DERIVATIVES

The Company utilizes derivative instruments to economically hedge a portion of its exposure to interest rate risk. As of March 31, 2017, the Company primarily uses pay-fixed interest rate swaps to hedge its exposure to changes in interest rates and uses receive-fixed interest rate swaps to offset a portion of its pay-fixed interest rate swaps in order to manage its overall hedge position. The objective of the Company's risk management strategy is to mitigate declines in book value resulting from fluctuations in the fair value of the Company's assets from changing interest rates and to protect some portion of the Company's earnings from rising interest rates. Please refer to Note 1 for information related to the Company's accounting policy for its derivative instruments.

The table below summarizes information about the Company’s derivative instruments treated as trading instruments on its consolidated balance sheet as of the dates indicated:



		March 31, 2017							December 31, 2016
Trading Instruments	Balance Sheet Location	Fair Value ⁽¹⁾			Notional		WAVG Net Pay-Fixed Rate⁽²⁾		Fair Value			Notional		WAVG Net Pay-Fixed Rate⁽²⁾
Interest rate swaps	Derivative assets	$	272		$	3,695,000	1.61	%	$	28,534		$	2,670,000	1.41	%
Interest rate swaps	Derivative liabilities	(58		)	850,000		2.13	%	(6,922		)	1,210,000		1.96	%

(1)

Refer to Note 1 regarding information on a change in the CME rulebook. Amounts reported on the consolidated balance sheet as of March 31, 2017 reflect the netting of the derivative asset or liability with the related collateral received or posted, respectively. The gross amounts comparable to December 31, 2016 for the derivative asset and derivative liabilities as of March 31, 2017 were $24,828 and $(6,133), respectively.


(2)	Weighted average net pay fixed rate is weighted by the notional amount of pay fixed interest rate swaps, net of receive-fixed interest rate swaps held as of date indicated.

The notional amount of pay-fixed interest rate swaps included in the table above that were forward starting was $2,675,000 at a weighted average pay-fixed rate of 2.16% as of March 31, 2017 compared to $2,725,000 at a weighted average pay-fixed rate of 2.18% as of December 31, 2016.

The following table summarizes the notional activity related to derivative instruments for the period indicated:



	Notional receive-fixed interest rate swaps			Notional pay-fixed interest rate swaps			Total Notional
As of December 31, 2016	$	425,000		$	3,455,000		$	3,880,000
Additions	$	—		$	1,400,000		$	1,400,000
Settlements, terminations, or expirations	$	(300,000	)	$	(435,000	)	$	(735,000	)
As of March 31, 2017	$	125,000		$	4,420,000		$	4,545,000

The table below provides detail of the Company's "gain (loss) on derivative instruments, net" by type of derivative for the periods indicated:



	Three Months Ended
	March 31,
Type of Derivative Instrument	2017			2016
Receive-fixed interest rate swaps	$	(134	)	$	10,534
Pay-fixed interest rate swaps	309			(46,612		)
Eurodollar futures	—			(12,186		)
Gain (loss) on derivative instruments, net	$	175		$	(48,264	)

There is a net unrealized gain of $572 remaining in AOCI on the Company's consolidated balance sheet as of March 31, 2017 which represents the activity related to interest rate swap agreements while they were previously designated as cash flow hedges, and this amount will be recognized in the Company's net income as an adjustment to "interest expense" over the remaining contractual life of the agreements. The Company estimates a credit of $217 will be reclassified to net income as a reduction of "interest expense" within the next 12 months.

A portion of the Company's interest rate swaps were entered into under bilateral agreements which contain cross-default provisions with other agreements between the parties. In addition, these bilateral agreements contain financial and operational covenants similar to those contained in our repurchase agreements as described in Note 3. The Company was in compliance with all covenants with respect to bilateral agreements under which interest rate swaps were entered into as of March 31, 2017.

The Company's derivatives are subject to underlying agreements with master netting or similar arrangements, which provide for the right of offset in the event of default or in the event of bankruptcy of either party to the transactions. The Company reports its derivative assets and liabilities subject to these arrangements on a gross basis. The following tables present information regarding those derivative assets and liabilities subject to such arrangements as if the Company had presented them on a net basis as of March 31, 2017 and December 31, 2016:



	Offsetting of Assets
	Gross Amount of Recognized Assets		Gross Amount Offset in the Balance Sheet		Net Amount of Assets Presented in the Balance Sheet		Gross Amount Not Offset in the Balance Sheet ⁽¹⁾						Net Amount
	Gross Amount of Recognized Assets		Gross Amount Offset in the Balance Sheet		Net Amount of Assets Presented in the Balance Sheet		Financial Instruments Received as Collateral			Cash Received as Collateral			Net Amount
March 31, 2017
Derivative assets	$	272	$	—	$	272	$	(29	)	$	—		$	243
December 31, 2016:
Derivative assets	$	28,534	$	—	$	28,534	$	(6,449	)	$	(22,085	)	$	—



	Offsetting of Liabilities
	Gross Amount of Recognized Liabilities		Gross Amount Offset in the Balance Sheet		Net Amount of Liabilities Presented in the Balance Sheet		Gross Amount Not Offset in the Balance Sheet ⁽¹⁾					Net Amount
	Gross Amount of Recognized Liabilities		Gross Amount Offset in the Balance Sheet		Net Amount of Liabilities Presented in the Balance Sheet		Financial Instruments Posted as Collateral			Cash Posted as Collateral		Net Amount
March 31, 2017
Derivative liabilities	$	58	$	—	$	58	$	(58	)	$	—	$	—

December 31, 2016:
Derivative liabilities	$	6,922	$	—	$	6,922	$	(6,913	)	$	—	$	9


(1)	Amounts disclosed for collateral received by or posted to the same counterparty include cash and the fair value of MBS up to and not exceeding the net amount of the asset or liability presented in the balance sheet. The fair value of the actual collateral received by or posted to the same counterparty may exceed the amounts presented.

Please see Note 3 for information related to the Company's repurchase agreements which are also subject to underlying agreements with master netting or similar arrangements.