Derivative Instruments and Hedging Activities (Notes)

v2.4.0.8

Derivative Instruments and Hedging Activities (Notes)	12 Months Ended
	Dec. 31, 2013
Derivative Instruments and Hedging Activities Disclosure [Abstract]
Derivative Instruments and Hedging Activities	Derivative Instruments and Hedging Activities The Company enters into a variety of derivative and non-derivative instruments in connection with its risk management activities. The Company’s primary objective for executing these derivatives and non-derivative instruments is to mitigate the Company’s economic exposure to future events that are outside its control. The Company’s derivative financial instruments are utilized principally to manage market risk and cash flow volatility associated with interest rate risk (including associated prepayment risk) related to certain assets and liabilities. As part of its risk management activities, the Company may, at times, enter into various forward contracts including short securities, Agency to-be-announced securities, or TBAs, options, futures, swaps, caps, and credit default swaps. In executing on the Company’s current risk management strategy, the Company has entered into interest rate swap and swaption agreements TBAs, put and call options for TBAs, constant maturity swaps, forward sale commitments, and credit default swaps. The Company has also entered into a number of non-derivative instruments to manage interest rate risk, principally U.S. Treasuries and Agency interest-only securities. At times, the Company may use TBAs for risk management purposes, or as a means of deploying capital until targeted investments are available and to take advantage of temporary displacements in the marketplace. TBAs are forward contracts for the purchase (long notional positions) or sale (short notional positions) of Agency RMBS. The issuer, coupon and stated maturity of the Agency RMBS is predetermined as well as the trade price, face amount and future settle date (published each month by the Securities Industry and Financial Markets Association); however, the specific Agency RMBS to be delivered upon settlement is not known at the time of the TBA transaction. As a result, and since physical delivery of the Agency RMBS upon settlement cannot be assured, the Company accounts for TBAs as derivative instruments. The following summarizes the Company’s significant asset and liability classes, the risk exposure for these classes, and the Company’s risk management activities used to mitigate certain of these risks. The discussion includes both derivative and non-derivative instruments used as part of these risk management activities. While the Company uses non-derivative and derivative instruments to achieve the Company’s risk management activities, it is possible that these instruments will not effectively mitigate all or a substantial portion of the Company’s market rate risk. In addition, the Company might elect, at times, not to enter into certain hedging arrangements in order to maintain compliance with REIT requirements. Balance Sheet Presentation The following tables present the gross fair value and notional amounts of the Company’s derivative financial instruments treated as trading instruments as of December 31, 2013 and December 31, 2012. (in thousands)   December 31, 2013     Derivative Assets   Derivative Liabilities Trading instruments   Fair Value   Notional   Fair Value   Notional Inverse interest-only securities   $ 221,364   $ 1,525,845   $ —   $ — Interest rate swap agreements   25,325   19,619,000   —   — Credit default swaps   —   —   (18,183 )   476,702 Swaptions   269,745   5,130,000   —   — TBAs   33,425   4,097,000   (125 )   400,000 Constant maturity swaps   —   —   (3,773 )   10,000,000 Forward purchase commitment   —   12,063   —   — Total   $ 549,859   $ 30,383,908   $ (22,081 )   $ 10,876,702 (in thousands)   December 31, 2012     Derivative Assets   Derivative Liabilities Trading instruments   Fair Value   Notional   Fair Value   Notional Inverse interest-only securities   $ 304,975   $ 1,909,351   $ —   $ — Interest rate swap agreements   —   —   (129,055 )   14,070,000 Credit default swaps   52,906   438,440   —   — Swaptions   102,048   4,950,000   —   — TBAs   1,917   2,414,000   (239 )   139,000 Forward purchase commitment   234   56,865   —   — Total   $ 462,080   $ 9,768,656   $ (129,294 )   $ 14,209,000 The following table provides the average outstanding notional amounts of the Company’s derivative financial instruments treated as trading instruments for the years ended December 31, 2013 and December 31, 2012. (in thousands)   Year Ended December 31,     2013   2012 Trading instruments   Derivative Assets   Derivative Liabilities   Derivative Assets   Derivative Liabilities Inverse interest-only securities   $ 1,782,306   $ —   $ 1,741,380   $ — Interest rate swap agreements   16,965,918   —   —   9,891,749 Credit default swaps   —   1,044,170   563,434   68,541 Swaptions   5,592,274   —   4,023,639   — TBAs   2,186,016   1,508,836   546,429   526,085 Put and call options for TBAs   420,334   —   —   — Constant maturity swaps   —   7,972,527   —   — Short U.S. Treasuries   —   6,658   —   11,749 Forward purchase commitment   57,489   —   94,855   — Forward sale commitment   —   —   2,395   — Comprehensive Income Statement Presentation The Company has not applied hedge accounting to its current derivative portfolio held to mitigate the interest rate risk associated with its debt portfolio. As a result, the Company is subject to volatility in its earnings due to movement in the unrealized gains and losses associated with its interest rate swaps and its other derivative instruments. The following table summarizes the location and amount of gains and losses on derivative instruments reported in the consolidated statements of comprehensive income on its derivative instruments: (in thousands)                 Trading Instruments   Location of Gain/(Loss) Recognized in Income on Derivatives   Amount of Gain/(Loss) Recognized in Income on Derivatives         Year Ended December 31,         2013   2012   2011 Interest rate risk management                 TBAs (1)   Gain (loss) on other derivative instruments   $ 151,021   $ (30,897 )   $ 91 Put and call options for TBAs (1)   Gain (loss) on other derivative instruments   7,798   —   — Constant maturity swaps (1)   Gain (loss) on other derivative instruments   (11,438 )   —   — Short U.S. Treasuries (1)   Gain (loss) on other derivative instruments   (991 )   (1,768 )   — Interest rate swap agreements - Receivers (1)   (Loss) gain on interest rate swap and swaption agreements   (15,378 )   —   — Interest rate swap agreements - Payers (1)   (Loss) gain on interest rate swap and swaption agreements   16,641   —   — Interest rate swap agreements - Receivers (2)   (Loss) gain on interest rate swap and swaption agreements   906   —   — Interest rate swap agreements - Payers (2)   (Loss) gain on interest rate swap and swaption agreements   (10,241 )   (13,056 )   6,112 Forward sale commitments (3)   (Loss) gain on mortgage loans held-for-sale   —   (26 )   — Interest rate swap agreements - Payers (4)   (Loss) gain on interest rate swap and swaption agreements   130,268   (111,707 )   (92,881 ) Swaptions (4)   (Loss) gain on interest rate swap and swaption agreements   123,033   (35,012 )   — Credit risk management                 Credit default swaps - Receive protection (5)   Gain (loss) on other derivative instruments   (75,927 )   (61,935 )   11,409 Non-risk management                 TBAs   Gain (loss) on other derivative instruments   38,297   —   — Inverse interest-only securities   Gain (loss) on other derivative instruments   (13,415 )   41,706   23,392 Credit default swaps - Provide protection   Gain (loss) on other derivative instruments   —   11,988   (8,137 ) Forward purchase commitments   (Loss) gain on mortgage loans held-for-sale   (20,015 )   2,396   — Total       $ 320,559   $ (198,311 )   $ (60,014 ) ____________________ (1) Includes derivative instruments held to mitigate interest rate risk associated with the Company’s available-for-sale securities, mortgage loans held-for-sale and forward purchase commitments. (2) Includes derivative instruments held to mitigate interest rate risk associated with the Company’s U.S. Treasuries, TBAs and MSR. (3) Includes derivative instruments held to mitigate interest rate risk associated with the Company’s mortgage loans held-for-sale. (4) Includes derivative instruments held to mitigate interest rate risk associated with the Company’s repurchase agreements. (5) Includes derivative instruments held to mitigate credit risk associated with the Company’s non-Agency RMBS and mortgage loans held-for-sale. For the years ended December 31, 2013, 2012 and 2011, the Company recognized $58.5 million, $38.4 million and $24.9 million, respectively, of expenses for the accrual and/or settlement of the net interest expense associated with its interest rate swaps. The expenses result from generally paying a fixed interest rate on an average $17.0 billion, $9.9 billion and $3.7 billion notional, respectively, to hedge a portion of the Company’s interest rate risk on its short-term repurchase agreements, funding costs, and macro-financing risk and generally receiving LIBOR interest. For the years ended December 31, 2013, 2012 and 2011, the Company terminated, had agreements mature, or had options expire on a total of 155, 26 and 32 interest rate swap and swaption positions of $33.8 billion, $4.5 billion and $3.2 billion notional, respectively. Upon settlement of the early terminations, contractual maturities and option expirations, the Company paid $34.5 million, $1.6 million and $6.0 million in full settlement of its net interest spread liability and recognized $12.3 million in realized gains, and $29.6 million and $17.0 million in realized losses on the swaps and swaptions for the years ended December 31, 2013, 2012 and 2011, respectively, including early termination penalties. For the years ended December 31, 2013, 2012 and 2011, the Company terminated a total of 22, 18 and 3 credit default swap positions totaling $2.5 billion, $825.0 million and $175.0 million notional, respectively. Upon settlement of the early terminations, the Company paid $1.9 million, $2.9 million and $1.1 million, respectively, in full settlement of its net interest spread payable and recognized $53.2 million and $17.6 million in realized losses, and $4.6 million in realized gains for the years ended December 31, 2013, 2012 and 2011, respectively, on the credit default swaps, including early termination penalties. Cash flow activity related to derivative instruments is reflected within the operating activities and investing activities sections of the consolidated statements of cash flows. Derivative fair value adjustments are reflected within the unrealized (gain) loss on interest rate swaps and swaptions, unrealized (gain) loss on other derivative instruments, and loss (gain) on mortgage loans held-for-sale line items within the operating activities section of the consolidated statements of cash flows. Realized losses on interest rate swap and swaption agreements are reflected within the (gain) loss on termination of interest rate swaps and swaptions line item within the operating activities section of the consolidated statements of cash flows. The remaining cash flow activity related to derivative instruments is reflected within the purchases of other derivative instruments, proceeds from sales of other derivative instruments, and (decrease) increase in due to counterparties, net line items within the investing activities section of the consolidated statements of cash flows. Interest Rate Sensitive Assets/Liabilities Available-for-sale Securities - The Company’s RMBS investment securities are generally subject to change in value when mortgage rates decline or increase, depending on the type of investment. Rising mortgage rates generally result in a slowing of refinancing activity, which slows prepayments and results in a decline in the value of the Company’s fixed-rate Agency pools. To mitigate the impact of this risk, the Company maintains a portfolio of financial instruments, primarily fixed-rate interest-only securities, which increase in value when interest rates increase. In addition, the Company has initiated TBA positions, put and call options for TBAs, constant maturity swaps and interest rate swap agreements to further mitigate its exposure to higher interest rates, decreased prepayment speeds and widening mortgage spreads. The objective is to reduce the risk of losses to the portfolio caused by interest rate changes and changes in prepayment speeds. As of December 31, 2013 and December 31, 2012, the Company had outstanding fair value of $75.6 million and $77.3 million, respectively, of interest-only securities in place to economically hedge its investment securities. These interest-only securities are included in AFS securities, at fair value, in the consolidated balance sheets. As of December 31, 2013, $0.4 billion of the Company’s long notional TBA positions and $1.9 billion of the Company’s short notional TBA positions were held as a means to mitigate exposure to higher interest rates and wider mortgage spreads, while the remaining $2.2 billion long notional TBA positions were held for non-risk management purposes (see “Non-Risk Management Activities” section). As of December 31, 2012, $1.8 billion of the Company’s long notional TBA positions and $800.0 million of the Company’s short notional TBA positions were held as a means to mitigate exposure to higher interest rates and wider mortgage spreads. The Company discloses these on a gross basis according to the unrealized gain or loss position of each TBA contract regardless of long or short notional position. The following table presents the notional amount, cost basis, market value and carrying value (which approximates fair value) of the Company’s TBA positions as of December 31, 2013 and December 31, 2012:   As of December 31, 2013               Net Carrying Value (4) (in thousands) Notional Amount (1)   Cost Basis (2)   Market Value (3)   Derivative Assets   Derivative Liabilities Purchase contracts $ 2,550,000   $ 2,749,648   $ 2,767,295   $ 17,771   $ (125 ) Sale contracts (1,947,000 )   (1,959,256 )   (1,943,602 )   15,654   — TBAs, net $ 603,000   $ 790,392   $ 823,693   $ 33,425   $ (125 )   As of December 31, 2012               Net Carrying Value (4) (in thousands) Notional Amount (1)   Cost Basis (2)   Market Value (3)   Derivative Assets   Derivative Liabilities Purchase contracts $ 1,753,000   $ 1,867,621   $ 1,869,112   $ 1,729   $ (239 ) Sale contracts (800,000 )   (857,625 )   (857,438 )   188   — TBAs, net $ 953,000   $ 1,009,996   $ 1,011,674   $ 1,917   $ (239 ) ___________________ (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 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. During the year ended December 31, 2013, the Company purchased and sold put and call options for TBAs; however, the Company did not hold any put or call options for TBAs as of December 31, 2013. The Company did not purchase or sell any put or call options for TBAs during the year ended December 31, 2012. The Company has also entered into constant maturity swaps between the 10-year interest rate swap curve and the yield to maturity on a 30-year Fannie Mae TBA to economically hedge mortgage spread widening. The Company had the following constant maturity swaps agreements in place at December 31, 2013: (notional and dollars in thousands)                 December 31, 2013 Determination Date   Average Strike Swap Rate   Notional Amount   Fair Value   Upfront Premium Paid   Unrealized Gain/(Loss) February 2014   0.768 %   3,000,000   625   —   625 March 2014   0.850 %   5,000,000   (3,171 )   —   (3,171 ) June 2014   0.828 %   2,000,000   (1,227 )   —   (1,227 ) Total   0.821 %   $ 10,000,000   $ (3,773 )   $ —   $ (3,773 ) The Company did not hold any constant maturity swaps as of December 31, 2012. As of December 31, 2013, the Company held the following interest rate swaps in order to mitigate mortgage interest rate exposure (or duration) risk associated with the Company’s available-for-sale securities whereby the Company receives interest at a 3-month LIBOR rate: (notional in thousands)             December 31, 2013 Swaps Maturities   Notional Amounts   Average Fixed Pay Rate   Average Receive Rate   Average Maturity (Years) 2018   $ 2,040,000   1.563 %   0.241 %   4.94 Total   $ 2,040,000             Additionally, as of December 31, 2013, the Company held the following interest rate swaps in order to mitigate mortgage interest rate exposure (or duration) risk associated with the Company’s available-for-sale securities whereby the Company pays interest at a 3-month LIBOR rate: (notional in thousands)             December 31, 2013 Swaps Maturities   Notional Amounts   Average Pay Rate   Average Fixed Receive Rate   Average Maturity (Years) 2023   $ 1,099,000   0.242 %   2.914 %   9.94 Total   $ 1,099,000             The Company did not hold any interest rate swaps in connection with the its available-for-sale securities as of December 31, 2012. U.S. Treasuries, TBAs and MSR - The Company has entered into interest rate swaps in combination with U.S. Treasuries, TBAs and MSR to economically hedge funding cost risk, mortgage interest rate exposure (or duration), and mortgage basis widening, depending on the type of investment. As of December 31, 2013 and December 31, 2012, the Company held $1.0 billion in fair value of U.S. Treasuries classified as trading securities and the following outstanding interest rate swaps utilized to economically hedge funding cost risk: (notional in thousands)             December 31, 2013 Swaps Maturities   Notional Amounts   Average Fixed Pay Rate   Average Receive Rate   Average Maturity (Years) 2016   $ 1,000,000   0.955 %   0.239 %   2.67 Total   $ 1,000,000             (notional in thousands)             December 31, 2012 Swaps Maturities   Notional Amounts   Average Fixed Pay Rate   Average Receive Rate   Average Maturity (Years) 2015   $ 1,000,000   0.799 %   0.350 %   2.28 Total   $ 1,000,000             As of December 31, 2013 and December 31, 2012, the Company held the following interest rate swaps that were entered into in combination with TBA contracts and/or MSR to economically hedge mortgage basis widening and duration: (notional in thousands)             December 31, 2013 Swaps Maturities   Notional Amounts   Average Pay Rate   Average Fixed Receive Rate   Average Maturity (Years) 2018 and Thereafter   1,055,000   0.239 %   1.736 %   5.65 Total   $ 1,055,000   0.239 %   1.736 %   5.65 (notional in thousands)             December 31, 2012 Swaps Maturities   Notional Amounts   Average Fixed Pay Rate   Average Receive Rate   Average Maturity (Years) 2014   $ 500,000   0.399 %   0.356 %   1.78 Total   $ 500,000             Commitments to Purchase and/or Sell Mortgage Loans Held-for-Sale - Prior to a mortgage loan purchase, the Company may enter into forward purchase commitments with counterparties whereby the Company commits to purchasing the loans at a particular interest rate, provided the borrower elects to close the loan. These commitments to purchase mortgage loans have been defined as derivatives and are therefore recorded on the balance sheet as assets or liabilities and measured at fair value. Subsequent changes in fair value are recorded on the balance sheet as adjustments to the carrying value of these assets or liabilities with a corresponding adjustment recognized in current period earnings. As of December 31, 2012, the Company had entered into commitments to purchase $56.9 million of mortgage loans, subject to fallout if the loans did not close, with a fair value of $0.2 million included in derivative assets on the consolidated balance sheet at December 31, 2012. As of December 31, 2013, the Company had outstanding commitments to purchase $12.1 million of mortgage loans, subject to fallout if the loans did not close. No fair value was assigned to the derivative as there was not a meaningful change in market value change from commitment date to December 31, 2013. The Company is exposed to interest rate risk on mortgage loans from the time it commits to purchase the mortgage loan until we acquire the loan from the originator and subsequently sell the loan to a third party. Changes in interest rates impact the market price for the mortgage loans. For example, as market interest rates decline, the value of mortgage loans held-for-sale increases, and vice versa. To mitigate the impact of this risk, the Company may from time to time enter into a forward sale commitment under the Forward AAA Securities Agreement, or the Forward Agreement, with Barclays Bank PLC, or Barclays, pursuant to which Barclays would purchase certain securities issued in connection with a potential securitization transaction involving mortgage loans subject to the Forward Agreement. As of December 31, 2013 and December 31, 2012, the Company did not have any trades under the Forward Agreement. The Company may also enter into other derivative contracts to hedge the interest rate risk related to the commitments to purchase mortgage loans, such as interest rate swaps, swaptions, TBA positions, put and call options for TBAs and constant maturity swaps. Repurchase Agreements - The Company monitors its repurchase agreements, which are generally floating rate debt, in relation to the rate profile of its investment securities. When it is cost effective to do so, the Company may enter into interest rate swap arrangements to align the interest rate composition of its investment securities and debt portfolios, specifically repurchase agreements with maturities of less than 6 months. Typically, the interest receivable terms (i.e., LIBOR) of the interest rate swaps match the terms of the underlying debt, resulting in an effective conversion of the rate of the related repurchase agreement from floating to fixed. As of December 31, 2013 and December 31, 2012, the Company had the following outstanding interest rate swaps that were utilized as economic hedges of interest rate exposure (or duration) associated with the Company’s short-term repurchase agreements: (notional in thousands)             December 31, 2013 Swaps Maturities   Notional Amounts   Average Fixed Pay Rate   Average Receive Rate   Average Maturity (Years) 2014   $ 3,900,000   0.300 %   0.245 %   0.76 2015   1,000,000   0.383 %   0.244 %   1.04 2016   2,950,000   0.626 %   0.246 %   2.42 2017   5,300,000   0.920 %   0.217 %   3.49 2018 and Thereafter   1,275,000   1.406 %   0.242 %   5.04 Total   $ 14,425,000   0.698 %   0.235 %   2.50 (notional in thousands)             December 31, 2012 Swaps Maturities   Notional Amount   Average Fixed Pay Rate   Average Receive Rate   Average Maturity (Years) 2013   2,275,000   0.713 %   0.315 %   0.56 2014   1,675,000   0.644 %   0.311 %   1.57 2015   2,770,000   0.908 %   0.313 %   2.43 2016   1,940,000   0.874 %   0.323 %   3.46 2017 and Thereafter   3,910,000   0.960 %   0.313 %   4.72 Total   $ 12,570,000   0.850 %   0.315 %   2.85 As of December 31, 2013 and December 31, 2012, the Company had the following outstanding interest rate swaptions (agreements to enter into interest rate swaps in the future for which the Company would either pay or receive a fixed rate) that were utilized as macro-economic hedges: December 31, 2013 (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   $ 10,431   $ 10,458   2.78   $ 675,000   3.33 %   3M Libor   10.0 Payer   ≥ 6 Months   223,504   353,108   39.14   6,000,000   4.27 %   3M Libor   9.0 Total Payer       $ 233,935   $ 363,566   38.16   $ 6,675,000   4.18 %   3M Libor   9.1                                   Receiver   < 6 Months   $ 3,991   $ 681   1.93   $ 275,000   3M Libor   2.89 %   10.0 Total Receiver       $ 3,991   $ 681   1.93   $ 275,000   3M Libor   2.89 %   10.0                                   Sale contracts:                                 Payer   < 6 Months   $ (3,455 )   $ (7,679 )   1.93   $ (510,000 )   1.60 %   3M Libor   5.0 Payer   ≥ 6 Months   (81,248 )   (86,361 )   42.02   (800,000 )   3.44 %   3M Libor   10.0 Total Payer       $ (84,703 )   $ (94,040 )   33.68   $ (1,310,000 )   2.72 %   3M Libor   8.1                                   Receiver   < 6 Months   $ (3,455 )   $ (462 )   1.93   $ (510,000 )   3M Libor   1.60 %   5.0 Total Receiver       $ (3,455 )   $ (462 )   1.93   $ (510,000 )   3M Libor   1.60 %   5.0 December 31, 2012 (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   $ 3,983   $ 30   5.38   $ 300,000   4.00 %   3M Libor   10.0 Payer   ≥ 6 Months   129,925   102,018   53.38   4,650,000   3.74 %   3M Libor   9.7 Total Payer       $ 133,908   $ 102,048   53.38   $ 4,950,000   3.75 %   3M Libor   9.8 The Company has not applied hedge accounting to its current derivative portfolio held to mitigate the interest rate risk associated with its debt portfolio. As a result, the Company is subject to volatility in its earnings due to movement in the unrealized gains and losses associated with its interest rate swaps and its other derivative instruments. Foreign Currency Risk In compliance with the Company’s REIT requirements, the Company does not have exposure to foreign denominated assets or liabilities. As such, the Company is not subject to foreign currency risk. Credit Risk The Company’s exposure to credit losses on its U.S. Treasuries and Agency portfolio of investment securities is limited because these securities are issued by the U.S. Department of the Treasury or the GSEs. The payment of principal and interest on the Freddie Mac and Fannie Mae mortgage-backed securities are guaranteed by those respective agencies, and the payment of principal and interest on the Ginnie Mae mortgage-backed securities are backed by the full faith and credit of the U.S. Government. For non-Agency investment securities and mortgage loans, the Company may enter into credit default swaps to hedge credit risk. In future periods, the Company could enhance its credit risk protection, enter into further paired derivative positions, including both long and short credit default swaps and/or seek opportunistic trades in the event of a market disruption (see “Non-Risk Management Activities” section). The Company also has processes and controls in place to monitor, analyze, manage and mitigate its credit risk with respect to non-Agency RMBS and mortgage loans. As of December 31, 2013, the Company held credit default swaps whereby the Company receives credit protection for a fixed premium. The maximum payouts for these credit default swaps are limited to the current notional amounts of each swap contract. Maximum payouts for credit default swaps do not represent the expected future cash requirements, as the Company’s credit default swaps are typically liquidated or expire and are not exercised by the holder of the credit default swaps. The following tables present credit default swaps where the Company is receiving protection held as of December 31, 2013 and December 31, 2012: (notional and dollars in thousands)                 December 31, 2013 Protection Maturity Date   Average Implied Credit Spread   Current Notional Amount   Fair Value   Upfront Payable   Unrealized Gain/(Loss) Receive 6/20/2016   105.50   (100,000 )   (2,149 )   (260 )   (2,409 )   12/20/2016   496.00   (25,000 )   (401 )   (4,062 )   (4,463 )   12/20/2018   393.31   (270,000 )   (23,568 )   12,838   (10,730 )   1/12/2043   176.00   (49,629 )   (134 )   (453 )   (587 )   5/25/2046   356.00   (32,073 )   8,069   (15,026 )   (6,957 )   Total   313.19   $ (476,702 )   $ (18,183 )   $ (6,963 )   $ (25,146 ) (notional and dollars in thousands)                 December 31, 2012 Protection Maturity Date   Average Implied Credit Spread   Current Notional Amount   Fair Value   Upfront Payable   Unrealized Gain/(Loss) Receive 9/20/2013   460.00   $ (45,000 )   $ (264 )   $ (3,127 )   $ (3,391 )   12/20/2013   181.91   (105,000 )   (198 )   (3,225 )   (3,423 )   6/20/2016   105.50   (100,000 )   (1,940 )   (260 )   (2,200 )   12/20/2016   496.00   (25,000 )   527   (4,062 )   (3,535 )   5/25/2046   297.60   (163,440 )   54,781   (71,114 )   (16,333 )   Total   254.06   $ (438,440 )   $ 52,906   $ (81,788 )   $ (28,882 ) Derivative financial instruments contain an element of credit risk if counterparties are unable to meet the terms of the agreements. Credit risk associated with derivative financial instruments is measured as the net replacement cost should the counterparties that owe the Company under such contracts completely fail to perform under the terms of these contracts, assuming there are no recoveries of underlying collateral, as measured by the market value of the derivative financial instruments. As of December 31, 2013, the fair value of derivative financial instruments as an asset and liability position was $549.9 million and $22.1 million, respectively. The Company mitigates the credit risk exposure on derivative financial instruments by limiting the counterparties to those major banks and financial institutions that meet established credit guidelines, and the Company seeks to transact with several different counterparties in order to reduce the exposure to any single counterparty. Additionally, the Company reduces credit risk on the majority of its derivative instruments by entering into agreements that permit the closeout and netting of transactions with the same counterparty upon occurrence of certain events. To further mitigate the risk of counterparty default, the Company maintains collateral agreements with certain of its counterparties. The agreements require both parties to maintain cash deposits in the event the fair values of the derivative financial instruments exceed established thresholds. As of December 31, 2013, the Company has received cash deposits from counterparties of $249.3 million and placed cash deposits of $200.4 million in accounts maintained by counterparties, of which the amounts are netted on a counterparty basis and classified within restricted cash, due from counterparties, or due to counterparties on the consolidated balance sheet. In accordance with ASC 815, as amended and interpreted, the Company records derivative financial instruments on its consolidated balance sheet as assets or liabilities at fair value. Changes in fair value are accounted for depending on the use of the derivative instruments and whether they qualify for hedge accounting treatment. Due to the volatility of the credit markets and difficulty in effectively matching pricing or cash flows, the Company has elected to treat all current derivative contracts as trading instruments. Non-Risk Management Activities The Company has entered into certain financial instruments that are considered derivative contracts under ASC 815 that are not for purposes of hedging. These contracts are currently limited to inverse interest-only RMBS, credit default swaps, forward purchase commitments, and TBAs. As of December 31, 2013, the Company held $2.2 billion notional TBAs as a means of deploying capital until targeted investments are available, and to take advantage of temporary displacements in the marketplace. None of the Company’s TBAs were held for this purpose as of December 31, 2012. As of December 31, 2013 and December 31, 2012, inverse interest-only securities with a carrying value of $221.4 million and $305.0 million, including accrued interest receivable of $2.9 million and $3.7 million, respectively, were accounted for as derivative financial instruments in the consolidated financial statements. The following table presents the amortized cost and carrying value (which approximates fair value) of inverse interest-only securities as of December 31, 2013 and December 31, 2012: (in thousands) December 31, 2013   December 31, 2012 Face Value $ 1,525,845   $ 1,909,351 Unamortized premium —   — Unamortized discount       Designated credit reserve —   — Net, unamortized (1,292,785 )   (1,620,966 ) Amortized Cost 233,060   288,385 Gross unrealized gains 5,891   21,616 Gross unrealized losses (20,442 )   (8,737 ) Carrying Value $ 218,509   $ 301,264