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Derivatives (Notes)
 9 Months Ended
Sep. 30, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivatives DERIVATIVES
Types and Uses of Derivatives Instruments
Interest Rate Derivatives. The Company is currently using short positions in U.S. Treasury futures, put options on U.S. Treasury futures, and interest rate swaptions to mitigate the impact of changing interest rates on its book value. The Company has substantially reduced its notional balance of interest rate swaps since first quarter of 2020 due to the significant reduction of its MBS portfolio and management’s expectation that financing costs will remain low for the near term.

TBA Transactions. The Company purchases 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 Company accounts for all TBAs (whether net long or net short positions, or collectively “TBA dollar roll positions”) as derivative instruments because it cannot assert that it is probable at inception and throughout the term of an individual TBA transaction that its settlement will result in physical delivery of the underlying Agency RMBS, or that the individual TBA transaction will not settle in the shortest period possible.

Gain (Loss) on Derivative Instruments, Net

The table below provides detail of the Company’s “gain (loss) on derivative instruments, net” by type of derivative for the periods indicated:
Three MonthsNine Months Ended
September 30,September 30,
Type of Derivative Instrument2020201920202019
Interest rate swaps$911 $(52,908)$(182,941)$(248,886)
Interest rate swaptions411 (4,329)(162)(4,329)
Futures(6,517)1,712 (25,140)1,501 
Options on U.S. Treasury futures(5,655)— (23,815)— 
TBA securities - long positions18,824 4,652 45,943 21,609 
TBA securities - short positions— 164 (10,041)164 
Gain (loss) on derivative instruments, net$7,974 $(50,709)$(196,156)$(229,941)

The table below summarizes information about the carrying value by type of derivative instrument on the Company’s consolidated balance sheets as of the dates indicated:
Type of Derivative InstrumentBalance Sheet LocationPurposeSeptember 30, 2020December 31, 2019
Options on U.S. Treasury futuresDerivative assetsEconomic hedging$386 $2,883 
Interest rate swaptionsDerivative assetsEconomic hedging411 573 
TBA securities - long positionsDerivative assetsInvesting3,469 834 
Total derivatives assets$4,266 $4,290 
U.S. Treasury futuresDerivative liabilitiesEconomic hedging$(5,164)$— 
TBA securities - short positionsDerivative liabilitiesEconomic hedging— (974)
Total derivatives liabilities$(5,164)$(974)
The following table summarizes certain characteristics of our derivative instruments outstanding as of September 30, 2020 and December 31, 2019:

Interest Rate Swaptions:OptionUnderlying Payer Swap
As of:Cost BasisFair ValueAverage Term to ExpirationNotional AmountAverage Fixed Pay RateAverage Term in Years
September 30, 2020$4,150 $411 6 months$500,000 1.01%10
December 31, 20196,180 573 1 month750,000 2.07%10
As of September 30, 2020:As of December 31, 2019:
Notional Amount Long (Short)Fair ValueAverage Term to ExpirationNotional Amount Long (Short)Fair ValueAverage Term to Expiration
Options on U.S. Treasury futures$1,225,000 $386 1 month$1,350,000 $2,883 2 months
U.S. Treasury futures - short positions(1,025,000)(5,164)3 months— — — 


As of September 30, 2020, the Company had one interest rate swap outstanding with a pay-fixed rate of 1.35% and a notional amount of $50,000 for which it had $(297) posted in variation margin. This instrument matured in October 2020.

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

September 30, 2020December 31, 2019
TBA securitiesLong PositionsShort PositionsLong PositionsShort Positions
Implied market value (1)
$1,164,000 $— $442,161 $(520,117)
Implied cost basis (2)
1,160,531 — 441,327 (519,143)
Net carrying value (3)
$3,469 $— $834 $(974)

(1) Implied market value represents the estimated fair value of the underlying Agency MBS as of the date indicated.
(2) Implied cost basis represents the forward price to be paid for the underlying Agency MBS 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 period indicated:
Type of Derivative InstrumentNotional Amount as of December 31, 2019AdditionsSettlements,
Terminations,
or Pair-Offs		Notional Amount as of September 30, 2020
Interest rate swaps$4,225,000 $2,915,000 $(7,090,000)$50,000 
Interest rate swaptions750,000 500,000 (750,000)500,000 
U.S. Treasury futures - short positions— 3,637,600 (4,662,600)(1,025,000)
Options on U.S. Treasury futures1,350,000 4,650,000 (4,775,000)1,225,000 
TBA - long positions435,000 9,936,000 (9,246,000)1,125,000 
TBA - short positions500,000 3,017,000 (3,517,000)— 

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, 2020 and December 31, 2019:

Offsetting of Assets
Gross Amount of Recognized AssetsGross Amount Offset in the Balance SheetNet Amount of Assets Presented in the Balance Sheet
Gross Amount Not Offset in the Balance Sheet (1)
Net Amount
Financial Instruments Received as CollateralCash Received as Collateral
September 30, 2020
Interest rate swaption$411 $— $411 $— $— $411 
Options on U.S. Treasury futures386 — 386 — — 386 
TBA - long positions3,469 — 3,469 — — 3,469 
Derivative assets$4,266 $— $4,266 $— $— $4,266 
December 31, 2019
Interest rate swaptions$573 $— $573 $— $— $573 
Options on U.S. Treasury futures2,883 — 2,883 — — 2,883 
TBA - long positions834 — 834 (380)— 454 
Derivative assets$4,290 $— $4,290 $(380)$— $3,910 
Offsetting of Liabilities
Gross Amount of Recognized LiabilitiesGross Amount Offset in the Balance SheetNet Amount of Liabilities Presented in the Balance Sheet
Gross Amount Not Offset in the Balance Sheet (1)
Net Amount
Financial Instruments Posted as CollateralCash Posted as Collateral
September 30, 2020
U.S. Treasury futures-short positions$(5,164)— $(5,164)$— $— $(5,164)
Derivative liabilities$(5,164)$— $(5,164)$— $— $(5,164)
December 31, 2019
TBA - short positions$(974)— $(974)$380 — $(594)
Derivative liabilities$(974)$— $(974)$380 $— $(594)
(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.