Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments and Hedging Activities (Tables)

v3.22.2.2
Derivative Instruments and Hedging Activities (Tables)
 9 Months Ended
Sep. 30, 2022
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, 2022 and December 31, 2021:
September 30, 2022
Derivative Assets Derivative Liabilities
(in thousands) Fair Value Notional Fair Value Notional
Inverse interest-only securities
 $ 16,719  $ 206,224  $ —  $ — 
Interest rate swap agreements
 —  —  —  — 
Swaptions, net —  —  —  — 
TBAs 1,687  (300,000) (107,379) 4,454,000 
Futures, net —  (15,296,550) —  — 
Total $ 18,406  $ (15,390,326) $ (107,379) $ 4,454,000 
December 31, 2021
Derivative Assets Derivative Liabilities
(in thousands) Fair Value Notional Fair Value Notional
Inverse interest-only securities
 $ 41,367  $ 247,101  $ —  $ — 
Interest rate swap agreements
 —  20,387,300  —  — 
Swaptions, net —  —  (51,743) (1,761,000)
TBAs 3,405  3,523,000  (1,915) 593,000 
Futures, net 35,362  (5,829,600) —  — 
Total $ 80,134  $ 18,327,801  $ (53,658) $ (1,168,000)
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 (loss) income:
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,
2022 2021 2022 2021
Interest rate risk management:
TBAs
Gain (loss) on other derivative instruments
 $ (227,668) $ (17,125) $ (535,946) $ (173,254)
Futures
Gain (loss) on other derivative instruments
 392,044  3,026  509,451  (63,851)
Options on futures
Gain (loss) on other derivative instruments
 —  —  (2,224) — 
Interest rate swaps - Payers
Gain (loss) on interest rate swap and swaption agreements
 100,435  7,019  772,829  64,313 
Interest rate swaps - Receivers
Gain (loss) on interest rate swap and swaption agreements
 (75,055) (15,316) (756,744) (67,460)
Swaptions
Gain (loss) on interest rate swap and swaption agreements
 9,426  4,350  13,414  8,249 
Non-risk management:
Inverse interest-only securities
Gain (loss) on other derivative instruments
 (5,332) (920) (15,272) (2,613)
Total $ 193,850  $ (18,966) $ (14,492) $ (234,616)
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, 2022 and 2021:
Three Months Ended September 30, 2022
(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 $ 217,851  $ —  $ (11,627) $ 206,224  $ 212,507  $ 3,640 
Interest rate swap agreements 14,850,336  4,953,139  (19,803,475) —  5,047,637  (133,218)
Swaptions, net (1,680,000) —  1,680,000  —  (978,696) (13,532)
TBAs, net 6,317,000  18,421,000  (20,584,000) 4,154,000  5,681,978  (134,107)
Futures, net
 (16,727,160) (29,472,140) 30,902,750  (15,296,550) (15,069,468) 333,203 
Total $ 2,978,027  $ (6,098,001) $ (7,816,352) $ (10,936,326) $ (5,106,042) $ 55,986 
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 
Options on TBAs, net —  1,000,000  —  1,000,000  10,869  — 
Futures, net
 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 
Nine Months Ended September 30, 2022
(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 $ 247,101  $ —  $ (40,877) $ 206,224  $ 225,928  $ — 
Interest rate swap agreements 20,387,300  22,398,148  (42,785,448) —  16,611,270  29,543 
Swaptions, net (1,761,000) (1,000,000) 2,761,000  —  (1,703,469) 13,654 
TBAs, net 4,116,000  60,636,000  (60,598,000) 4,154,000  4,961,564  (428,765)
Futures, net
 (5,829,600) (51,838,300) 42,371,350  (15,296,550) (12,919,205) 333,583 
Options on futures, net
 —  2,000  (2,000) —  557  (2,224)
Total $ 17,159,801  $ 30,197,848  $ (58,293,975) $ (10,936,326) $ 7,176,645  $ (54,209)
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)
Options on TBAs, net —  1,000,000  —  1,000,000  3,663  — 
Futures, net
 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)
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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, 2022 and December 31, 2021:
September 30, 2022
Net Carrying Value (4)
(in thousands)
Notional Amount (1)
Cost Basis (2)
Market Value (3)
Derivative Assets Derivative Liabilities
Purchase contracts $ 4,454,000  $ 4,425,269  $ 4,317,890  $ —  $ (107,379)
Sale contracts (300,000) (271,687) (270,000) 1,687  — 
TBAs, net $ 4,154,000  $ 4,153,582  $ 4,047,890  $ 1,687  $ (107,379)
December 31, 2021
Net Carrying Value (4)
(in thousands)
Notional Amount (1)
Cost Basis (2)
Market Value (3)
Derivative Assets Derivative Liabilities
Purchase contracts $ 4,116,000  $ 4,238,881  $ 4,240,371  $ 3,405  $ (1,915)
Sale contracts —  —  —  —  — 
TBAs, net $ 4,116,000  $ 4,238,881  $ 4,240,371  $ 3,405  $ (1,915)
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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 U.S. Treasury and Eurodollar Futures The following table summarizes certain characteristics of the Company’s futures as of September 30, 2022 and December 31, 2021:
(dollars in thousands) September 30, 2022 December 31, 2021
Type & Maturity Notional Amount Carrying Value Weighted Average Days to Expiration Notional Amount Carrying Value Weighted Average Days to Expiration
U.S. Treasury futures - 2 year $ (642,600) $ —  97 $ —  $ —  0
U.S. Treasury futures - 5 year (4,706,000) —  97 —  —  0
U.S. Treasury futures - 10 year (3,219,200) —  91 687,900  1,809  90
U.S. Treasury futures - 20 year (553,900) —  91 —  —  0
Federal Funds futures - 30 day (1,250,100) —  50 —  —  0
Eurodollar futures - 3 month
≤ 1 year (3,832,000) —  152 (3,582,000) 15,121  213
> 1 and ≤ 2 years (1,092,750) —  457 (2,269,500) 14,952  560
> 2 and ≤ 3 years —  —  0 (666,000) 3,480  854
Total futures $ (15,296,550) $ —  126 $ (5,829,600) $ 35,362  370
Schedule of Interest Rate Swap Payers As of December 31, 2021, 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 (OIS or SOFR):
(notional in thousands)
December 31, 2021
Swaps Maturities Notional Amount Weighted Average Fixed Pay Rate Weighted Average Receive Rate Weighted Average Maturity (Years)
2022 $ 7,415,818  0.420  % 0.070  % 0.66
2023 2,582,084  0.113  % 0.068  % 1.51
2024 —  —  % —  % 0.00
2025 377,610  1.030  % 0.050  % 3.96
2026 and Thereafter 2,782,057  0.652  % 0.063  % 6.56
Total $ 13,157,569  0.213  % 0.067  % 2.17
Schedule of Interest Rate Swap Receivers
Additionally, as of December 31, 2021, 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 (OIS or SOFR):
(notional in thousands)
December 31, 2021
Swaps Maturities Notional Amount Weighted Average Pay Rate Weighted Average Fixed Receive Rate Weighted Average Maturity (Years)
2022 $ 2,221,658  0.070  % 0.118  % 1.19
2023 —  —  % —  % 0.00
2024 —  —  % —  % 0.00
2025 —  —  % —  % 0.00
2026 and Thereafter 5,008,073  0.058  % 1.049  % 10.00
Total $ 7,229,731  0.062  % 0.763  % 7.29
Schedule of Interest Rate Swaptions As of December 31, 2021, the Company had the following outstanding interest rate swaptions:
December 31, 2021
(notional and dollars in thousands) Option Underlying Swap
Swaption Expiration Cost Fair Value Average Months to Expiration Notional Amount
Average Fixed Rate (1)
Average Term (Years)
Purchase contracts:
Payer < 6 Months $ 11,314  $ 3,539  5.33  $ 886,000  2.26  % 10.0
Sale contracts:
Payer ≥ 6 Months $ (26,329) $ (23,958) 17.79  $ (780,000) 1.72  % 10.0
Receiver < 6 Months $ (10,640) $ (6,856) 5.11  $ (1,087,000) 1.26  % 10.0
Receiver ≥ 6 Months $ (26,329) $ (24,468) 18.91  $ (780,000) 1.72  % 10.0
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(1)As of December 31, 2021, 100.0% of the underlying swap floating rates were tied to 3-Month LIBOR.