Annual report pursuant to Section 13 and 15(d)

Derivative Instruments and Hedging Activities (Tables)

v3.10.0.1
Derivative Instruments and Hedging Activities (Tables)
12 Months Ended
Dec. 31, 2018
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 December 31, 2018 and December 31, 2017.
 
 
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

Markit IOS total return swaps
 

 

 
(383
)
 
48,265

Short U.S. Treasuries
 

 

 
(781,455
)
 
800,000

Total
 
$
319,981

 
$
36,258,904

 
$
(820,590
)
 
$
5,403,265


 
 
December 31, 2017
 
 
Derivative Assets
 
Derivative Liabilities
(in thousands)
 
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

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 (loss) income:
Derivative 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,
 
 
 
 
2018
 
2017
 
2016
Interest rate risk management
 
 
 
 
 
 
TBAs
 
(Loss) gain on other derivative instruments
 
$
(12,521
)
 
$
(46,778
)
 
$
51,816

Short U.S. Treasuries
 
(Loss) gain on other derivative instruments
 
(26,988
)
 

 

Put and call options for TBAs
 
(Loss) gain on other derivative instruments
 
(18,457
)
 
(22,623
)
 
64,920

Interest rate swaps - Payers
 
Gain (loss) on interest rate swap, cap and swaption agreements
 
48,995

 
67,124

 
(3,110
)
Interest rate swaps - Receivers
 
Gain (loss) on interest rate swap, cap and swaption agreements
 
(74,407
)
 
(17,677
)
 
37,272

Swaptions
 
Gain (loss) on interest rate swap, cap and swaption agreements
 
45,954

 
(59,200
)
 
11,209

Interest rate caps
 
Gain (loss) on interest rate swap, cap and swaption agreements
 
(4,499
)
 

 

Markit IOS total return swaps
 
(Loss) gain on other derivative instruments
 
125

 
(870
)
 
(36,898
)
Credit risk management
 
 
 
 
 
 
 
 
Credit default swaps - Receive protection
 
(Loss) gain on other derivative instruments
 

 

 
962

Non-risk management
 
 
 
 
 
 
 
 
Inverse interest-only securities
 
(Loss) gain on other derivative instruments
 
2,984

 
112

 
18,579

Forward purchase commmitments
 
(Loss) gain on other derivative instruments
 

 

 
2,418

Total
 
 
 
$
(38,814
)
 
$
(79,912
)
 
$
147,168

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, 2018 and 2017:
 
Year Ended December 31, 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

 
$

 
$
(111,947
)
 
$
476,299

 
$
530,509

 
$

Interest rate swap agreements
28,482,125

 
49,269,781

 
(48,228,301
)
 
29,523,605

 
28,317,793

 
(71,578
)
Interest rate cap contracts

 
2,500,000

 

 
2,500,000

 
1,054,795

 

Swaptions, net
2,666,000

 
(35,000
)
 
(2,568,000
)
 
63,000

 
(1,495,421
)
 
67,985

TBAs, net
(573,000
)
 
64,988,000

 
(57,931,000
)
 
6,484,000

 
4,502,888

 
(35,140
)
Short U.S. Treasuries

 
(800,000
)
 

 
(800,000
)
 
(337,534
)
 

Put and call options for TBAs, net

 
(451,000
)
 
(1,316,000
)
 
(1,767,000
)
 
(804,997
)
 
6,839

Markit IOS total return swaps
63,507

 

 
(15,242
)
 
48,265

 
55,143

 
(765
)
Total
$
31,226,878

 
$
115,471,781

 
$
(110,170,490
)
 
$
36,528,169

 
$
31,823,176

 
$
(32,659
)
 
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

____________________
(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, 2018 and December 31, 2017:
 
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

 
$

 
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
)
___________________
(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, 2018 and December 31, 2017, 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, 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

(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
____________________
(1)
Notional amount includes $572.0 million and $570.0 million in forward starting interest rate swaps as of December 31, 2018 and December 31, 2017, respectively.
(2)
Weighted averages exclude forward starting interest rate swaps. As of December 31, 2018 and December 31, 2017, the weighted average fixed pay rate on forward starting interest rate swaps was 2.8% and 2.1%, respectively.

Schedule of Interest Rate Swap Receivers Additionally, as of December 31, 2018 and December 31, 2017, 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, 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
(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
Schedule of Interest Rate Swaptions As of December 31, 2018 and December 31, 2017, the Company had the following outstanding interest rate swaptions that were utilized as macro-economic hedges:
 
 
December 31, 2018
(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
 
$
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
 
 
December 31, 2017
(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
 
$
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
Schedule of Interest Rate Caps [Table Text Block] 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

The Company did not hold any interest rate caps as of December 31, 2017.
Schedule of Total Return Swaps The Company had the following total return swap agreements in place at December 31, 2018 and December 31, 2017:
(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
)
(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
)