DERIVATIVES

As part of its risk management activities, the Company’ utilizes derivative financial instruments to manage its exposure to cash flow volatility and market value risk related to interest rate risk on the Company's investments and their associated financing. Effective June 30, 2013, the Company voluntarily discontinued hedge accounting for interest rate swaps which had previously been accounted for as cash flow hedges under GAAP.

The tables below summarize information about the Company’s derivative financial instruments on the balance sheet as of the dates indicated:



		June 30, 2013					December 31, 2012
Accounting Designation:	Balance Sheet Location:	Fair Value			Aggregate Notional Amount		Fair Value			Aggregate Notional Amount
Trading instruments	Derivative assets	$	14,860		$	600,000	$	—		$	—

Hedging instruments		$	—		$	—	$	(39,813	)	$	1,435,000
Trading instruments		(21,192		)	1,042,000		(2,724		)	27,000
	Derivative liabilities	$	(21,192	)	$	1,042,000	$	(42,537	)	$	1,462,000

The following table summarizes the contractual maturities remaining for the Company’s outstanding interest rate swap agreements as of June 30, 2013:



Remaining Maturity	Notional Amount: Trading		Notional Amount: Hedging		Notional Amount: Total		Number of Swaps	Weighted-Average Fixed Rate Swapped
0-12 months	$	435,000	$	—	$	435,000	7	1.26	%
13-36 months	390,000		—		390,000		11	1.99	%
37-60 months	212,000		—		212,000		8	1.17	%
Over 60 months	605,000		—		605,000		20	1.76	%
	$	1,642,000	$	—	$	1,642,000	46	1.61	%

As of June 30, 2013 three of these agreements with a total notional balance of $150,000 and a weighted average pay-fixed rate of 2.17% are forward-starting and will not be effective until 2014.

The Company’s objective for using interest rate swaps is to manage its exposure to the risk of cash flow volatility from increased interest expense on its repurchase agreement borrowings. Because repurchase agreements are short-term in nature, as they mature, the interest rate on the new repurchase agreement resets to a market interest rate. This sequential rollover borrowing program creates a variable interest expense pattern. The changes in the cash flows of the interest rate swaps are expected to be highly effective at offsetting changes in the interest portion of the cash flows expected to be paid at maturity of each borrowing.

Activity up to and including June 30, 2013 for those interest rate swap agreements previously designated as cash flow hedges was recorded in accordance with cash flow hedge accounting as prescribed by ASC Topic 815. The table below presents the effect of those derivatives while they were designated as hedging instruments on the Company’s consolidated statement of comprehensive income for the periods indicated:



Type of Derivative Designated as Cash Flow Hedge	Amount of Gain (Loss) Recognized in OCI (Effective Portion)	Amount Reclassified from OCI into Net Income as "Interest Expense" (Effective Portion)	Amount of Gain Recognized in Net Income as "Other income, net" (Ineffective Portion)
For the three months ended June 30, 2013:
Interest rate swaps	$15,944	$4,693	$90
For the three months ended June 30, 2012:
Interest rate swaps	$(14,693)	$3,509	$131
For the six months ended June 30, 2013:
Interest rate swaps	$16,381	$8,796	$50
For the six months ended June 30, 2012:
Interest rate swaps	$(17,780)	$6,775	$69

As a result of discontinuing hedge accounting, the net unrealized loss remaining in AOCI as of June 30, 2013 of $14,558 related to the interest rate swap agreements previously designated as cash flow hedges will be recognized into the Company's consolidated statement of income as a portion of "interest expense" over the remaining contractual life of the agreements. The Company estimates the net amount of existing net unrealized loss on discontinued cash flow hedges expected to be reclassified to earnings within the next 12 months is $9,042.

During the second quarter of 2013, the Company also entered into four additional interest rate swap agreements with a combined notional balance of $180,000 and designated them as trading at inception. The table below presents the amount of gain (loss) recognized in net income for the changes in fair value of the Company's derivatives designated as trading instruments for the periods indicated:



Type of Derivative Designated as Trading	Location On Income Statement	Three Months Ended					Six Months Ended
Type of Derivative Designated as Trading	Location On Income Statement	June 30, 2013		June 30, 2012			June 30, 2013		June 30, 2012
Interest rate swaps	Fair value adjustments, net	$	11,353	$	(500	)	$	11,336	$	(574	)

All of the Company's interest rate swap agreements contain various covenants related to the Company’s credit risk. Specifically, if the Company defaults on any of its indebtedness, including those circumstances whereby repayment of the indebtedness has not yet been accelerated by the lender, or is declared in default of any of its covenants with any counterparty, then the Company could also be declared in default of its derivative obligations. Additionally, the agreements outstanding with its derivative counterparties allow those counterparties to require settlement of its outstanding derivative transactions if the Company fails to earn GAAP net income greater than one dollar as measured on a rolling two quarter basis. These interest rate agreements also contain provisions whereby, if the Company fails to maintain a minimum net amount of shareholders’ equity, then the Company may be declared in default on its derivative obligations.