Derivatives (Notes)

12 Months Ended

Dec. 31, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

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 utilize 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 long and 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	December 31, 2019		December 31, 2018
Interest rate swaps ⁽¹⁾	Derivative assets	Economic hedging	$	—	$	324
Interest rate swaptions	Derivative assets	Economic hedging	573		—
Options on U.S. Treasury futures	Derivative assets	Economic hedging	2,883		—
TBA securities - long positions	Derivative assets	Investing	834		6,239
			$	4,290	$	6,563

TBA securities - short positions	Derivative liabilities	Economic hedging	$	(974)	$	—
U.S. Treasury futures	Derivative liabilities	Economic hedging	—		(1,218)
			$	(974)	$	(1,218)

(1) Amounts shown as of December 31, 2019 and December 31, 2018 are net of $(9,265) paid and $8,424 received, respectively, in variation margin which is recorded on the Company’s consolidated balance sheets within “restricted cash.” As of December 31, 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:


	Year Ended
	December 31,
Type of Derivative Instrument	2019		2018		2017
Interest rate swaps	$	(202,450)	$	10,363	$	(2,632)
Interest rate swaptions	(5,607)		—		—
Eurodollar futures	2,359		1,887		821
U.S. Treasury futures	(109)		(4,609)		—
Options on U.S. Treasury futures	(1,422)		(658)		—
TBA securities - long positions	20,020		(10,737)		5,757
TBA securities - short positions	260		293		(902)
(Loss) gain on derivative instruments, net	$	(186,949)	$	(3,461)	$	3,044

Interest Rate Swaps

The following tables present information about the Company’s interest rate swaps as of the dates indicated:


	December 31, 2019
			Weighted-Average
Years to Maturity:	Notional Amount		Pay Rate		Life Remaining (in Years)
< 3 years	$	2,860,000	1.58	%	1.5
>3 and < 6 years	700,000		1.43	%	4.7
>6 and < 10 years	545,000		1.78	%	9.4
>10 years	120,000		2.84	%	27.7
Total	$	4,225,000	1.62	%	3.8

	December 31, 2018
			Weighted-Average
Years to Maturity:	Notional Amount		Pay Rate		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

Options

The following table presents information about the Company’s options outstanding as of December 31, 2019:⁽¹⁾


	December 31, 2019
	Option									Underlying Instrument
	Cost Basis		Fair Value		Maturity Date	Notional Amount		Rate ⁽²⁾		Term in Years
Pay-fixed interest rate swaptions	$	6,180	$	573	January 16, 2020	$	750,000	2.07	%	10.0
Options on U.S. Treasury futures	4,359		2,883		Febuary 21, 2020	1,350,000		n/a		10.0
Total	$	10,539	$	3,456		$	2,100,000

(1) The Company did not have any options as of December 31, 2018.

(2) Weighted average based on notional amount of the underlying instrument.

TBA Securities

The following table summarizes information about the Company's TBA securities as of the dates indicated:


	December 31, 2019						December 31, 2018
	Long Positions		Short Positions		Long Positions		Short Positions
Implied market value ⁽¹⁾	$	442,161	$	(520,117)	$	888,469	$	—
Implied cost basis ⁽²⁾	441,327		(519,143)		882,230		—
Net carrying value ⁽³⁾	$	834	$	(974)	$	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 December 31, 2019
Interest rate swaps	$	4,515,000	$	6,560,000	$	(6,850,000)	$	4,225,000
Interest rate swaptions	—		1,500,000		(750,000)		750,000
Eurodollar futures	—		9,000,000		(9,000,000)		—
U.S. Treasury futures	50,000		—		(50,000)		—
Options on U.S. Treasury futures	—		1,350,000		—		1,350,000
TBA long positions	860,000		7,615,000		(8,040,000)		435,000
TBA short positions	—		1,800,000		(2,300,000)		(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 December 31, 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
December 31, 2019

Interest rate swaptions	$	573	$	—	$	573	$	—	$	—	$	573
Options on U.S. Treasury future	2,883		—		2,883		—		—		2,883
TBA securities-long positions	834		—		834		(380)		—		454
Derivative assets	$	4,290	$	—	$	4,290	$	(380)	$	—	$	3,910
December 31, 2018
Interest rate swaps	$	324	$	—	$	324	$	—	$	—	$	324
TBA securities-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
December 31, 2019
TBA securities-short positions	(974)		—		(974)		380		—		(594)
Derivative liabilities	$	(974)	$	—	$	(974)	$	380	$	—	$	(594)

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.