Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments and Hedging Activities (Tables)

v3.20.2
Derivative Instruments and Hedging Activities (Tables)
 6 Months Ended
Jun. 30, 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 June 30, 2020 and December 31, 2019.
June 30, 2020
Derivative Assets Derivative Liabilities
(in thousands) Fair Value Notional Fair Value Notional
Inverse interest-only securities
 $ 72,822    $ 361,933    $ —    $ —   
Interest rate swap agreements
 —    —    —    4,479,000   
TBAs 37,705    2,036,000    (1,298)   1,200,000   
Total $ 110,527    $ 2,397,933    $ (1,298)   $ 5,679,000   
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 condensed consolidated statements of comprehensive income (loss):
Derivative Instruments Location of Gain (Loss) Recognized in Income Amount of Gain (Loss) Recognized in Income
Three Months Ended Six Months Ended
(in thousands) June 30, June 30,
2020 2019 2020 2019
Interest rate risk management
TBAs
Gain (loss) on other derivative instruments
 $ 75,680    $ 28,964    $ (90,378)   $ 138,475   
Short U.S. Treasuries
Gain (loss) on other derivative instruments
 —    —    —    (6,801)  
U.S. Treasury futures
Gain (loss) on other derivative instruments
 (3,464)   42,721    22,508    46,448   
Put and call options for TBAs
Gain (loss) on other derivative instruments
 —    —    —    (7,666)  
Interest rate swaps - Payers
Loss on interest rate swap, cap and swaption agreements
 (122,053)   (422,602)   (1,159,388)   (661,570)  
Interest rate swaps - Receivers
Loss on interest rate swap, cap and swaption agreements
 12,418    289,626    912,371    453,227   
Swaptions
Loss on interest rate swap, cap and swaption agreements
 62,713    48,525    (50,501)   43,993   
Interest rate caps
Loss on interest rate swap, cap and swaption agreements
 —    (4,324)   —    (7,684)  
Markit IOS total return swaps
Gain (loss) on other derivative instruments
 —    103    (2,430)   (477)  
Non-risk management
Inverse interest-only securities
Gain (loss) on other derivative instruments
 4,390    8,876    13,438    14,963   
Total $ 29,684    $ (8,111)   $ (354,380)   $ 12,908   
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 six months ended June 30, 2020 and 2019:
Three Months Ended June 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 $ 379,239    $ —    $ (17,306)   $ 361,933    $ 371,585    $ —   
Interest rate swap agreements 56,158,068    24,104,324    (75,783,392)   4,479,000    45,825,536    (742,555)  
Swaptions, net 1,376,000    587,000    (1,963,000)   —    582,429    (4,500)  
TBAs, net 1,761,000    7,582,000    (6,107,000)   3,236,000    1,717,868    (26,688)  
U.S. Treasury futures 875,000    —    (875,000)   —    104,385    (7,495)  
Markit IOS total return swaps —    —    —    —    —    —   
Total $ 60,549,307    $ 32,273,324    $ (84,745,698)   $ 8,076,933    $ 48,601,803    $ (781,238)  
Three Months Ended June 30, 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 $ 456,433    $ —    $ (19,822)   $ 436,611    $ 447,550    $ —   
Interest rate swap agreements 38,396,277    3,904,000    (1,830,000)   40,470,277    38,903,453    14,114   
Interest rate cap contracts 2,500,000    —    (2,500,000)   —    1,779,121    (8,690)  
Swaptions, net 5,900,000    7,300,000    (9,325,000)   3,875,000    5,959,615    50,089   
TBAs, net 10,168,000    36,172,000    (36,918,000)   9,422,000    8,790,560    76,683   
U.S. Treasury futures 1,310,000    3,200,000    (3,210,000)   1,300,000    1,267,692    20,626   
Markit IOS total return swaps 47,073    —    (1,537)   45,536    46,088    —   
Total $ 58,777,783    $ 50,576,000    $ (53,804,359)   $ 55,549,424    $ 57,194,079    $ 152,822   
Six Months Ended June 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    $ —    $ (35,204)   $ 361,933    $ 380,238    $ —   
Interest rate swap agreements 39,702,470    48,487,435    (83,710,905)   4,479,000    44,346,426    (334,502)  
Swaptions, net 1,257,000    1,017,000    (2,274,000)   —    1,318,956    (50,700)  
TBAs, net 7,427,000    20,073,000    (24,264,000)   3,236,000    3,328,819    (125,483)  
U.S. Treasury futures (380,000)   8,230,000    (7,850,000)   —    527,170    23,004   
Markit IOS total return swaps 41,890    —    (41,890)   —    20,394    (2,077)  
Total $ 48,445,497    $ 77,807,435    $ (118,175,999)   $ 8,076,933    $ 49,922,003    $ (489,758)  
Six Months Ended June 30, 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    $ —    $ (39,688)   $ 436,611    $ 457,177    $ —   
Interest rate swap agreements 29,523,605    14,498,633    (3,551,961)   40,470,277    36,991,058    3,931   
Interest rate cap contracts 2,500,000    —    (2,500,000)   —    2,137,569    (8,690)  
Swaptions, net 63,000    13,200,000    (9,388,000)   3,875,000    3,569,343    25,774   
TBAs, net 6,484,000    78,905,000    (75,967,000)   9,422,000    8,802,365    147,597   
Short U.S. Treasuries (800,000)   —    800,000    —    (14,365)   (23,172)  
U.S. Treasury futures —    4,510,000    (3,210,000)   1,300,000    708,895    20,626   
Put and call options for TBAs, net (1,767,000)   —    1,767,000    —    (222,633)   (32,962)  
Markit IOS total return swaps 48,265    —    (2,729)   45,536    46,768    —   
Total $ 36,528,169    $ 111,113,633    $ (92,092,378)   $ 55,549,424    $ 52,476,177    $ 133,104   
____________________
(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 June 30, 2020 and December 31, 2019:
June 30, 2020
Net Carrying Value (4)
(in thousands)
Notional Amount (1)
Cost Basis (2)
Market Value (3)
Derivative Assets Derivative Liabilities
Purchase contracts $ 5,539,000    $ 5,836,137    $ 5,866,185    $ 31,346    $ (1,298)  
Sale contracts (2,303,000)   (2,433,663)   (2,427,304)   6,359    —   
TBAs, net $ 3,236,000    $ 3,402,474    $ 3,438,881    $ 37,705    $ (1,298)  
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 condensed consolidated balance sheets.
Schedule of Interest Rate Swap Payers As of June 30, 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)
June 30, 2020
Swaps Maturities Notional Amount Weighted Average Fixed Pay Rate Weighted Average Receive Rate Weighted Average Maturity (Years)
2023 $ 2,281,500    0.023  % 0.080  % 2.98
2024 and Thereafter 1,497,500    0.257  % 0.080  % 6.99
Total $ 3,779,000    0.116  % 0.080  % 4.57
(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 June 30, 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)
June 30, 2020
Swaps Maturities Notional Amounts Weighted Average Pay Rate Weighted Average Fixed Receive Rate Weighted Average Maturity (Years)
2024 and Thereafter $ 700,000    0.080  % 0.419  % 9.76
Total $ 700,000    0.080  % 0.419  % 9.76
(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, 2019, the Company had the following outstanding interest rate swaptions that were utilized as macro-economic hedges:
December 31, 2019
(notional and dollars in thousands) Option Underlying Swap
Swaption Expiration Cost Fair Value Average Months to Expiration Notional Amount Average Fixed 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