DERIVATIVE INSTRUMENTS

9 Months Ended

Sep. 30, 2017

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE INSTRUMENTS

9. DERIVATIVE INSTRUMENTS

The Company uses derivative instruments primarily to economically manage the fair value variability of fixed rate assets caused by interest rate fluctuations and overall portfolio market risk.  The following is a breakdown of the derivatives outstanding as of September 30, 2017 and December 31, 2016 ($ in thousands):

September 30, 2017

			Fair Value						Remaining Maturity (years)
Contract Type	Notional		Asset(1)			Liability(1)
Futures
5-year Swap	$	260,700	$	2,715		$	—		0.25
10-year Swap	338,000		6,799			2			0.25
5-year U.S. Treasury Note	12,000		86			—			0.25
10-year U.S. Treasury Note Ultra	700		9			—			0.25
Variation Margin	—		(9,110		)	(2		)
Total futures	611,400		499			—
Swaps
3 Month LIBOR(2)	50,000		—			2,343			3.00
Credit derivatives
CMBX	10,000		69			—			4.42
CDX	33,500		—			368			1.23
Total credit derivatives	43,500		69			368
Total derivatives	$	704,900	$	568		$	2,711

(1)  Shown as derivative instruments, at fair value, in the accompanying consolidated balance sheets.

(2) The Company is paying fixed interest rates on these swaps.

December 31, 2016

			Fair Value				Remaining Maturity (years)
Contract Type	Notional		Asset(1)		Liability(1)
Futures
5-year Swap	602,200		3,210		2		0.25
10-year Swap	226,700		1,674		266		0.25
5-year U.S. Treasury Note	21,800		93		—		0.25
10-year U.S. Treasury Note	3,200		38		—		0.25
Total futures	853,900		5,015		268
Swaps
3 Month LIBOR(2)	50,000		—		2,697		3.72
Credit Derivatives
CMBX	10,000		3		—		5.08
CDX	33,500		—		481		1.97
Total credit derivatives	43,500		3		481
Total derivatives	$	947,400	$	5,018	$	3,446

(1)  Shown as derivative instruments, at fair value, in the accompanying consolidated balance sheets.

(2) The Company is paying fixed interest rates on these swaps.

The following table indicates the net realized gains (losses) and unrealized appreciation (depreciation) on derivatives, by primary underlying risk exposure, as included in net result from derivatives transactions in the consolidated statements of operations for the nine months ended September 30, 2017 and 2016 ($ in thousands):

	Three Months Ended September 30, 2017									Nine Months Ended September 30, 2017
	Unrealized Gain/(Loss)			Realized Gain/(Loss)			Net Result from Derivative Transactions			Unrealized Gain/(Loss)			Realized Gain/(Loss)			Net Result from Derivative Transactions
Contract Type
Futures	$	(2,587	)	$	2,192		$	(395	)	$	(4,249	)	$	(13,571	)	$	(17,820	)
Swaps	277			(242		)	35			561			(780		)	(219		)
Credit Derivatives	110			(98		)	12			178			(491		)	(313		)
Total	$	(2,200	)	$	1,852		$	(348	)	$	(3,510	)	$	(14,842	)	$	(18,352	)

	Three Months Ended September 30, 2016									Nine Months Ended September 30, 2016
	Unrealized Gain/(Loss)			Realized Gain/(Loss)			Net Result from Derivative Transactions			Unrealized Gain/(Loss)			Realized Gain/(Loss)			Net Result from Derivative Transactions
Contract Type
Futures	$	16,876		$	(7,617	)	$	9,259		$	(5,401	)	$	(58,634	)	$	(64,035	)
Swaps	683			(311		)	372			(582		)	(972		)	(1,554		)
Credit Derivatives	(176		)	(99		)	(275		)	(290		)	(269		)	(559		)
Total	$	17,383		$	(8,027	)	$	9,356		$	(6,273	)	$	(59,875	)	$	(66,148	)

The Company’s counterparties held $12.2 million and $11.3 million of cash margin as collateral for derivatives as of September 30, 2017 and December 31, 2016, respectively, which is included in restricted cash in the consolidated balance sheets.

Futures

Collateral posted with our futures counterparties is segregated in the Company’s books and records. Interest rate futures are centrally cleared by the Chicago Mercantile Exchange (“CME”) through a Futures Commission Merchant. Interest rate futures that are governed by an ISDA agreement provide for bilateral collateral pledging based on the counterparties’ market value. The counterparties have the right to re-pledge the collateral posted, but have the obligation to return the pledged collateral, or substantially the same collateral, if agreed to by us, as the market value of the interest rate futures change.

The Company is required to post initial margin and daily variation margin for our interest rate futures that are centrally cleared by CME. CME determines the fair value of our centrally cleared futures, including daily variation margin. Effective January 3, 2017, CME amended their rulebooks to legally characterize daily variation margin payments for centrally cleared interest rate futures as settlement rather than collateral. As a result of this rule change, variation margin pledged on the Company’s centrally cleared interest rate futures is settled against the realized results of these futures.

Credit Risk-Related Contingent Features

The Company has agreements with certain of its derivative counterparties that contain a provision whereby, if the Company defaults on certain of its indebtedness, the Company could also be declared in default on its derivatives, resulting in an acceleration of payment under the derivatives. As of September 30, 2017 and December 31, 2016, the Company was in compliance with these requirements and not in default on its indebtedness. As of September 30, 2017 and December 31, 2016, there was $4.5 million and $6.2 million of cash collateral held by the derivative counterparties for these derivatives, respectively, included in restricted cash in the consolidated statements of financial condition. No additional cash would be required to be posted if the acceleration of payment under the derivatives was triggered.