Annual report pursuant to Section 13 and 15(d)

Derivative Instruments and Hedging Activities (Tables)

v3.20.4
Derivative Instruments and Hedging Activities (Tables)
 12 Months Ended
Dec. 31, 2020
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 December 31, 2020 and December 31, 2019.
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 3,675  2,021,100  —  — 
Total $ 95,937  $ 10,039,262  $ (11,058) $ 13,893,341 
December 31, 2019
Derivative Assets Derivative Liabilities
(in thousands) Fair Value Notional Fair Value Notional
Inverse interest-only securities
 $ 69,469  $ 397,137  $ —  $ — 
Interest rate swap agreements
 102,268  2,725,000  —  36,977,470 
Swaptions, net 7,801  1,257,000  —  — 
TBAs 8,011  9,584,000  (6,711) (2,157,000)
U.S. Treasury futures 502  380,000  —  — 
Markit IOS total return swaps
 —  —  (29) 41,890 
Total $ 188,051  $ 14,343,137  $ (6,740) $ 34,862,360 
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 consolidated statements of comprehensive (loss) income:
Derivative Instruments Location of Gain (Loss) Recognized in Income Amount of Gain (Loss) Recognized in Income
Year Ended
(in thousands) December 31,
2020 2019 2018
Interest rate risk management
TBAs
Gain (loss) on other derivative instruments
 $ 60,798  $ 214,414  $ (12,521)
Short U.S. Treasuries
Gain (loss) on other derivative instruments
 —  (6,801) (26,988)
U.S. Treasury futures
Gain (loss) on other derivative instruments
 18,143  44,474  — 
Put and call options for TBAs
Gain (loss) on other derivative instruments
 —  (7,666) (18,457)
Interest rate swaps - Payers
(Loss) gain on interest rate swap, cap and swaption agreements
 (1,128,788) (637,307) 48,995 
Interest rate swaps - Receivers
(Loss) gain on interest rate swap, cap and swaption agreements
 879,289  461,801  (74,407)
Swaptions
(Loss) gain on interest rate swap, cap and swaption agreements
 (61,307) 74,901  45,954 
Interest rate caps
(Loss) gain on interest rate swap, cap and swaption agreements
 —  (7,684) (4,499)
Markit IOS total return swaps
Gain (loss) on other derivative instruments
 (2,430) (1,213) 125 
Non-risk management
Inverse interest-only securities
Gain (loss) on other derivative instruments
 13,512  16,790  2,984 
Total $ (220,783) $ 151,709  $ (38,814)
Schedule of Notional Amounts of Outstanding Derivative Positions
Year Ended December 31, 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  $ —  $ (78,975) $ 318,162  $ 360,000  $ (116)
Interest rate swap agreements 39,702,470  56,867,740  (83,923,869) 12,646,341  27,137,669  (334,458)
Swaptions, net 1,257,000  6,767,000  (4,274,000) 3,750,000  2,188,661  (53,290)
TBAs, net 7,427,000  60,103,000  (62,333,000) 5,197,000  4,540,759  42,499 
U.S. Treasury futures (380,000) 13,385,800  (10,984,700) 2,021,100  791,420  14,996 
Markit IOS total return swaps 41,890  —  (41,890) —  10,141  (2,077)
Total $ 48,445,497  $ 137,123,540  $ (161,636,434) $ 23,932,603  $ 35,028,650  $ (332,446)
Year Ended December 31, 2019
(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 $ 476,299  $ —  $ (79,162) $ 397,137  $ 437,039  $ — 
Interest rate swap agreements 29,523,605  35,458,291  (25,279,426) 39,702,470  38,951,332  41,975 
Interest rate cap contracts 2,500,000  —  (2,500,000) —  1,060,000  (8,690)
Swaptions, net 63,000  14,457,000  (13,263,000) 1,257,000  2,846,660  61,644 
TBAs, net 6,484,000  143,008,000  (142,065,000) 7,427,000  8,895,340  234,716 
Short U.S. Treasuries (800,000) —  800,000  —  (45,697) (23,172)
U.S. Treasury futures —  7,197,000  (7,577,000) (380,000) 684,647  43,977 
Put and call options for TBAs, net (1,767,000) —  1,767,000  —  (110,401) (32,962)
Markit IOS total return swaps 48,265  —  (6,375) 41,890  45,092  — 
Total $ 36,528,169  $ 200,120,291  $ (188,202,963) $ 48,445,497  $ 52,764,012  $ 317,488 
____________________
(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 December 31, 2020 and December 31, 2019:
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)
December 31, 2019
Net Carrying Value (4)
(in thousands)
Notional Amount (1)
Cost Basis (2)
Market Value (3)
Derivative Assets Derivative Liabilities
Purchase contracts $ 10,223,000  $ 10,557,745  $ 10,565,556  $ 8,011  $ (200)
Sale contracts (2,796,000) (2,902,858) (2,909,369) —  (6,511)
TBAs, net $ 7,427,000  $ 7,654,887  $ 7,656,187  $ 8,011  $ (6,711)
___________________
(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 consolidated balance sheets.
Schedule of Interest Rate Swap Payers As of December 31, 2020 and December 31, 2019, 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)
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
(notional in thousands)
December 31, 2019
Swaps Maturities Notional Amount Weighted Average Fixed Pay Rate Weighted Average Receive Rate Weighted Average Maturity (Years)
2020 $ 3,640,000  1.806  % 1.937  % 0.83
2021 15,740,977  1.681  % 1.910  % 1.47
2022 2,578,640  1.911  % 1.901  % 2.74
2023 215,000  3.057  % 1.910  % 3.90
2024 and Thereafter 8,739,092  2.224  % 1.935  % 7.20
Total $ 30,913,709  1.878  % 1.921  % 3.14
Schedule of Interest Rate Swap Receivers
Additionally, as of December 31, 2020 and December 31, 2019, 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)
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
(notional in thousands)
December 31, 2019
Swaps Maturities Notional Amounts Weighted Average Pay Rate Weighted Average Fixed Receive Rate Weighted Average Maturity (Years)
2020 $ 250,000  1.953  % 2.258  % 0.06
2021 915,000  1.894  % 2.516  % 1.10
2022 —  —  % —  % 0.00
2023 —  —  % —  % 0.00
2024 and Thereafter 7,623,761  1.937  % 2.232  % 8.64
Total $ 8,788,761  1.933  % 2.262  % 7.61
Schedule of Interest Rate Swaptions As of December 31, 2020 and December 31, 2019, the Company had the following outstanding interest rate swaptions:
December 31, 2020
(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 $ 7,210  $ 2,448  4.23  $ 2,800,000  1.32  % SOFR 10.0
Receiver < 6 Months $ 3,010  $ —  0.97  $ 2,000,000  SOFR 0.23  % 10.0
Sale contracts:
Receiver < 6 Months $ (2,600) $ (3,044) 5.13  $ (1,050,000) SOFR 0.55  % 10.0
December 31, 2019
(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 $ 24,700  $ 16,095  3.20  $ 7,525,000  2.27  % 3M Libor 10.0
Receiver < 6 Months $ 4,100  $ 342  1.10  $ 500,000  3M Libor 1.55  % 10.0
Sale contracts:
Receiver < 6 Months $ (20,800) $ (8,636) 3.24  $ (6,768,000) 3M Libor 1.28  % 10.0
Schedule of Total Return Swaps As of December 31, 2019, the Company had the following total return swap agreements in place:
(notional and dollars in thousands)
December 31, 2019
Maturity Date Current Notional Amount Fair Value Cost Basis Unrealized Gain (Loss)
January 12, 2043 $ (18,625) $ 5  $ (30) $ 35 
January 12, 2044 (23,265) (34) (29) (5)
Total $ (41,890) $ (29) $ (59) $ 30