The Company holds and issues derivative financial instruments in connection with its operating activities. Derivative financial instruments are created as a result of certain of the Company’s operations and when the Company enters into derivative transactions as part of its interest rate risk management activities. Derivative financial instruments created as a result of the Company’s operations include:

The Company also engages in interest rate risk management activities in an effort to moderate the effect of changes in market interest rates on the fair value of certain of the its assets. To manage this fair value risk resulting from interest rate risk, the Company uses derivative financial instruments acquired with the intention of reducing the risk that changes in market interest rates will result in unfavorable changes in the fair value of the Company’s IRLCs, inventory of loans held for sale and the portion of its MSRs not financed with ESS.

The Company does not designate and qualify any of its derivatives for hedge accounting. The Company records all derivative financial instruments at fair value and records changes in fair value in current period income.

The Company had the following derivative financial instruments recorded on its consolidated balance sheets:

(1)	All the hedging derivatives are interest rate derivatives and are used as economic hedges.

The following table summarizes notional amount activity for derivative contracts used in the Company’s hedging activities:


	Notional amounts, quarter ended September 30, 2020
	Beginning of		Dispositions/	End of
Instrument	quarter	Additions	expirations	quarter

	(in thousands)
Forward purchase contracts	20,709,914	143,902,517	(133,168,648)	31,443,783
Forward sale contracts	25,302,147	175,642,745	(158,506,649)	42,438,243
MBS put options	11,200,000	29,850,000	(28,100,000)	12,950,000
MBS call options	—	1,850,000	—	1,850,000
Swaption purchase contracts	3,375,000	3,625,000	(3,875,000)	3,125,000
Swaption sale contracts	—	3,875,000	(3,875,000)	—
Put options on interest rate futures purchase contracts	350,000	3,325,000	(1,400,000)	2,275,000
Call options on interest rate futures purchase contracts	1,800,000	1,200,000	(2,050,000)	950,000
Put options on interest rate futures sale contracts	—	1,400,000	(1,400,000)	—
Call options on interest rate futures sale contracts	—	2,050,000	(2,050,000)	—
Treasury futures purchase contracts	925,000	1,561,500	(1,486,500)	1,000,000
Treasury futures sale contracts	450,000	1,486,500	(1,486,500)	450,000
Interest rate swap futures purchase contracts	3,460,000	1,200,000	(1,075,000)	3,585,000
Interest rate swap futures sales contracts	—	1,075,000	(1,075,000)	—


	Notional amounts, quarter ended September 30, 2019
	Beginning of		Dispositions/	End of
Instrument	quarter	Additions	expirations	quarter

	(in thousands)
Forward purchase contracts	19,497,698	100,139,970	(103,807,843)	15,829,825
Forward sale contracts	14,276,156	122,174,329	(121,333,675)	15,116,810
MBS put options	12,775,000	29,575,000	(32,300,000)	10,050,000
MBS call options	2,250,000	—	(2,250,000)	—
Put options on interest rate futures purchase contracts	2,835,000	9,850,000	(8,335,000)	4,350,000
Call options on interest rate futures purchase contracts	3,687,500	1,750,000	(4,837,500)	600,000
Put options on interest rate futures sale contracts	—	8,335,000	(8,335,000)	—
Call options on interest rate futures sale contracts	—	4,837,500	(4,837,500)	—
Treasury futures purchase contracts	486,100	5,132,000	(4,209,600)	1,408,500
Treasury futures sale contracts	1,550,000	3,792,100	(4,209,600)	1,132,500
Interest rate swap futures purchase contracts	2,900,000	1,800,000	(790,000)	3,910,000
Interest rate swap futures sale contracts	—	790,000	(790,000)	—


	Notional amounts, nine months ended September 30, 2020
	Beginning of		Dispositions/	End of
Instrument	period	Additions	expirations	period

	(in thousands)
Forward purchase contracts	13,618,361	370,704,328	(352,878,906)	31,443,783
Forward sale contracts	16,220,526	444,965,072	(418,747,355)	42,438,243
MBS put options	6,100,000	79,600,000	(72,750,000)	12,950,000
MBS call options	—	1,850,000	—	1,850,000
Swaption purchase contracts	1,750,000	14,700,000	(13,325,000)	3,125,000
Swaption sale contracts	—	13,325,000	(13,325,000)	—
Put options on interest rate futures purchase contracts	2,250,000	12,025,000	(12,000,000)	2,275,000
Call options on interest rate futures purchase contracts	750,000	9,740,000	(9,540,000)	950,000
Put options on interest rate futures sale contracts	—	12,000,000	(12,000,000)	—
Call options on interest rate futures sale contracts	—	9,540,000	(9,540,000)	—
Treasury futures purchase contracts	1,276,000	5,516,700	(5,792,700)	1,000,000
Treasury futures sale contracts	1,010,000	5,232,700	(5,792,700)	450,000
Interest rate swap futures purchase contracts	3,210,000	4,150,000	(3,775,000)	3,585,000
Interest rate swap futures sales contracts	—	3,775,000	(3,775,000)	—


	Notional amounts, nine months ended September 30, 2019
	Beginning of		Dispositions/	End of
Instrument	period	Additions	expirations	period

	(in thousands)
Forward purchase contracts	6,657,026	237,370,321	(228,197,522)	15,829,825
Forward sale contracts	6,890,046	275,749,351	(267,522,587)	15,116,810
MBS put options	4,635,000	77,185,000	(71,770,000)	10,050,000
MBS call options	1,450,000	6,750,000	(8,200,000)	—
Put options on interest rate futures purchase contracts	3,085,000	19,422,500	(18,157,500)	4,350,000
Call options on interest rate futures purchase contracts	1,512,500	13,127,800	(14,040,300)	600,000
Put options on interest rate futures sale contracts	—	27,297,800	(27,297,800)	—
Call options on interest rate futures sale contracts	—	4,837,500	(4,837,500)	—
Treasury futures purchase contracts	835,000	11,943,400	(11,369,900)	1,408,500
Treasury futures sale contracts	1,450,000	11,052,400	(11,369,900)	1,132,500
Interest rate swap futures purchase contracts	625,000	4,075,000	(790,000)	3,910,000
Interest rate swap futures sale contracts	—	790,000	(790,000)	—

Derivative Balances and Netting of Financial Instruments

The Company has elected to present net derivative asset and liability positions, and cash collateral obtained from (or posted to) its counterparties when subject to a master netting arrangement that is legally enforceable on all counterparties in the event of default. The derivatives that are not subject to a master netting arrangement are IRLCs and repurchase agreement derivatives.

Offsetting of Derivative Assets

Following are summaries of derivative assets and related netting amounts:


	September 30, 2020						December 31, 2019
	Gross		Gross amount		Net amount		Gross		Gross amount		Net amount
	amount of		offset in the		of assets in the		amount of		offset in the		of assets in the
	recognized		consolidated		consolidated		recognized		consolidated		consolidated
	assets		balance sheet		balance sheet		assets		balance sheet		balance sheet

	(in thousands)
Derivatives not subject to master netting arrangements:
Interest rate lock commitments	$	544,151	$	—	$	544,151	$	138,511	$	—	$	138,511
Repurchase agreement derivatives		—		—		—		8,187		—		8,187
		544,151		—		544,151		146,698		—		146,698
Derivatives subject to master netting arrangements:
Forward purchase contracts		72,640		—		72,640		12,364		—		12,364
Forward sale contracts		21,652		—		21,652		17,097		—		17,097
MBS put options		27,336		—		27,336		3,415		—		3,415
MBS call options		4,255		—		4,255		—		—		—
Swaption purchase contracts		5,568		—		5,568		2,409		—		2,409
Put options on interest rate futures purchase contracts		5,910		—		5,910		3,945		—		3,945
Call options on interest rate futures purchase contracts		1,570		—		1,570		1,469		—		1,469
Netting		—		(104,828)		(104,828)		—		(27,711)		(27,711)
		138,931		(104,828)		34,103		40,699		(27,711)		12,988
	$	683,082	$	(104,828)	$	578,254	$	187,397	$	(27,711)	$	159,686

Derivative Assets, Financial Instruments, and Cash Collateral Held by Counterparty

The following table summarizes by significant counterparty the amount of derivative asset positions after considering master netting arrangements and financial instruments or cash pledged that do not meet the accounting guidance qualifying for netting.


	September 30, 2020								December 31, 2019
			Gross amount not								Gross amount not
			offset in the								offset in the
			consolidated								consolidated
	Net amount		balance sheet						Net amount		balance sheet
	of assets in the				Cash				of assets in the				Cash
	consolidated		Financial		collateral		Net		consolidated		Financial		collateral		Net
	balance sheet		instruments		received		amount		balance sheet		instruments		received		amount

	(in thousands)
Interest rate lock commitments	$	544,151	$	—	$	—	$	544,151	$	138,511	$	—	$	—	$	138,511
JPMorgan Chase Bank, N.A.		18,772		—		—		18,772		2,196		—		—		2,196
RJ O'Brien		7,480		—		—		7,480		5,414		—		—		5,414
Wells Fargo Bank, N.A.		5,256		—		—		5,256		—		—		—		—
Goldman Sachs		1,148		—		—		1,148		2,548		—		—		2,548
Deutsche Bank		—		—		—		—		9,138		—		—		9,138
Mizuho Securities		—		—		—		—		1,597		—		—		1,597
Others		1,447		—		—		1,447		282		—		—		282
	$	578,254	$	—	$	—	$	578,254	$	159,686	$	—	$	—	$	159,686

Offsetting of Derivative Liabilities and Financial Liabilities

Following is a summary of net derivative liabilities and assets sold under agreements to repurchase and related netting amounts. Assets sold under agreements to repurchase do not qualify for netting.


	September 30, 2020						December 31, 2019
					Net						Net
					amount						amount
	Gross		Gross amount		of liabilities		Gross		Gross amount		of liabilities
	amount of		offset in the		in the		amount of		offset in the		in the
	recognized		consolidated		consolidated		recognized		consolidated		consolidated
	liabilities		balance sheet		balance sheet		liabilities		balance sheet		balance sheet

	(in thousands)
Derivatives not subject to master netting arrangements – Interest rate lock commitments	$	2,706	$	—	$	2,706	$	1,861	$	—	$	1,861
Derivatives subject to a master netting arrangement:
Forward purchase contracts		15,903		—		15,903		19,040		—		19,040
Forward sale contracts		98,765		—		98,765		18,045		—		18,045
Netting		—		(92,837)		(92,837)		—		(16,616)		(16,616)
		114,668		(92,837)		21,831		37,085		(16,616)		20,469
Total derivatives		117,374		(92,837)		24,537		38,946		(16,616)		22,330
Assets sold under agreements to repurchase:
Amount outstanding		7,267,046		—		7,267,046		4,141,680		—		4,141,680
Unamortized debt issuance cost, net		(7,858)		—		(7,858)		(627)		—		(627)
		7,259,188		—		7,259,188		4,141,053		—		4,141,053
	$	7,376,562	$	(92,837)	$	7,283,725	$	4,179,999	$	(16,616)	$	4,163,383

Derivative Liabilities, Financial Instruments, and Collateral Held by Counterparty

The following table summarizes by significant counterparty the amount of derivative liabilities and assets sold under agreements to repurchase after considering master netting arrangements and financial instruments or cash pledged that do not qualify under the accounting guidance for netting. All assets sold under agreements to repurchase are secured by sufficient collateral or have fair value that exceeds the liability amount recorded on the consolidated balance sheets.


	September 30, 2020								December 31, 2019
			Gross amounts								Gross amounts
			not offset in the								not offset in the
	Net amount		consolidated						Net amount		consolidated
	of liabilities		balance sheet						of liabilities		balance sheet
	in the				Cash				in the				Cash
	consolidated		Financial		collateral		Net		consolidated		Financial		collateral		Net
	balance sheet		instruments		pledged		amount		balance sheet		instruments		pledged		amount

	(in thousands)
Interest rate lock commitments	$	2,706	$	—	$	—	$	2,706	$	1,861	$	—	$	—	$	1,861
Credit Suisse First Boston Mortgage Capital LLC		3,613,132		(3,607,746)		—		5,386		1,235,430		(1,235,430)		—		—
Morgan Stanley Bank, N.A.		784,434		(784,434)		—		—		582,941		(582,941)		—		—
Bank of America, N.A.		767,391		(767,391)		—		—		379,400		(374,190)		—		5,210
JPMorgan Chase Bank, N.A.		741,341		(741,341)		—		—		936,172		(936,172)		—		—
Citibank, N.A.		637,347		(632,928)		—		4,419		655,831		(653,170)		—		2,661
BNP Paribas		370,013		(370,013)		—		—		183,880		(183,880)		—		—
Royal Bank of Canada		363,193		(363,193)		—		—		175,897		(175,897)		—		—
Federal Home Loan Mortgage Corporation		5,755		—		—		5,755		—		—		—		—
Mizuho Securities		2,366		—		—		2,366		—		—		—		—
Barclays Capital		1,648		—		—		1,648		—		—		—		—
Wells Fargo Bank, N.A.		—		—		—		—		11,212		—		—		11,212
Others		2,257		—		—		2,257		1,386		—		—		1,386
	$	7,291,583	$	(7,267,046)	$	—	$	24,537	$	4,164,010	$	(4,141,680)	$	—	$	22,330

Following are the gains (losses) recognized by the Company on derivative financial instruments and the income statement lines where such gains and losses are included:


		Quarter ended September 30,				Nine months ended September 30,
Derivative activity	Income statement line	2020		2019		2020		2019

		(in thousands)
Interest rate lock commitments	Net gains on loans held for sale at fair value (1)	$	173,381	$	33,347	$	404,795	$	95,785
Repurchase agreement derivatives	Interest expense	$	83	$	92	$	83	$	(1,608)
Hedged item (2):
Interest rate lock commitments and loans held for sale	Net gains on loans held for sale at fair value	$	(77,320)	$	(55,540)	$	(403,992)	$	(157,362)
Mortgage servicing rights	Net loan servicing fees–Change in fair value of mortgage servicing rights and mortgage servicing liabilities	$	6,521	$	250,146	$	1,027,327	$	587,883

(1)

Represents net increase in fair value of IRLCs from the beginning to the end of the reporting period. Amounts recognized at the date of commitment and fair value changes recognized during the period until purchase of the underlying loans are shown in the rollforward of IRLCs for the period in Note 6 – Fair Value – Assets and Liabilities Measured at Fair Value on a Recurring Basis.

(2)	All the hedging derivatives are interest rate derivatives and are used as economic hedges.