Annual report pursuant to Section 13 and 15(d)

Derivative Instruments and Hedging Activities (Tables)

v3.8.0.1
Derivative Instruments and Hedging Activities (Tables)
12 Months Ended
Dec. 31, 2017
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 instruments as of December 31, 2017 and December 31, 2016.
(in thousands)
 
December 31, 2017
 
 
Derivative Assets
 
Derivative Liabilities
Trading instruments
 
Fair Value
 
Notional
 
Fair Value
 
Notional
Inverse interest-only securities
 
$
91,827

 
$
588,246

 
$

 
$

Interest rate swap agreements
 
206,773

 
21,516,125

 
(29,867
)
 
6,966,000

Swaptions, net
 
10,405

 
2,666,000

 

 

TBAs
 
913

 
733,000

 
(1,930
)
 
1,306,000

Markit IOS total return swaps
 

 

 
(106
)
 
63,507

Total
 
$
309,918

 
$
25,503,371

 
$
(31,903
)
 
$
8,335,507


(in thousands)
 
December 31, 2016
 
 
Derivative Assets
 
Derivative Liabilities
Trading instruments
 
Fair Value
 
Notional
 
Fair Value
 
Notional
Inverse interest-only securities
 
$
127,843

 
$
740,844

 
$

 
$

Interest rate swap agreements
 
109,531

 
18,471,063

 
(495
)
 
1,900,000

Swaptions, net
 
39,881

 
825,000

 
(1,645
)
 
600,000

TBAs
 
4,294

 
536,000

 
(10,344
)
 
953,000

Put and call options for TBAs, net
 
42,633

 
1,136,000

 

 

Markit IOS total return swaps
 

 

 
(17
)
 
90,593

Total
 
$
324,182

 
$
21,708,907

 
$
(12,501
)
 
$
3,543,593

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 income (loss):
Trading Instruments
 
Location of Gain (Loss) Recognized in Income on Derivatives
 
Amount of Gain (Loss) Recognized in Income on Derivatives
 
 
 
 
Year Ended
(in thousands)
 
 
 
December 31,
 
 
 
 
2017
 
2016
 
2015
Interest rate risk management
 
 
 
 
 
 
 
 
TBAs
 
(Loss) gain on other derivative instruments
 
$
(46,778
)
 
$
51,816

 
$
(39,748
)
Short U.S. Treasuries
 
(Loss) gain on other derivative instruments
 

 

 
125

Put and call options for TBAs
 
(Loss) gain on other derivative instruments
 
(22,623
)
 
64,920

 
6,846

Put and call options for U.S. Treasuries
 
(Loss) gain on other derivative instruments
 

 

 
(837
)
Constant maturity swaps
 
(Loss) gain on other derivative instruments
 

 

 
6,164

Interest rate swap agreements - Payers
 
(Loss) gain on interest rate swap and swaption agreements
 
67,124

 
(3,110
)
 
(199,609
)
Interest rate swap agreements - Receivers
 
(Loss) gain on interest rate swap and swaption agreements
 
(17,677
)
 
37,272

 
52,785

Swaptions
 
(Loss) gain on interest rate swap and swaption agreements
 
(59,200
)
 
11,209

 
(63,797
)
Markit IOS total return swaps
 
(Loss) gain on other derivative instruments
 
(870
)
 
(36,898
)
 
(13,371
)
Credit risk management
 
 
 
 
 
 
 
 
Credit default swaps - Receive protection
 
(Loss) gain on other derivative instruments
 

 
962

 
(294
)
Non-risk management
 
 
 
 
 
 
 
 
Inverse interest-only securities
 
(Loss) gain on other derivative instruments
 
112

 
18,579

 
36,066

Forward purchase commitments
 
Gain on residential mortgage loans held-for-sale
 

 
2,418

 
(1,668
)
Total
 
 
 
$
(79,912
)
 
$
147,168

 
$
(217,338
)
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 years ended December 31, 2017 and 2016:
 
Year Ended December 31, 2017
(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
$
740,844

 
$

 
$
(152,598
)
 
$
588,246

 
$
662,273

 
$
(40
)
Interest rate swap agreements
20,371,063

 
36,642,245

 
(28,531,183
)
 
28,482,125

 
19,447,067

 
54,476

Swaptions, net
225,000

 
4,306,000

 
(1,865,000
)
 
2,666,000

 
1,014,578

 
8,694

TBAs, net
(1,489,000
)
 
(7,249,400
)
 
8,165,400

 
(573,000
)
 
(1,256,424
)
 
(51,810
)
Put and call options for TBAs, net
(1,136,000
)
 
4,460,000

 
(3,324,000
)
 

 
11,978

 
20,010

Markit IOS total return swaps
90,593

 

 
(27,086
)
 
63,507

 
74,183

 
(181
)
Total
$
18,802,500

 
$
38,158,845

 
$
(25,734,467
)
 
$
31,226,878

 
$
19,953,655

 
$
31,149

 
Year Ended December 31, 2016
(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
$
932,037

 
$

 
$
(191,193
)
 
$
740,844

 
$
836,707

 
$

Interest rate swap agreements
14,268,806

 
25,103,456

 
(19,001,199
)
 
20,371,063

 
15,506,763

 
16,032

Credit default swaps
125,000

 
10,000

 
(135,000
)
 

 
71,257

 
1,022

Swaptions, net
5,200,000

 
1,668,000

 
(6,643,000
)
 
225,000

 
2,449,268

 
(98,016
)
TBAs, net
297,000

 
(10,173,000
)
 
8,387,000

 
(1,489,000
)
 
(531,866
)
 
57,616

Put and call options for TBAs, net

 
11,260,000

 
(12,396,000
)
 
(1,136,000
)
 
2,569,117

 
22,288

Markit IOS total return swaps
889,418

 
99,911

 
(898,736
)
 
90,593

 
471,028

 
(13,374
)
Forward purchase commitments
286,120

 
1,548,027

 
(1,834,147
)
 

 
269,562

 
2,068

Total
$
21,998,381

 
$
29,516,394

 
$
(32,712,275
)
 
$
18,802,500

 
$
21,641,836

 
$
(12,364
)
____________________
(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, 2017 and December 31, 2016:
 
December 31, 2017
 
 
 
 
 
 
 
Net Carrying Value (4)
(in thousands)
Notional Amount (1)
 
Cost Basis (2)
 
Market Value (3)
 
Derivative Assets
 
Derivative Liabilities
Purchase contracts
$
733,000

 
$
769,446

 
$
770,359

 
$
913

 
$

Sale contracts
(1,306,000
)
 
(1,316,368
)
 
(1,318,297
)
 

 
(1,930
)
TBAs, net
$
(573,000
)
 
$
(546,922
)
 
$
(547,938
)
 
$
913

 
$
(1,930
)
 
December 31, 2016
 
 
 
 
 
 
 
Net Carrying Value (4)
(in thousands)
Notional Amount (1)
 
Cost Basis (2)
 
Market Value (3)
 
Derivative Assets
 
Derivative Liabilities
Purchase contracts
$
1,500,000

 
$
1,576,270

 
$
1,576,875

 
$
605

 
$

Sale contracts
(2,989,000
)
 
(3,028,470
)
 
(3,035,125
)
 
3,689

 
(10,344
)
TBAs, net
$
(1,489,000
)
 
$
(1,452,200
)
 
$
(1,458,250
)
 
$
4,294

 
$
(10,344
)
___________________
(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, 2017 and December 31, 2016, 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)
 
 
 
 
 
 
December 31, 2017
Swaps Maturities
 
Notional Amount (1)
 
Weighted Average Fixed Pay Rate (2)
 
Weighted Average Receive Rate (2)
 
Weighted Average Maturity (Years) (2)
2018
 
$
4,320,000

 
1.155
%
 
1.508
%
 
0.50
2019
 
5,448,135

 
1.767
%
 
1.386
%
 
1.79
2020
 
5,490,000

 
1.945
%
 
1.509
%
 
2.87
2021
 
2,417,000

 
1.788
%
 
1.628
%
 
3.92
2022 and Thereafter
 
5,245,000

 
1.764
%
 
1.516
%
 
6.44
Total
 
$
22,920,135

 
1.694
%
 
1.493
%
 
3.01

(notional in thousands)
 
 
 
 
 
 
December 31, 2016
Swaps Maturities
 
Notional Amount (1)
 
Weighted Average Fixed Pay Rate (2)
 
Weighted Average Receive Rate (2)
 
Weighted Average Maturity (Years) (2)
2018
 
$
2,375,000

 
0.765
%
 
0.934
%
 
0.59
2019
 
5,340,000

 
1.232
%
 
0.945
%
 
1.59
2020
 
350,000

 
1.283
%
 
0.895
%
 
2.44
2021
 
1,460,000

 
1.481
%
 
0.920
%
 
3.74
2022 and Thereafter
 
5,782,063

 
1.984
%
 
0.955
%
 
6.17
Total
 
$
15,307,063

 
1.441
%
 
0.943
%
 
3.24
____________________
(1)
Notional amount includes $570.0 million and $777.1 million in forward starting interest rate swaps as of December 31, 2017 and December 31, 2016, respectively.
(2)
Weighted averages exclude forward starting interest rate swaps. As of December 31, 2017 and December 31, 2016, the weighted average fixed pay rate on forward starting interest rate swaps was 2.1% and 2.0%, respectively.

Schedule of Interest Rate Swap Receivers
Additionally, as of December 31, 2017 and December 31, 2016, 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)
 
 
 
 
 
 
December 31, 2017
Swaps Maturities
 
Notional Amounts
 
Weighted Average Pay Rate
 
Weighted Average Fixed Receive Rate
 
Weighted Average Maturity (Years)
2020
 
$
200,000

 
1.391
%
 
1.642
%
 
2.60
2021
 
500,000

 
1.357
%
 
1.327
%
 
3.05
2022 and Thereafter
 
4,861,990

 
1.475
%
 
2.325
%
 
8.34
Total
 
$
5,561,990

 
1.462
%
 
2.211
%
 
7.66
(notional in thousands)
 
 
 
 
 
 
December 31, 2016
Swaps Maturities
 
Notional Amounts
 
Weighted Average Pay Rate
 
Weighted Average Fixed Receive Rate
 
Weighted Average Maturity (Years)
2019
 
$
575,000

 
0.911
%
 
1.440
%
 
1.89
2020
 
500,000

 
0.882
%
 
1.042
%
 
2.06
2021
 
510,000

 
0.881
%
 
1.580
%
 
3.59
2022 and Thereafter
 
3,479,000

 
0.963
%
 
2.137
%
 
5.52
Total
 
$
5,064,000

 
0.941
%
 
1.894
%
 
4.57
Schedule of Interest Rate Swaptions
As of December 31, 2017 and December 31, 2016, the Company had the following outstanding interest rate swaptions that were utilized as macro-economic hedges:
 
 
December 31, 2017
(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
 
$
21,380

 
$
17,736

 
4.03

 
$
7,200,000

 
2.27
%
 
3M Libor
 
3.8
Receiver
 
< 6 Months
 
$
4,660

 
$
2,982

 
3.72

 
$
2,300,000

 
3M Libor
 
2.10
%
 
10.0
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sale contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Payer
 
< 6 Months
 
$
(7,950
)
 
$
(5,619
)
 
4.66

 
$
(1,693,000
)
 
2.70
%
 
3M Libor
 
10.0
Receiver
 
< 6 Months
 
$
(16,260
)
 
$
(4,694
)
 
5.17

 
$
(5,141,000
)
 
3M Libor
 
1.89
%
 
5.6
 
 
December 31, 2016
(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
 
$
29,360

 
$
42,149

 
1.22

 
$
4,500,000

 
2.16
%
 
3M Libor
 
4.8
Payer
 
≥ 6 Months
 
13,655

 
792

 
6.70

 
300,000

 
3.50
%
 
3M Libor
 
10.0
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sale contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Payer
 
< 6 Months
 
$
(51,355
)
 
$
(1,414
)
 
5.81

 
$
(500,000
)
 
3.40
%
 
3M Libor
 
10.0
Payer
 
≥ 6 Months
 
(29,893
)
 
(938
)
 
6.77

 
(300,000
)
 
3.50
%
 
3M Libor
 
10.0
Receiver
 
< 6 Months
 
$

 
$
(2,353
)
 
2.30

 
$
(3,775,000
)
 
3M Libor
 
1.19
%
 
4.9
Schedule of Inverse Interest-Only Securities Reconciliation
The following table presents the amortized cost and carrying value (which approximates fair value) of inverse interest-only securities as of December 31, 2017 and December 31, 2016:
(in thousands)
December 31,
2017
 
December 31,
2016
Face Value
$
588,246

 
$
740,844

 
 
 
 
Amortized Cost
$
86,734

 
$
109,762

Gross unrealized gains
6,843

 
18,389

Gross unrealized losses
(2,602
)
 
(1,552
)
Market Value
$
90,975

 
$
126,599



Schedule of Total Return Swaps
The Company had the following total return swap agreements in place at December 31, 2017 and December 31, 2016:
(notional and dollars in thousands)
 
 
 
 
 
December 31, 2017
Maturity Date
 
Current Notional Amount
 
Fair Value
 
Cost Basis
 
Unrealized Gain (Loss)
January 12, 2043
 
$
(24,362
)
 
$
(24
)
 
$
201

 
$
(225
)
January 12, 2044
 
(39,145
)
 
(82
)
 
366

 
(448
)
Total
 
$
(63,507
)
 
$
(106
)
 
$
567

 
$
(673
)
(notional and dollars in thousands)
 
 
 
 
 
December 31, 2016
Maturity Date
 
Current Notional Amount
 
Fair Value
 
Cost Basis
 
Unrealized Gain (Loss)
January 12, 2043
 
$
(45,083
)
 
$
(5
)
 
$
320

 
$
(325
)
January 12, 2044
 
(45,510
)
 
(12
)
 
366

 
(378
)
Total
 
$
(90,593
)
 
$
(17
)
 
$
686

 
$
(703
)