Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments and Hedging Activities (Tables)

v3.19.2
Derivative Instruments and Hedging Activities (Tables)
6 Months Ended
Jun. 30, 2019
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, 2019 and December 31, 2018.
 
 
June 30, 2019
 
 
Derivative Assets
 
Derivative Liabilities
(in thousands)
 
Fair Value
 
Notional
 
Fair Value
 
Notional
Inverse interest-only securities
 
$
76,724

 
$
436,611

 
$

 
$

Interest rate swap agreements
 
101,820

 
2,725,000

 

 
37,745,277

Swaptions, net
 
29,959

 
3,875,000

 

 

TBAs
 
12,649

 
9,178,000

 
(170
)
 
244,000

U.S. Treasury futures
 
25,843

 
1,300,000

 

 

Markit IOS total return swaps
 

 

 
(85
)
 
45,536

Total
 
$
246,995

 
$
17,514,611

 
$
(255
)
 
$
38,034,813


 
 
December 31, 2018
 
 
Derivative Assets
 
Derivative Liabilities
(in thousands)
 
Fair Value
 
Notional
 
Fair Value
 
Notional
Inverse interest-only securities
 
$
70,813

 
$
476,299

 
$

 
$

Interest rate swap agreements
 
187,231

 
26,798,605

 

 
2,725,000

Interest rate cap contracts
 
40,335

 
2,500,000

 

 

Swaptions, net
 

 

 
(13,456
)
 
63,000

TBAs
 
21,602

 
6,484,000

 

 

Put and call options for TBAs, net
 

 

 
(25,296
)
 
1,767,000

Short U.S. Treasuries
 

 

 
(781,455
)
 
800,000

Markit IOS total return swaps
 

 

 
(383
)
 
48,265

Total
 
$
319,981

 
$
36,258,904

 
$
(820,590
)
 
$
5,403,265


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:
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,
 
 
 
 
2019
 
2018
 
2019
 
2018
Interest rate risk management
 
 
 
 
 
 
 
 
TBAs
 
Gain on other derivative instruments
 
$
28,964

 
$
12,131

 
$
138,475

 
$
(10,535
)
Short U.S. Treasuries
 
Gain on other derivative instruments
 

 

 
(6,801
)
 

U.S. Treasury futures
 
Gain on other derivative instruments
 
42,721

 

 
46,448

 

Put and call options for TBAs
 
Gain on other derivative instruments
 

 
(2,396
)
 
(7,666
)
 
29,839

Interest rate swaps - Payers
 
(Loss) gain on interest rate swap, cap and swaption agreements
 
(422,602
)
 
63,991

 
(661,570
)
 
307,096

Interest rate swaps - Receivers
 
(Loss) gain on interest rate swap, cap and swaption agreements
 
289,626

 
(43,907
)
 
453,227

 
(197,722
)
Swaptions
 
(Loss) gain on interest rate swap, cap and swaption agreements
 
48,525

 
9,049

 
43,993

 
70,304

Interest rate caps
 
(Loss) gain on interest rate swap, cap and swaption agreements
 
(4,324
)
 

 
(7,684
)
 

Markit IOS total return swaps
 
Gain on other derivative instruments
 
103

 
(220
)
 
(477
)
 
673

Non-risk management
 
 
 
 
 
 
 
 
 
 
Inverse interest-only securities
 
Gain on other derivative instruments
 
8,876

 
(1,840
)
 
14,963

 
(4,249
)
Total
 
 
 
$
(8,111
)
 
$
36,808

 
$
12,908

 
$
195,406



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, 2019 and 2018:
 
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

 
Three Months Ended June 30, 2018
(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
$
558,942

 
$

 
$
(29,886
)
 
$
529,056

 
$
545,159

 
$

Interest rate swap agreements
23,598,825

 
7,740,752

 
(5,292,313
)
 
26,047,264

 
25,377,155

 
(35,568
)
Swaptions, net
(6,175,000
)
 
(23,000
)
 
5,460,000

 
(738,000
)
 
(4,263,868
)
 
15,119

TBAs, net
445,000

 
6,482,000

 
(3,878,000
)
 
3,049,000

 
2,341,879

 
6,222

Put and call options for TBAs, net
(60,000
)
 
(1,468,000
)
 
1,208,000

 
(320,000
)
 
203,429

 
(19,661
)
Markit IOS total return swaps
61,521

 

 
(9,980
)
 
51,541

 
59,594

 
(249
)
Total
$
18,429,288

 
$
12,731,752

 
$
(2,542,179
)
 
$
28,618,861

 
$
24,263,348

 
$
(34,137
)
 
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

 
Six Months Ended June 30, 2018
(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
$
588,246

 
$

 
$
(59,190
)
 
$
529,056

 
$
559,844

 
$

Interest rate swap agreements
28,482,125

 
25,349,632

 
(27,784,493
)
 
26,047,264

 
23,272,892

 
4,138

Swaptions, net
2,666,000

 
(1,238,000
)
 
(2,166,000
)
 
(738,000
)
 
(3,092,050
)
 
67,892

TBAs, net
(573,000
)
 
17,713,000

 
(14,091,000
)
 
3,049,000

 
1,563,801

 
(5,614
)
Put and call options for TBAs, net

 
4,602,000

 
(4,922,000
)
 
(320,000
)
 
(327,917
)
 
38,542

Markit IOS total return swaps
63,507

 

 
(11,966
)
 
51,541

 
60,864

 
(249
)
Total
$
31,226,878

 
$
46,426,632

 
$
(49,034,649
)
 
$
28,618,861

 
$
22,037,434

 
$
104,709

____________________
(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, 2019 and December 31, 2018:
 
June 30, 2019
 
 
 
 
 
 
 
Net Carrying Value (4)
(in thousands)
Notional Amount (1)
 
Cost Basis (2)
 
Market Value (3)
 
Derivative Assets
 
Derivative Liabilities
Purchase contracts
$
9,422,000

 
$
9,806,028

 
$
9,818,507

 
$
12,649

 
$
(170
)
Sale contracts

 

 

 

 

TBAs, net
$
9,422,000

 
$
9,806,028

 
$
9,818,507

 
$
12,649

 
$
(170
)
 
December 31, 2018
 
 
 
 
 
 
 
Net Carrying Value (4)
(in thousands)
Notional Amount (1)
 
Cost Basis (2)
 
Market Value (3)
 
Derivative Assets
 
Derivative Liabilities
Purchase contracts
$
6,484,000

 
$
6,734,858

 
$
6,756,460

 
$
21,602

 
$

Sale contracts

 

 

 

 

TBAs, net
$
6,484,000

 
$
6,734,858

 
$
6,756,460

 
$
21,602

 
$

___________________
(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, 2019 and December 31, 2018, 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 three-month LIBOR rate:
(notional in thousands)
 
 
 
 
 
 
June 30, 2019
Swaps Maturities
 
Notional Amount
 
Weighted Average Fixed Pay Rate
 
Weighted Average Receive Rate
 
Weighted Average Maturity (Years)
2019
 
$
4,236,897

 
1.781
%
 
2.569
%
 
0.30
2020
 
3,640,000

 
1.806
%
 
2.502
%
 
1.33
2021
 
10,456,400

 
2.104
%
 
2.484
%
 
1.88
2022
 
2,470,000

 
2.002
%
 
2.430
%
 
3.25
2023 and Thereafter
 
8,540,309

 
2.532
%
 
2.536
%
 
6.54
Total
 
$
29,343,606

 
2.136
%
 
2.509
%
 
3.05

(notional in thousands)
 
 
 
 
 
 
December 31, 2018
Swaps Maturities
 
Notional Amount (1)
 
Weighted Average Fixed Pay Rate (2)
 
Weighted Average Receive Rate (2)
 
Weighted Average Maturity (Years) (2)
2019
 
$
4,336,897

 
1.769
%
 
2.565
%
 
0.79
2020
 
3,640,000

 
1.806
%
 
2.689
%
 
1.83
2021
 
4,117,000

 
1.550
%
 
2.687
%
 
2.69
2022
 
2,470,000

 
2.002
%
 
2.728
%
 
3.75
2023 and Thereafter
 
6,842,270

 
2.495
%
 
2.636
%
 
7.60
Total
 
$
21,406,167

 
1.978
%
 
2.651
%
 
3.75
____________________
(1)
Notional amount includes $572.0 million in forward starting interest rate swaps as of December 31, 2018.
(2)
Weighted averages exclude forward starting interest rate swaps. As of December 31, 2018, the weighted average fixed pay rate on forward starting interest rate swaps was 2.8%.

Schedule of Interest Rate Swap Receivers
Additionally, as of June 30, 2019 and December 31, 2018, 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 three-month LIBOR rate:
(notional in thousands)
 
 
 
 
 
 
June 30, 2019
Swaps Maturities
 
Notional Amounts
 
Weighted Average Pay Rate
 
Weighted Average Fixed Receive Rate
 
Weighted Average Maturity (Years)
2020
 
$
250,000

 
2.581
%
 
2.258
%
 
0.56
2021
 
2,477,438

 
2.575
%
 
2.736
%
 
1.74
2022
 
800,000

 
2.523
%
 
2.975
%
 
2.89
2023 and Thereafter
 
7,599,233

 
2.505
%
 
2.648
%
 
8.00
Total
 
$
11,126,671

 
2.524
%
 
2.682
%
 
6.07
(notional in thousands)
 
 
 
 
 
 
December 31, 2018
Swaps Maturities
 
Notional Amounts
 
Weighted Average Pay Rate
 
Weighted Average Fixed Receive Rate
 
Weighted Average Maturity (Years)
2020
 
$
250,000

 
2.469
%
 
2.258
%
 
1.06
2021
 
2,477,438

 
2.538
%
 
2.736
%
 
2.24
2022
 
800,000

 
2.653
%
 
2.975
%
 
3.39
2023 and Thereafter
 
4,590,000

 
2.653
%
 
2.757
%
 
7.37
Total
 
$
8,117,438

 
2.612
%
 
2.757
%
 
5.22

Schedule of Interest Rate Swaptions As of June 30, 2019 and December 31, 2018, the Company had the following outstanding interest rate swaptions that were utilized as macro-economic hedges:
 
 
June 30, 2019
(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
 
$
1,945

 
$
878

 
4.86

 
$
1,250,000

 
2.28
%
 
3M Libor
 
5.2
Total Payer
 
 
 
$
1,945

 
$
878

 
4.86

 
$
1,250,000

 
2.28
%
 
3M Libor
 
5.2
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Receiver
 
< 6 Months
 
$
23,250

 
$
29,081

 
4.71

 
$
2,625,000

 
3M Libor
 
1.87
%
 
10.0
Total Receiver
 
 
 
$
23,250

 
$
29,081

 
4.71

 
$
2,625,000

 
3M Libor
 
1.87
%
 
10.0
 
 
December 31, 2018
(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
 
$
4,855

 
$
2,430

 
5.13

 
$
900,000

 
3.16
%
 
3M Libor
 
10.0
Payer
 
≥ 6 Months
 
8,400

 
5,992

 
8.60

 
800,000

 
3.14
%
 
3M Libor
 
10.0
Total Payer
 
 
 
$
13,255

 
$
8,422

 
7.92

 
$
1,700,000

 
3.15
%
 
3M Libor
 
10.0
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sale contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Receiver
 
< 6 Months
 
$
(4,855
)
 
$
(9,001
)
 
4.74

 
$
(845,000
)
 
3M Libor
 
2.66
%
 
10.0
Receiver
 
≥ 6 Months
 
(8,400
)
 
(12,877
)
 
8.60

 
(792,000
)
 
3M Libor
 
2.64
%
 
10.0
Total Receiver
 
 
 
$
(13,255
)
 
$
(21,878
)
 
7.52

 
$
(1,637,000
)
 
3M Libor
 
2.65
%
 
10.0

Schedule of Interest Rate Caps As of December 31, 2018, the Company held the following interest rate caps that were utilized as economic hedges of interest rate exposure (or duration) whereby the Company receives interest at a three-month LIBOR rate, net of a fixed cap rate:
(notional in thousands)
 
 
 
 
 
 
December 31, 2018
Caps Maturities
 
Notional Amount
 
Weighted Average Cap Rate
 
Weighted Average Receive Rate
 
Weighted Average Maturity (Years)
2019
 
$
800,000

 
1.344
%
 
2.422
%
 
0.53
2020
 
1,700,000

 
1.250
%
 
2.766
%
 
1.29
Total
 
$
2,500,000

 
1.280
%
 
2.656
%
 
1.04

Schedule of Total Return Swaps The Company had the following total return swap agreements in place at June 30, 2019 and December 31, 2018:
(notional and dollars in thousands)
 
 
 
 
 
June 30, 2019
Maturity Date
 
Current Notional Amount
 
Fair Value
 
Cost Basis
 
Unrealized Gain (Loss)
January 12, 2043
 
$
(20,213
)
 
$
(17
)
 
$
(30
)
 
$
13

January 12, 2044
 
(25,323
)
 
(68
)
 
(29
)
 
(39
)
Total
 
$
(45,536
)
 
$
(85
)
 
$
(59
)
 
$
(26
)
(notional and dollars in thousands)
 
 
 
 
 
December 31, 2018
Maturity Date
 
Current Notional Amount
 
Fair Value
 
Cost Basis
 
Unrealized Gain (Loss)
January 12, 2043
 
$
(21,395
)
 
$
(153
)
 
$
(30
)
 
$
(123
)
January 12, 2044
 
(26,870
)
 
(230
)
 
(29
)
 
(201
)
Total
 
$
(48,265
)
 
$
(383
)
 
$
(59
)
 
$
(324
)