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Derivatives (Notes)
 9 Months Ended
Sep. 30, 2021
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivatives DERIVATIVES
Types and Uses of Derivatives Instruments

Interest Rate Derivatives. During the three and nine months ended September 30, 2021, the Company has been 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.

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. 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 Months EndedNine Months Ended
September 30,September 30,
Type of Derivative Instrument2021202020212020
Interest rate swaps$— $911 $— $(182,941)
Interest rate swaptions3,985 411 42,686 (162)
U.S. Treasury futures11,209 (6,517)43,673 (25,140)
Options on U.S. Treasury futures(3,226)(5,655)(2,141)(23,815)
TBA securities - long positions(2,365)18,824 (19,755)45,943 
TBA securities - short positions— — — (10,041)
Gain (loss) on derivative instruments, net$9,603 $7,974 $64,463 $(196,156)

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, 2021December 31, 2020
U.S. Treasury futuresDerivative assetsEconomic hedging$60,159 $— 
Options on U.S. Treasury futuresDerivative assetsEconomic hedging— 1,094 
Interest rate swaptionsDerivative assetsEconomic hedging9,939 1,360 
TBA securitiesDerivative assetsInvesting— 8,888 
Total derivatives assets$70,098 $11,342 
Interest rate swaptionsDerivative liabilitiesEconomic hedging$— $(107)
U.S. Treasury futuresDerivative liabilitiesEconomic hedging— (1,527)
TBA securitiesDerivative liabilitiesInvesting(12,584)— 
Total derivatives liabilities$(12,584)$(1,634)
The following table provides details on the Company’s interest rate swaptions held as of the dates indicated:
OptionUnderlying Payer Swap
Average Months to ExpirationCostFair ValueNotional AmountAverage Fixed Pay RateAverage Term in Years
As of September 30, 2021:
3 months or less$3,725 $4,453 $250,000 1.19%10
9-12 months9,375 5,486 500,000 1.60%10
$13,100 $9,939 $750,000 1.46%
As of December 31, 2020:
6 months or less$6,312 $1,161 $750,000 1.02%10
6-9 months6,688 92 500,000 1.16%10
$13,000 $1,253 $1,250,000 1.07%

The following table provides details on the Company’s U.S. Treasury futures and options on U.S. Treasury futures held as of the dates indicated:
September 30, 2021December 31, 2020:
Notional Amount Long (Short)Fair ValueAverage Term to ExpirationNotional Amount Long (Short)Fair ValueAverage Term to Expiration
Options on U.S. Treasury futures$— $— n/a$500,000 $1,094 1 month
U.S. Treasury futures(3,540,000)60,159 3 months(825,000)(1,527)2 months

The following table summarizes information about the Company's long positions in TBA securities as of the dates indicated:
September 30, 2021December 31, 2020
Implied market value (1)
$1,987,906 $1,572,949 
Implied cost basis (2)
2,000,490 1,564,061 
Net carrying value (3)
$(12,584)$8,888 
(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 nine months ended September 30, 2021:
Type of Derivative InstrumentBeginning
Notional Amount-Long (Short)		AdditionsSettlements,
Terminations,
or Pair-Offs		Ending
Notional Amount-Long (Short)
Interest rate swaptions1,250,000 500,000 (1,000,000)750,000 
U.S. Treasury futures(825,000)(11,640,000)8,925,000 (3,540,000)
Options on U.S. Treasury futures500,000 2,350,000 (2,850,000)— 
TBA securities1,515,000 20,235,000 (19,770,000)1,980,000 

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. Please see Note 4 for information related to the Company’s repurchase agreements, which are also subject to underlying agreements with master netting or similar arrangements. 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, 2021 and December 31, 2020:
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, 2021
U.S. Treasury futures$60,159 $— $60,159 $— $(12,537)$47,622 
Interest rate swaptions9,939 — 9,939 — (9,939)— 
Derivative assets$70,098 $— $70,098 $— $(22,476)$47,622 
December 31, 2020
Interest rate swaptions$1,360 $— $1,360 $(107)$— $1,253 
Options on U.S. Treasury futures1,094 — 1,094 — — 1,094 
TBA securities8,888 — 8,888 — (7,681)1,207 
Derivative assets$11,342 $— $11,342 $(107)$(7,681)$3,554 
Offsetting of Liabilities
Gross Amount of Recognized LiabilitiesGross Amount Offset in the Balance SheetNet Amount of Liabilities Presented in the Balance Sheet
Gross Amount Not Offset in the Balance Sheet (1)
Net Amount
Financial Instruments Posted as CollateralCash Posted as Collateral
September 30, 2021
TBA securities$(12,584)— $(12,584)$— $12,584 $— 
Derivative liabilities$(12,584)$— $(12,584)$— $12,584 $— 
December 31, 2020
U.S. Treasury futures-short positions$(1,527)— $(1,527)$— $1,527 $— 
Interest rate swaptions(107)— (107)107 — — 
Derivative liabilities$(1,634)$— $(1,634)$107 $1,527 $— 
(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 fair value of financial instruments pledged as collateral for derivatives and repurchase agreements, which is shown parenthetically, and the total cash pledged or received as collateral which is disclosed in “cash collateral posted to/by counterparties.”