Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments and Hedging Activities (Tables)

v3.23.3
Derivative Instruments and Hedging Activities (Tables)
 9 Months Ended
Sep. 30, 2023
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, 2023 and December 31, 2022:
September 30, 2023
Derivative Assets Derivative Liabilities
(in thousands) Fair Value Notional Fair Value Notional
Inverse interest-only securities
 $ 9,967  $ 171,507  $ —  $ — 
Interest rate swap agreements
 —  8,545,965  —  — 
Swaptions, net 171  (200,000) —  — 
TBAs 10,454  441,000  (23,550) 1,753,000 
Futures, net —  (7,870,450) —  — 
Total $ 20,592  $ 1,088,022  $ (23,550) $ 1,753,000 
December 31, 2022
Derivative Assets Derivative Liabilities
(in thousands) Fair Value Notional Fair Value Notional
Inverse interest-only securities
 $ 15,293  $ 196,456  $ —  $ — 
Interest rate swap agreements
 —  —  —  — 
Swaptions, net —  —  —  — 
TBAs 11,145  (650,000) (34,048) 4,476,000 
Futures, net —  (18,285,452) —  — 
Total $ 26,438  $ (18,738,996) $ (34,048) $ 4,476,000 
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:
Derivative Instruments Location 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,
2023 2022 2023 2022
Interest rate risk management:
TBAs
Gain (loss) on other derivative instruments
 $ (90,662) $ (227,668) $ (184,909) $ (535,946)
Futures
Gain (loss) on other derivative instruments
 179,697  392,044  166,533  509,451 
Options on futures
Gain (loss) on other derivative instruments
 (779) —  (779) (2,224)
Interest rate swaps - Payers
Gain on interest rate swap and swaption agreements
 160,099  100,435  211,941  772,829 
Interest rate swaps - Receivers
Gain on interest rate swap and swaption agreements
 (47,937) (75,055) (125,596) (756,744)
Swaptions
Gain on interest rate swap and swaption agreements
 (253) 9,426  (57) 13,414 
Non-risk management:
Inverse interest-only securities
Gain (loss) on other derivative instruments
 (2,044) (5,332) (3,243) (15,272)
Total $ 198,121  $ 193,850  $ 63,890  $ (14,492)
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, 2023 and 2022:
Three Months Ended September 30, 2023
(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 $ 179,542  $ —  $ (8,035) $ 171,507  $ 175,850  $ — 
Interest rate swap agreements 8,977,714  1,307,773  (1,739,522) 8,545,965  8,869,676  (5,096)
Swaptions, net (200,000) (200,000) 200,000  (200,000) (186,957) (80)
TBAs, net 3,051,000  9,704,000  (10,561,000) 2,194,000  2,713,272  (88,858)
Futures, net
 (6,624,550) (7,617,280) 6,371,380  (7,870,450) (7,003,084) 143,517 
Options on futures, net
 —  —  —  —  —  (779)
Total $ 5,383,706  $ 3,194,493  $ (5,737,177) $ 2,841,022  $ 4,568,757  $ 48,704 
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 
Options on futures, net
 —  —  —  —  —  — 
Total $ 2,978,027  $ (6,098,001) $ (7,816,352) $ (10,936,326) $ (5,106,042) $ 55,986 
Nine Months Ended September 30, 2023
(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 $ 196,456  $ —  $ (24,949) $ 171,507  $ 184,172  $ — 
Interest rate swap agreements —  11,873,556  (3,327,591) 8,545,965  6,874,280  (23,676)
Swaptions, net —  (400,000) 200,000  (200,000) (148,718) (80)
TBAs, net 3,826,000  35,490,000  (37,122,000) 2,194,000  3,394,330  (194,716)
Futures, net
 (18,285,452) (29,619,130) 40,034,132  (7,870,450) (9,637,688) 123,547 
Options on futures, net
 —  —  —  —  —  (779)
Total $ (14,262,996) $ 17,344,426  $ (240,408) $ 2,841,022  $ 666,376  $ (95,704)
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)
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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, 2023 and December 31, 2022:
September 30, 2023
Net Carrying Value (4)
(in thousands)
Notional Amount (1)
Cost Basis (2)
Market Value (3)
Derivative Assets Derivative Liabilities
Purchase contracts $ 2,553,000  $ 2,486,178  $ 2,464,472  $ 1,844  $ (23,550)
Sale contracts (359,000) (338,638) (330,028) 8,610  — 
TBAs, net $ 2,194,000  $ 2,147,540  $ 2,134,444  $ 10,454  $ (23,550)
December 31, 2022
Net Carrying Value (4)
(in thousands)
Notional Amount (1)
Cost Basis (2)
Market Value (3)
Derivative Assets Derivative Liabilities
Purchase contracts $ 4,826,000  $ 4,802,009  $ 4,767,989  $ 28  $ (34,048)
Sale contracts (1,000,000) (878,711) (867,594) 11,117  — 
TBAs, net $ 3,826,000  $ 3,923,298  $ 3,900,395  $ 11,145  $ (34,048)
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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 Futures The following table summarizes certain characteristics of the Company’s futures as of September 30, 2023 and December 31, 2022:
(dollars in thousands) September 30, 2023 December 31, 2022
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 $ —  $ —  0 $ (562,200) $ —  95
U.S. Treasury futures - 5 year (2,868,000) —  96 (3,855,500) —  95
U.S. Treasury futures - 10 year (2,074,700) —  90 (2,397,200) —  90
U.S. Treasury futures - 20 year (335,000) —  90 101,000  —  90
Federal Funds futures —  —  0 (7,948,552) —  92
SOFR/Eurodollar futures (1)
≤ 1 year (1,842,750) —  239 (2,957,000) —  184
> 1 and ≤ 2 years (750,000) —  581 (666,000) —  489
> 2 and ≤ 3 years —  —  0 —  —  0
Total futures $ (7,870,450) $ —  174 $ (18,285,452) $ —  122
___________________
(1)During the three months ended June 30, 2023, all of the Company’s outstanding Eurodollar futures contracts with maturities after June 30, 2023 were converted into three-month SOFR futures contracts with similar characteristics.
Schedule of Interest Rate Swap Payers As of September 30, 2023, 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)
September 30, 2023
Swaps Maturities
Notional Amount (1)
Weighted Average Fixed Pay Rate (2)
Weighted Average Receive Rate Weighted Average Maturity (Years)
2023 $ —  —  % —  % 0.00
2024 —  —  % —  % 0.00
2025 2,647,671  4.730  % 5.310  % 1.46
2026 —  —  % —  % 0.00
2027 and Thereafter 3,066,604  3.570  % 5.310  % 8.65
Total $ 5,714,275  4.108  % 5.310  % 5.32
Schedule of Interest Rate Swap Receivers
Additionally, as of September 30, 2023, 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)
September 30, 2023
Swaps Maturities
Notional Amount (1)
Weighted Average Pay Rate (2)
Weighted Average Fixed Receive Rate (2)
Weighted Average Maturity (Years) (2)
2023 $ —  —  % —  % 0.00
2024 —  —  % —  % 0.00
2025 1,831,339  5.310  % 3.899  % 1.47
2026 —  —  % —  % 0.00
2027 and Thereafter 1,000,351  5.310  % 3.314  % 7.15
Total $ 2,831,690  5.310  % 3.755  % 8.62
____________________
(1)Notional amount includes $398.0 million in forward starting interest rate swaps as of September 30, 2023.
(2)Weighted averages exclude forward starting interest rate swaps. As of September 30, 2023, the weighted average fixed receive rate on forward starting interest rate swaps was 3.8%.
Schedule of Interest Rate Swaptions As of September 30, 2023, the Company had the following outstanding interest rate swaptions:
September 30, 2023
(notional and dollars in thousands) Option Underlying Swap
Swaption Expiration Cost Basis Fair Value Average Months to Expiration Notional Amount
Average Fixed Rate (1)
Average Term (Years)
Purchase contracts:
Payer < 6 Months $ 480  $ 550  5.40  $ 200,000  5.13  % 1.0
Sale contracts:
Payer < 6 Months $ (332) $ (379) 5.40  $ (400,000) 5.61  % 1.0
____________________
(1)As of September 30, 2023, all underlying swap floating rates were tied to SOFR.