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Derivatives
 9 Months Ended
Sep. 30, 2022
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivatives DERIVATIVES
Types and Uses of Derivatives Instruments

Interest Rate Derivatives. As of September 30, 2022, the Company used short positions in U.S. Treasury futures and call options on U.S. Treasury futures to mitigate the impact of changing interest rates on the fair value of its investments and its net interest earnings.

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 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.

The table below provides detail of the Company’s “gain on derivative instruments, net” by type of derivative instrument for the periods indicated:
Three Months EndedNine Months Ended
September 30,September 30,
Type of Derivative Instrument2022202120222021
U.S. Treasury futures$281,827 $11,209 $721,236 $43,673 
Interest rate swaptions(4,202)3,985 47,738 42,686 
Options on U.S. Treasury futures630 (3,226)630 (2,141)
TBA securities(181,308)(2,365)(346,034)(19,755)
Gain on derivative instruments, net$96,947 $9,603 $423,570 $64,463 

    The table above includes realized gains (losses) of $149,600 and $485,960 for the three and nine months ended September 30, 2022, compared to $(71,708) and $15,962 for the three and nine months ended September 30, 2021 on derivatives designated for tax purposes as hedges of interest rate risk. Though these realized gains (losses) are included in GAAP net income (loss), the majority of these gains are not included in REIT taxable income nor distributable as part of the Company’s dividends until amortized over the original periods hedged, though recognition may be accelerated if the underlying instrument originally hedged is terminated or paid off.

The table below provides the carrying amount by type of derivative instrument comprising the Company’s derivative assets and liabilities on its consolidated balance sheets as of the dates indicated:
Type of Derivative InstrumentBalance Sheet LocationPurposeSeptember 30, 2022December 31, 2021
Interest rate swaptionsDerivative assetsEconomic hedging$— $3,202 
Options on U.S. Treasury futuresDerivative assetsEconomic hedging3,047 — 
TBA securitiesDerivative assetsInvesting10,818 4,767 
Total derivatives assets$13,865 $7,969 
TBA securitiesDerivative liabilitiesInvesting$99,670 — 
Total derivatives liabilities$99,670 $— 

Because the Company’s short positions in U.S. Treasury futures are net settled on a daily basis, the carrying value within “derivative assets” on the Company’s consolidated balance sheet nets to $0. As of September 30, 2022, the amount of cash posted by the Company for its U.S. Treasury futures was $105,062, of which $95,665 is the required margin recorded within “restricted cash,” The excess amount of $9,397 is recorded within “due from counterparties.”

The Company’s options on U.S. Treasury futures are recorded at fair value on its consolidated balance sheet as of September 30, 2022. The Company’s cost basis as of September 30, 2022 was $2,417, which represents the premium paid.

The following table summarizes information about the Company's long positions in TBA securities as of the dates indicated:
September 30, 2022December 31, 2021
Implied market value (1)
$3,224,087 $1,531,188 
Implied cost basis (2)
3,312,939 1,526,421 
Net carrying value (3)
$(88,852)$4,767 
(1) Implied market value represents the estimated fair value of the underlying Agency MBS as of the dates indicated.
(2) Implied cost basis represents the forward price to be paid for the underlying Agency MBS as of the dates indicated.
(3) Net carrying value is the amount included on the consolidated balance sheets within “derivative assets” and “derivative liabilities” and represents the difference between the implied market value and the implied cost basis of the TBA securities as of the dates indicated.

Volume of Activity

The table below summarizes changes in the Company’s derivative instruments for the nine months ended September 30, 2022:
Type of Derivative InstrumentBeginning
Notional Amount-Long (Short)		AdditionsSettlements,
Terminations,
or Pair-Offs		Ending
Notional Amount-Long (Short)
Interest rate swaptions$500,000 $— $(500,000)$— 
U.S. Treasury futures(3,890,000)13,480,000 (14,750,000)(5,160,000)
Options on U.S. Treasury futures— 750,000 — 750,000 
TBA securities1,530,000 27,093,000 (25,104,000)3,519,000 

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, 2022 and December 31, 2021:
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, 2022
Options on U.S. Treasury futures$3,047 $— $3,047 $— $— $3,047 
TBA securities10,818 — 10,818 (10,818)— — 
Derivative assets$13,865 $— $13,865 $(10,818)$— $3,047 
December 31, 2021
Interest rate swaptions$3,202 $— $3,202 $— $(481)$2,721 
TBA securities4,767 — 4,767 — (1,353)3,414 
Derivative assets$7,969 $— $7,969 $— $(1,834)$6,135 
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, 2022
TBA securities$99,670 $— $99,670 $(10,818)$(77,096)$11,756 
Derivative liabilities$99,670 $— $99,670 $(10,818)$(77,096)$11,756 
December 31, 2021
Derivative liabilities$— $— $— $— $— $— 
(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.”