XML 35 R10.htm IDEA: XBRL DOCUMENT v3.19.3
Derivatives (Notes)
 9 Months Ended
Sep. 30, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivatives DERIVATIVES

     The Company is a party to certain types of financial instruments that are accounted for as derivative instruments. Please refer to Note 1 for information related to the Company’s accounting policy for its derivative instruments.

Types and Uses of Derivatives Instruments
Interest Rate Derivatives. Changing interest rates impact the fair value of the Company’s investments as well as the interest rates on the Company’s repurchase agreement borrowings used to finance its investments. The Company primarily uses interest rate swaps as economic hedges to mitigate declines in book value and to protect some portion of the Company's earnings from rising interest rates. The Company may also periodically utilizes other types of interest rate derivatives, such as interest rate swaptions and Eurodollar and U.S. Treasury futures as economic hedges.
TBA Transactions. The Company may also purchase TBA securities as a means of investing in non-specified fixed-rate Agency RMBS, and may also periodically sell TBA securities as a means of economically hedging its book value exposure to Agency RMBS as well as earnings exposure from rising financing costs. The Company holds net long and net short positions in TBA securities by executing a series of transactions, commonly referred to as “dollar roll” transactions, which effectively delay the settlement of a forward purchase (or sale) of a non-specified Agency RMBS by entering into an offsetting TBA position, net settling the paired-off positions in cash, and simultaneously entering into an identical TBA long (or short) position with a
later settlement date. TBA securities purchased (or sold) for a forward settlement date are generally priced at a discount relative to TBA securities settling in the current month. This discount, often referred to as “drop income” represents the economic equivalent of net interest income (interest income less implied financing cost) on the underlying Agency security from trade date to settlement date.
The table below summarizes information about the fair value by type of derivative instrument on the Company’s consolidated balance sheets as of the dates indicated:  
Type of Derivative Instrument
 
Balance Sheet Location
 
Purpose
 
September 30, 2019
 
December 31, 2018
Interest rate swaps (1)
 
Derivative assets
 
Economic hedging
 
$
—

 
$
324

Interest rate swaptions
 
Derivative assets
 
Economic hedging
 
1,851

 
—

Eurodollar futures
 
Derivative assets
 
Economic hedging
 
928

 
—

TBA securities - net long position
 
Derivative assets
 
Trading
 
2,066

 
6,239

 
 
 
 
 
 
$
4,845

 
$
6,563

 
 
 
 
 
 
 
 
 
TBA securities - net short position
 
Derivative liabilities
 
Economic hedging
 
$
(439
)
 
$
—

U.S. Treasury futures
 
Derivative liabilities
 
Economic hedging
 
—

 
(1,218
)
 
 
 
 
 
 
$
(439
)
 
$
(1,218
)

(1)
Amounts shown as of September 30, 2019 and December 31, 2018 are net of $(44,140) paid and $8,424 received, respectively, in variation margin which is recorded on the Company’s consolidated balance sheets within “restricted cash.” As of September 30, 2019, all of the Company’s interest rate swap agreements are centrally cleared through the CME. Please refer to Note 1 for information regarding the exchange of variation margin being legally considered as settlement of the derivative as opposed to a pledge of collateral. The amount shown as of December 31, 2018 is the unsettled fair value of the instruments subject to bilateral agreements and not centrally cleared through the CME as of that date.

The table below provides detail of the Company’s “(loss) gain on derivative instruments, net” by type of derivative for the periods indicated:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
Type of Derivative Instrument
 
2019
 
2018
 
2019
 
2018
Interest rate swaps
 
$
(52,908
)
 
25,019

 
$
(248,886
)
 
$
93,833

Interest rate swaptions
 
(4,329
)
 
—

 
(4,329
)
 
—

Eurodollar futures
 
1,712

 
(189
)
 
1,610

 
1,886

U.S. Treasury futures
 
—

 
—

 
(109
)
 
—

Options on U.S. Treasury futures
 
—

 
(127
)
 
—

 
764

TBA securities - net long position
 
4,652

 
(5,204
)
 
21,609

 
(18,256
)
TBA securities - net short position
 
164

 
—

 
164

 
293

(Loss) gain on derivative instruments, net
 
$
(50,709
)
 
$
19,499

 
$
(229,941
)
 
$
78,520






Interest Rate Swaps

The following tables present information about the Company’s interest rate swaps as of the dates indicated:
 
 
September 30, 2019
 
 
 
 
Weighted-Average:
Years to Maturity:
 
Notional Amount (1)
 
Pay Rate (2)
 
Life Remaining (in Years)
< 3 years
 
$
2,360,000

 
1.58
%
 
1.6
>3 and < 6 years
 
550,000

 
1.35
%
 
4.9
>6 and < 10 years
 
850,000

 
1.85
%
 
9.6
   >10 years
 
120,000

 
2.84
%
 
27.9
Total
 
$
3,880,000

 
1.65
%
 
4.7
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
Weighted-Average:
Years to Maturity:
 
Notional Amount (1)
 
Pay Rate (2)
 
Life Remaining (in Years)
< 3 years
 
$
1,560,000

 
1.96
%
 
1.4
>3 and < 6 years
 
1,230,000

 
2.23
%
 
4.4
>6 and < 10 years
 
1,505,000

 
2.80
%
 
8.3
   >10 years
 
220,000

 
2.81
%
 
21.9
Total
 
$
4,515,000

 
2.35
%
 
5.5
(1)
The notional amounts include $0 and $775,000 of forward starting pay-fixed interest rate swaps as of September 30, 2019 and December 31, 2018, respectively.
(2)
Excluding forward starting pay-fixed interest rate swaps, the weighted average pay rate was 1.65% and 2.29% as of September 30, 2019 and December 31, 2018, respectively.


Interest Rate Swaptions
    
The following table presents information about the Company’s interest rate swaption as of September 30, 2019:(1) 
 
September 30, 2019
 
Option
 
Underlying Swap
 
Cost Basis
 
Fair Value
 
Months to Expiration
 
Notional Amount
 
Pay-Fixed Rate (2)
 
Term in Years
Interest rate swaption
$
6,180

 
$
1,851

 
3.7
 
$
750,000

 
2.07
%
 
10.0
(1)
The Company did not have any interest rate swaptions as of December 31, 2018.
(2)
Receive-variable rate based on 3-month LIBOR.

TBA Securities

The following table summarizes information about the Company's TBA securities as of the dates indicated:
 
September 30, 2019
 
December 31, 2018
 
Net Long Positions
 
Net Short Positions
 
Net Long Positions
 
Net Short Positions
Implied market value (1)
$
395,874

 
$
(519,082
)
 
$
888,469

 
$
—

Implied cost basis (2)
393,808

 
(518,643
)
 
882,230

 
—

Net carrying value (3)
$
2,066

 
$
(439
)
 
$
6,239

 
$
—


(1)
Implied market value represents the estimated fair value of the underlying Agency MBS as if settled as of the date indicated.
(2)
Implied cost basis represents the forward price to be paid for the underlying Agency MBS as if settled as of the date indicated.
(3)
Net carrying value is the amount included on the consolidated balance sheets within “derivative assets (liabilities)” and represents the difference between the implied market value and the implied cost basis of the TBA security as of the date indicated.

Volume of Activity

The tables below summarize changes in the Company’s derivative instruments for the periods indicated:
Type of Derivative Instrument
 
Notional Amount as of December 31, 2018
 
Additions
 
Settlements,
Terminations,
or Pair-Offs
 
Notional Amount as of September 30, 2019
Interest rate swaps
 
$
4,515,000

 
$
5,560,000


$
(6,195,000
)
 
$
3,880,000

Interest rate swaptions
 
—

 
1,500,000

 
(750,000
)
 
750,000

Eurodollar futures
 
—

 
9,000,000

 
(3,000,000
)
 
6,000,000

U.S. Treasury futures
 
50,000

 
—

 
(50,000
)
 
—

TBA net long positions
 
860,000

 
6,935,000

 
(7,400,000
)
 
395,000

TBA net short positions
 
—

 
(2,300,000
)
 
1,800,000

 
(500,000
)


Offsetting

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 September 30, 2019 and December 31, 2018:
 
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
Financial Instruments Received as Collateral
 
Cash Received as Collateral
September 30, 2019
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaptions
$
1,851

 
$
—

 
$
1,851

 
$
—

 
$
—

 
$
1,851

Eurodollar futures
928

 
—

 
928

 
—

 
(928
)
 
—

TBA securities-net long positions
2,066

 
—

 
2,066

 
(355
)
 
—

 
1,711

Derivative assets
$
4,845

 
$
—

 
$
4,845

 
$
(355
)
 
$
(928
)
 
$
3,562

December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
$
324

 
$
—

 
$
324

 
$
—

 
$
—

 
$
324

TBA securities-net long positions
6,239

 
—

 
6,239

 
—

 
(1,719
)
 
4,520

Derivative assets
$
6,563

 
$
—

 
$
6,563

 
$
—

 
$
(1,719
)
 
$
4,844



 
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
Financial Instruments Posted as Collateral
 
Cash Posted as Collateral
September 30, 2019
 
 
 
 
 
 
 
 
 
 
 
TBA securities-net short positions
(439
)
 
—

 
(439
)
 
355

 
—

 
(84
)
Derivative liabilities
$
(439
)
 
$
—

 
$
(439
)
 
$
355

 
$
—

 
$
(84
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury futures
(1,218
)
 
—

 
(1,218
)
 
—

 
1,218

 
—

Derivative liabilities
$
(1,218
)
 
$
—

 
$
(1,218
)
 
$
—

 
$
1,218

 
$
—


(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 derivative asset or liability presented in the balance sheet. The fair value of the total collateral received by or posted to the same counterparty may exceed the amounts presented. Please refer to the consolidated balance sheets for the total cash posted as collateral, which is recorded as "restricted cash", and the total fair value of financial instruments pledged as collateral for derivatives and repurchase agreements, which is shown parenthetically.
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.