Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments and Hedging Activities (Tables)

v3.20.2
Derivative Instruments and Hedging Activities (Tables)
 9 Months Ended
Sep. 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 September 30, 2020 and December 31, 2019.
September 30, 2020
Derivative Assets Derivative Liabilities
(in thousands) Fair Value Notional Fair Value Notional
Inverse interest-only securities
 $ 67,468  $ 338,646  $ —  $ — 
Interest rate swap agreements
 —  —  —  12,394,818 
Swaptions, net 10,791  6,000,000  —  — 
TBAs 18,460  3,947,000  (3,551) 2,289,000 
U.S. Treasury futures 1,170  866,600  —  — 
Total $ 97,889  $ 11,152,246  $ (3,551) $ 14,683,818 
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 Nine Months Ended
(in thousands) September 30, September 30,
2020 2019 2020 2019
Interest rate risk management
TBAs
Gain on other derivative instruments
 $ 60,993  $ 82,964  $ (29,385) $ 221,439 
Short U.S. Treasuries
Gain on other derivative instruments
 —  —  —  (6,801)
U.S. Treasury futures
Gain on other derivative instruments
 4,448  (359) 26,956  46,089 
Put and call options for TBAs
Gain on other derivative instruments
 —  —  —  (7,666)
Interest rate swaps - Payers
Gain (loss) on interest rate swap, cap and swaption agreements
 8,269  (172,856) (1,151,119) (834,426)
Interest rate swaps - Receivers
Gain (loss) on interest rate swap, cap and swaption agreements
 (7,879) 211,086  904,492  664,313 
Swaptions
Gain (loss) on interest rate swap, cap and swaption agreements
 1,011  32,390  (49,490) 76,383 
Interest rate caps
Gain (loss) on interest rate swap, cap and swaption agreements
 —  —  —  (7,684)
Markit IOS total return swaps
Gain on other derivative instruments
 —  (888) (2,430) (1,365)
Non-risk management
Inverse interest-only securities
Gain on other derivative instruments
 155  4,139  13,593  19,102 
Total $ 66,997  $ 156,476  $ (287,383) $ 169,384 
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, 2020 and 2019:
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 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 
Three Months Ended September 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 $ 436,611  $ —  $ (20,668) $ 415,943  $ 427,222  $ — 
Interest rate swap agreements 40,470,277  17,874,435  (16,511,217) 41,833,495  41,180,308  38,044 
Interest rate cap contracts —  —  —  —  —  — 
Swaptions, net 3,875,000  1,000,000  (3,125,000) 1,750,000  2,650,815  37,365 
TBAs, net 9,422,000  40,347,000  (39,906,000) 9,863,000  9,107,707  94,505 
U.S. Treasury futures 1,300,000  3,567,000  (4,547,000) 320,000  657,022  26,939 
Markit IOS total return swaps 45,536  —  (1,769) 43,767  46,088  — 
Total $ 55,549,424  $ 62,788,435  $ (64,111,654) $ 54,226,205  $ 54,069,162  $ 196,853 
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 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)
Nine Months Ended September 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  $ —  $ (60,356) $ 415,943  $ 447,082  $ — 
Interest rate swap agreements 29,523,605  32,373,068  (20,063,178) 41,833,495  38,402,820  41,975 
Interest rate cap contracts 2,500,000  —  (2,500,000) —  1,417,216  (8,690)
Swaptions, net 63,000  14,200,000  (12,513,000) 1,750,000  3,259,802  63,139 
TBAs, net 6,484,000  119,252,000  (115,873,000) 9,863,000  8,905,264  242,102 
Short U.S. Treasuries (800,000) —  800,000  —  (61,097) (23,172)
U.S. Treasury futures —  8,077,000  (7,757,000) 320,000  691,414  47,565 
Put and call options for TBAs, net (1,767,000) —  1,767,000  —  (147,606) (32,962)
Markit IOS total return swaps 48,265  —  (4,498) 43,767  45,964  — 
Total $ 36,528,169  $ 173,902,068  $ (156,204,032) $ 54,226,205  $ 52,960,859  $ 329,957 
____________________
(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, 2020 and December 31, 2019:
September 30, 2020
Net Carrying Value (4)
(in thousands)
Notional Amount (1)
Cost Basis (2)
Market Value (3)
Derivative Assets Derivative Liabilities
Purchase contracts $ 8,789,000  $ 9,196,682  $ 9,210,143  $ 16,768  $ (3,307)
Sale contracts (2,553,000) (2,700,653) (2,699,205) 1,692  (244)
TBAs, net $ 6,236,000  $ 6,496,029  $ 6,510,938  $ 18,460  $ (3,551)
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 September 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)
September 30, 2020
Swaps Maturities Notional Amount Weighted Average Fixed Pay Rate Weighted Average Receive Rate Weighted Average Maturity (Years)
2022 $ 7,415,818  0.042  % 0.090  % 1.91
2023 2,281,500  0.023  % 0.090  % 2.73
2024 and Thereafter 1,497,500  0.257  % 0.090  % 6.74
Total $ 11,194,818  0.067  % 0.090  % 2.72
(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 September 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)
September 30, 2020
Swaps Maturities Notional Amounts Weighted Average Pay Rate Weighted Average Fixed Receive Rate Weighted Average Maturity (Years)
2024 and Thereafter $ 1,200,000  0.090  % 0.442  % 9.68
Total $ 1,200,000  0.090  % 0.442  % 9.68
(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 September 30, 2020 and December 31, 2019, the Company had the following outstanding interest rate swaptions that were utilized as macro-economic hedges:
September 30, 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 $ 5,780  $ 6,942  3.36  $ 3,000,000  1.23  % SOFR 10.0
Receiver < 6 Months $ 4,000  $ 3,849  3.36  $ 3,000,000  SOFR 0.23  % 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