Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments and Hedging Activities (Tables)

v3.21.2
Derivative Instruments and Hedging Activities (Tables)
 9 Months Ended
Sep. 30, 2021
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Schedule of Derivative Instruments in Statement of Financial Position, Fair Value
The following tables present the gross fair value and notional amounts of the Company’s derivative financial instruments treated as trading derivatives as of September 30, 2021 and December 31, 2020:
September 30, 2021
Derivative Assets Derivative Liabilities
(in thousands) Fair Value Notional Fair Value Notional
Inverse interest-only securities
 $ 45,724  $ 263,014  $ —  $ — 
Interest rate swap agreements
 —  —  —  17,036,595 
Swaptions, net 760  (114,000) (6,441) (827,000)
TBAs 2,556  1,478,000  (48,701) 7,264,000 
Put and call options for TBAs, net
 4,004  1,000,000  —  — 
U.S. Treasury and Eurodollar futures, net —  —  (27,753) (5,913,100)
Total $ 53,044  $ 2,627,014  $ (82,895) $ 17,560,495 
December 31, 2020
Derivative Assets Derivative Liabilities
(in thousands) Fair Value Notional Fair Value Notional
Inverse interest-only securities
 $ 62,200  $ 318,162  $ —  $ — 
Interest rate swap agreements
 —  —  —  12,646,341 
Swaptions, net —  —  (596) 3,750,000 
TBAs 30,062  7,700,000  (10,462) (2,503,000)
U.S. Treasury futures, net 3,675  2,021,100  —  — 
Total $ 95,937  $ 10,039,262  $ (11,058) $ 13,893,341 
Schedule of Derivative Instruments, Gain (Loss) in Statement of Financial Performance
The following table summarizes the location and amount of gains and losses on derivative instruments reported in the condensed consolidated statements of comprehensive income (loss):
Derivative Instruments Location of Gain (Loss) Recognized in Income Amount of Gain (Loss) Recognized in Income Amount of Gain (Loss) Recognized in Income
Three Months Ended Nine Months Ended
(in thousands) September 30, September 30,
2021 2020 2021 2020
Interest rate risk management:
TBAs
(Loss) gain on other derivative instruments
 $ (17,125) $ 60,993  $ (173,254) $ (29,385)
U.S. Treasury and Eurodollar futures
(Loss) gain on other derivative instruments
 3,026  4,448  (63,851) 26,956 
Put and call options for TBAs
(Loss) gain on other derivative instruments
 —  —  —  — 
Interest rate swaps - Payers
(Loss) gain on interest rate swap and swaption agreements
 7,019  8,269  64,313  (1,151,119)
Interest rate swaps - Receivers
(Loss) gain on interest rate swap and swaption agreements
 (15,316) (7,879) (67,460) 904,492 
Swaptions
(Loss) gain on interest rate swap and swaption agreements
 4,350  1,011  8,249  (49,490)
Markit IOS total return swaps
(Loss) gain on other derivative instruments
 —  —  —  (2,430)
Non-risk management:
Inverse interest-only securities
(Loss) gain on other derivative instruments
 (920) 155  (2,613) 13,593 
Total $ (18,966) $ 66,997  $ (234,616) $ (287,383)
Schedule of Notional Amounts of Outstanding Derivative Positions
The following tables present information with respect to the volume of activity in the Company’s derivative instruments during the three and nine months ended September 30, 2021 and 2020:
Three Months Ended September 30, 2021
(in thousands) Beginning of Period Notional Amount Additions Settlement, Termination, Expiration or Exercise End of Period Notional Amount Average Notional Amount
Realized Gain (Loss),
net (1)
Inverse interest-only securities $ 281,473  $ —  $ (18,459) $ 263,014  $ 272,815  $ (323)
Interest rate swap agreements 15,646,953  1,909,792  (520,150) 17,036,595  15,906,528  5,220 
Swaptions, net (201,000) (740,000) —  (941,000) (209,043) — 
TBAs, net 6,854,000  27,671,000  (25,783,000) 8,742,000  7,934,239  32,588 
Put and call options for TBAs, net —  1,000,000  —  1,000,000  10,869  — 
U.S. Treasury and Eurodollar futures
 513,500  (1,688,300) (4,738,300) (5,913,100) (2,777,793) 28,354 
Total $ 23,094,926  $ 28,152,492  $ (31,059,909) $ 20,187,509  $ 21,137,615  $ 65,839 
Three Months Ended September 30, 2020
(in thousands) Beginning of Period Notional Amount Additions Settlement, Termination, Expiration or Exercise End of Period Notional Amount Average Notional Amount
Realized Gain (Loss),
net (1)
Inverse interest-only securities $ 361,933  $ —  $ (23,287) $ 338,646  $ 350,876  $ — 
Interest rate swap agreements 4,479,000  7,915,818  —  12,394,818  7,595,385  — 
Swaptions, net —  6,000,000  —  6,000,000  239,130  — 
TBAs, net 3,236,000  21,358,000  (18,358,000) 6,236,000  4,760,456  82,490 
U.S. Treasury and Eurodollar futures
 —  2,552,500  (1,685,900) 866,600  986,795  3,291 
Total $ 8,076,933  $ 37,826,318  $ (20,067,187) $ 25,836,064  $ 13,932,642  $ 85,781 
Nine Months Ended September 30, 2021
(in thousands) Beginning of Period Notional Amount Additions Settlement, Termination, Expiration or Exercise End of Period Notional Amount Average Notional Amount
Realized Gain (Loss),
net (1)
Inverse interest-only securities $ 318,162  $ —  $ (55,148) $ 263,014  $ 291,597  $ (286)
Interest rate swap agreements 12,646,341  6,102,655  (1,712,401) 17,036,595  14,869,384  5,267 
Swaptions, net 3,750,000  (941,000) (3,750,000) (941,000) 13,802  2,245 
TBAs, net 5,197,000  69,385,000  (65,840,000) 8,742,000  6,506,407  (107,509)
Put and call options for TBAs, net —  1,000,000  —  1,000,000  3,663  — 
U.S. Treasury and Eurodollar futures
 2,021,100  6,234,500  (14,168,700) (5,913,100) (844,586) (32,368)
Total $ 23,932,603  $ 81,781,155  $ (85,526,249) $ 20,187,509  $ 20,840,267  $ (132,651)
Nine Months Ended September 30, 2020
(in thousands) Beginning of Period Notional Amount Additions Settlement, Termination, Expiration or Exercise End of Period Notional Amount Average Notional Amount
Realized Gain (Loss),
net (1)
Inverse interest-only securities $ 397,137  $ —  $ (58,491) $ 338,646  $ 370,379  $ — 
Interest rate swap agreements 39,702,470  56,403,253  (83,710,905) 12,394,818  32,006,660  (334,502)
Swaptions, net 1,257,000  7,017,000  (2,274,000) 6,000,000  956,387  (50,700)
TBAs, net 7,427,000  41,431,000  (42,622,000) 6,236,000  3,809,515  (42,993)
U.S. Treasury and Eurodollar futures
 (380,000) 10,782,500  (9,535,900) 866,600  681,497  26,295 
Markit IOS total return swaps 41,890  —  (41,890) —  13,547  (2,077)
Total $ 48,445,497  $ 115,633,753  $ (138,243,186) $ 25,836,064  $ 37,837,985  $ (403,977)
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(1)Excludes net interest paid or received in full settlement of the net interest spread liability.
Schedule of TBA Positions The following tables present the notional amount, cost basis, market value and carrying value (which approximates fair value) of the Company’s TBA positions as of September 30, 2021 and December 31, 2020:
September 30, 2021
Net Carrying Value (4)
(in thousands)
Notional Amount (1)
Cost Basis (2)
Market Value (3)
Derivative Assets Derivative Liabilities
Purchase contracts $ 8,842,000  $ 9,126,540  $ 9,080,544  $ 2,556  $ (48,552)
Sale contracts (100,000) (107,031) (107,180) —  (149)
TBAs, net $ 8,742,000  $ 9,019,509  $ 8,973,364  $ 2,556  $ (48,701)
December 31, 2020
Net Carrying Value (4)
(in thousands)
Notional Amount (1)
Cost Basis (2)
Market Value (3)
Derivative Assets Derivative Liabilities
Purchase contracts $ 7,700,000  $ 8,102,344  $ 8,132,406  $ 30,062  $ — 
Sale contracts (2,503,000) (2,640,465) (2,650,927) —  (10,462)
TBAs, net $ 5,197,000  $ 5,461,879  $ 5,481,479  $ 30,062  $ (10,462)
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(1)Notional amount represents the face amount of the underlying Agency RMBS.
(2)Cost basis represents the forward price to be paid (received) for the underlying Agency RMBS.
(3)Market value represents the current market value of the TBA (or of the underlying Agency RMBS) as of period-end.
(4)Net carrying value represents the difference between the market value of the TBA as of period-end and its cost basis, and is reported in derivative assets / (liabilities), at fair value, in the condensed consolidated balance sheets.
Schedule of Interest Rate Swap Payers As of September 30, 2021 and December 31, 2020, the Company held the following interest rate swaps that were utilized as economic hedges of interest rate exposure (or duration) whereby the Company receives interest at a floating interest rate (LIBOR or the OIS rate):
(notional in thousands)
September 30, 2021
Swaps Maturities Notional Amount Weighted Average Fixed Pay Rate Weighted Average Receive Rate Weighted Average Maturity (Years)
2021 $ —  —  % —  % 0.00
2022 7,415,818  0.042  % 0.060  % 0.91
2023 2,582,084  0.011  % 0.059  % 1.76
2024 —  —  % —  % 0.00
2025 and Thereafter 2,256,607  0.474  % 0.058  % 6.05
Total $ 12,254,509  0.137  % 0.059  % 2.04
(notional in thousands)
December 31, 2020
Swaps Maturities Notional Amount Weighted Average Fixed Pay Rate Weighted Average Receive Rate Weighted Average Maturity (Years)
2021 $ —  —  % —  % 0.00
2022 7,415,818  0.042  % 0.090  % 1.66
2023 2,281,500  0.023  % 0.090  % 2.48
2024 —  —  % —  % 0.00
2025 and Thereafter 1,497,500  0.257  % 0.090  % 6.49
Total $ 11,194,818  0.067  % 0.090  % 2.47
Schedule of Interest Rate Swap Receivers
Additionally, as of September 30, 2021 and December 31, 2020, the Company held the following interest rate swaps in order to mitigate mortgage interest rate exposure (or duration) risk whereby the Company pays interest at a floating interest rate (LIBOR or the OIS rate):
(notional in thousands)
September 30, 2021
Swaps Maturities Notional Amounts Weighted Average Pay Rate Weighted Average Fixed Receive Rate Weighted Average Maturity (Years)
2021 $ —  —  % —  % 0.00
2022 —  —  % —  % 0.00
2023 2,221,658  0.060  % 0.118  % 1.44
2024 —  —  % —  % 0.00
2025 and Thereafter 2,560,428  0.059  % 0.812  % 9.22
Total $ 4,782,086  0.059  % 0.489  % 5.61
(notional in thousands)
December 31, 2020
Swaps Maturities Notional Amounts Weighted Average Pay Rate Weighted Average Fixed Receive Rate Weighted Average Maturity (Years)
2021 $ —  —  % —  % 0.00
2022 —  —  % —  % 0.00
2023 —  —  % —  % 0.00
2024 —  —  % —  % 0.00
2025 and Thereafter 1,451,523  0.090  % 0.468  % 9.49
Total $ 1,451,523  0.090  % 0.468  % 9.49
Schedule of Interest Rate Swaptions As of September 30, 2021 and December 31, 2020, the Company had the following outstanding interest rate swaptions:
September 30, 2021
(notional and dollars in thousands) Option Underlying Swap
Swaption Expiration Cost Basis Fair Value Average Months to Expiration Notional Amount Average Pay Rate Average Receive Rate Average Term (Years)
Purchase contracts:
Payer ≥ 6 Months $ 11,314  $ 6,715  8.30  $ 886,000  2.26  % 3M LIBOR 10.0
Sale contracts:
Payer < 6 Months $ (4,144) $ (4,096) 2.20  $ (740,000) 1.77  % 3M LIBOR 10.0
Receiver ≥ 6 Months $ (10,640) $ (8,300) 8.10  $ (1,087,000) 3M LIBOR 1.26  % 10.0
December 31, 2020
(notional and dollars in thousands) Option Underlying Swap
Swaption Expiration Cost Fair Value Average Months to Expiration Notional Amount Average Pay Rate Average Receive Rate Average Term (Years)
Purchase contracts:
Payer < 6 Months $ 7,210  $ 2,448  4.23  $ 2,800,000  1.32  % 3M LIBOR 10.0
Receiver < 6 Months $ 3,010  $ —  0.97  $ 2,000,000  3M LIBOR 0.23  % 10.0
Sale contracts:
Receiver < 6 Months $ (2,600) $ (3,044) 5.13  $ (1,050,000) 3M LIBOR 0.55  % 10.0