, the Company utilizes U.S. Treasury futures and forward-settling purchases and sales of RMBS where the underlying pools of mortgage loans are TBAs. Pursuant to these TBA transactions, the Company agrees to purchase or sell, for future delivery, Agency RMBS with certain principal and interest terms and certain types of underlying collateral, but the particular Agency RMBS to be delivered is not identified until shortly before the TBA settlement date. Unless otherwise indicated, references to U.S. Treasury futures include options on U.S. Treasury futures.

The following table summarizes the outstanding notional amounts of derivative instruments as of the dates indicated (dollars in thousands):

Derivatives
  
June 30, 2021
    
December 31, 2020
  
Notional amount of interest rate swaps
  
$
1,427,500
    
$
1,451,900
  
Notional amount of swaptions
    
70,000
      
70,000
  
Notional amount of TBAs, net
    
352,900
      
332,000
  
Notional amount of treasury futures
    
67,000
      
110,000
  
Notional amount of options on treasury futures
    
30,000
      
-
  
Total notional amount
  
$
1,947,400
    
$
1,963,900
  

The following table presents information about the Company’s interest rate swap agreements as of the dates indicated (dollars in thousands):

 
  
Notional
Amount
    
Fair Value
    
Weighted
Average Pay
Rate
    
Weighted
Average
Receive Rate
    
Weighted
Average
Years to
Maturity
  
June 30, 2021
  
$
1,427,500
    
$
14,268
      
0.50
%
    
0.72
%
    
6.6
  
December 31, 2020
  
$
1,451,900
    
$
4,913
      
0.45
%
    
0.84
%
    
6.4
  

The following table presents information about the Company’s interest rate swaption agreements as of the dates indicated (dollars in thousands):

 
  
Notional
Amount
    
Fair
Value
    
Weighted
Average
Underlying
Pay Rate
  
Weighted
Average
Underlying
Receive Rate(A)
  
Weighted
Average
Underlying
Years to
Maturity(B)
    
Weighted
Average Years
to Expiration
  
June 30, 2021
  
$
70,000
    
$
1,516
      
1.54
%
LIBOR-BBA%
    
9.3
      
0.6
  
December 31, 2020
  
$
70,000
    
$
798
      
1.32
%
LIBOR-BBA%
    
10.6
      
0.5
  

(A)
Floats in accordance with LIBOR.
(B)
Weighted average years to maturity of the underlying swaps from the reporting date.

The following tables present information about the Company’s TBA derivatives as of the dates indicated (dollars in thousands):

As June 30, 2021

Purchase and sale contracts for derivative TBAs
  
Notional
    
Implied Cost
Basis
    
Implied Fair
Value
    
Net Carrying
Value
  
Purchase contracts
  
$
1,364,500
    
$
1,405,001
    
$
1,407,235
    
$
2,235
  
Sale contracts
    
(1,011,600
)
    
(1,042,991
)
    
(1,044,343
)
    
(1,352
)
Net TBA derivatives
  
$
352,900
    
$
362,010
    
$
362,892
    
$
883
  


As of December 31, 2020

Purchase and sale contracts for derivative TBAs
  
Notional
    
Implied Cost
Basis
    
Implied Fair
Value
    
Net Carrying
Value
  
Purchase contracts
  
$
875,000
    
$
904,653
    
$
911,393
    
$
6,740
  
Sale contracts
    
(543,000
)
    
(564,934
)
    
(567,544
)
    
(2,610
)
Net TBA derivatives
  
$
332,000
    
$
339,719
    
$
343,849
    
$
4,130
  


The following tables present information about the Company’s U.S. Treasury futures agreements as of the dates indicated (dollars in thousands):

As of June 30, 2021

Maturity
  
Notional
Amount -
Long
    
Notional
Amount -
Short
    
Fair Value
  
5 years
  
$
11,500
    
$
-
    
$
18
  
10 years
    
55,500
      
-
      
(42
)
Total
  
$
67,000
    
$
-
    
$
(24
)

As of December 31, 2020

Maturity
  
Notional
Amount -
Long
    
Notional
Amount -
Short
    
Fair Value
  
5 years
  
$
85,000
    
$
-
    
$
252
  
10 years
    
25,000
      
-
      
-
  
Total
  
$
110,000
    
$
-
    
$
252
  

The Company did not have any U.S. Treasury futures options agreements as of December 31, 2020. The following table presents information about the Company’s U.S. Treasury futures options agreements as of the dates indicated (dollars in thousands):

As of June 30, 2021

Maturity
  
Notional
Amount -
Long
    
Notional
Amount -
Short
    
Fair Value
  
10 years
  
$
70,000
    
$
40,000
)
  
$
83
  
Total
  
$
70,000
    
$
(40,000
)
  
$
83
  

The following table presents information about realized gain (loss) on derivatives, which is included on the consolidated statements of income (loss) for the periods indicated (dollars in thousands):

Realized Gains (Losses) on Derivatives

 
     
Three Months Ended June 30,
    
Six Months Ended June 30,
  
Derivatives
Consolidated Statements of Income (Loss) Location
  
2021
    
2020
    
2021
    
2020
  
Interest rate swaps
Realized gain (loss) on derivatives, net
  
$
(209
)
  
$
(6,759
)
  
$
(292
)
  
$
(54,624
)
Swaptions
Realized gain (loss) on derivatives, net
    
(321
)
    
(212
)
    
(594
)
    
(212
)
TBAs
Realized gain (loss) on derivatives, net
    
(7,473
)
    
(115
)
    
(10,739
)
    
344
  
Treasury futures
Realized gain (loss) on derivatives, net
    
(2,136
)
    
11,644
      
(3,255
)
    
40,294
  
Total
 
  
$
(10,139
)
  
$
4,558
    
$
(14,880
)
  
$
(14,198
)

Offsetting Assets and Liabilities

The Company has netting arrangements in place with all of its derivative counterparties pursuant to standard documentation developed by the International Swaps and Derivatives Association. Under GAAP, if the Company has a valid right of offset, it may offset the related asset and liability and report the net amount. The Company presents interest rate swaps, swaptions and U.S. Treasury futures assets and liabilities on a gross basis in its consolidated balance sheets, but in the case of interest rate swaps, net of variation margin. The Company presents TBA assets and liabilities on a net basis in its consolidated balance sheets. The Company presents repurchase agreements in this section even though they are not derivatives because they are subject to master netting arrangements. However, repurchase agreements are presented on a gross basis. Additionally, the Company does not offset financial assets and liabilities with the associated cash collateral on the consolidated balance sheets.

The following tables present information about the Company’s assets and liabilities that are subject to master netting arrangements or similar agreements and can potentially be offset on the Company’s consolidated balance sheets as of the dates indicated (dollars in thousands):

Offsetting Assets and Liabilities

As of June 30, 2021

                    
Gross Amounts Not Offset in the
Consolidated Balance Sheet
        
   
Gross
Amounts of
Recognized
Assets or
Liabilities
    
Gross
Amounts
Offset in the
Consolidated
Balance Sheet
    
Net Amounts
of Assets and
Liabilities
Presented in
the
Consolidated
Balance Sheet
    
Financial
Instruments
    
Cash
Collateral
Received
(Pledged)
    
Net Amount
  
Assets
                                    
Interest rate swaps
  
$
15,164
    
$
-
    
$
15,164
    
$
(15,164
)
  
$
-
    
$
-
  
Interest rate swaptions
    
1,516
      
-
      
1,516
      
(1,516
)
    
-
      
-
  
TBAs
    
2,235
      
(1,352
)
    
883
      
(883
)
    
-
      
-
  
U.S. treasury futures options
    
83
      
-
      
83
      
1,129
      
(1,212
)
    
-
  
Total Assets
  
$
18,998
    
$
(1,352
)
  
$
17,646
    
$
(16,434
)
  
$
(1,212
)
  
$
-
  
                                                 
Liabilities
                                                
Repurchase agreements
  
$
897,047
    
$
-
    
$
897,047
    
$
(888,441
)
  
$
(8,606
)
  
$
-
  
Interest rate swaps
    
896
      
-
      
896
      
(896
)
    
-
      
-
  
TBAs
    
1,352
      
(1,352
)
    
-
      
-
      
-
      
-
  
U.S. treasury futures
    
24
      
-
      
24
      
(24
)
    
-
      
-
  
Total Liabilities
  
$
899,319
    
$
(1,352
)
  
$
897,967
    
$
(889,361
)
  
$
(8,606
)
  
$
-
  

As of December 31, 2020

                    
Gross Amounts Not Offset in the
Consolidated Balance Sheet
        
   
Gross
Amounts of
Recognized
Assets or
Liabilities
    
Gross
Amounts
Offset in the
Consolidated
Balance Sheet
    
Net Amounts
of Assets and
Liabilities
Presented in
the
Consolidated
Balance Sheet
    
Financial
Instruments
    
Cash
Collateral
Received
(Pledged)
    
Net Amount
  
Assets
                                    
Interest rate swaps
  
$
10,791
    
$
-
    
$
10,791
    
$
(10,791
)
  
$
-
    
$
-
  
Interest rate swaptions
    
798
      
-
      
798
      
(798
)
    
-
      
-
  
TBAs
    
6,740
      
(2,611
)
    
4,129
      
(4,129
)
    
-
      
-
  
Treasury futures
    
252
      
-
      
252
      
1,717
      
(1,969
)
    
-
  
Total Assets
  
$
18,581
    
$
(2,611
)
  
$
15,970
    
$
(14,001
)
  
$
(1,969
)
  
$
-
  
                                                 
Liabilities
                                                
Repurchase agreements
  
$
1,149,978
    
$
-
    
$
1,149,978
    
$
(1,105,621
)
  
$
(44,357
)
  
$
-
  
Interest rate swaps
    
5,878
      
-
      
5,878
      
(5,878
)
    
-
      
-
  
TBAs
    
2,611
      
(2,611
)
    
-
      
-
      
-
      
-
  
Total Liabilities
  
$
1,158,467
    
$
(2,611
)
  
$
1,155,856
    
$
(1,111,499
)
  
$
(44,357
)
  
$
-