XML 27 R15.htm IDEA: XBRL DOCUMENT
v3.24.3

DERIVATIVE INSTRUMENTS | 9 Months Ended
--- | ---
Sep. 30, 2024
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
DERIVATIVE INSTRUMENTS |
9. DERIVATIVE INSTRUMENTS
Derivative instruments include, but are not limited to, interest rate swaps, options to enter into interest rate swaps (“swaptions”), TBA derivatives, U.S. Treasury and Secured Overnight Financing Rate (“SOFR”) futures contracts and certain forward purchase commitments. The Company may also enter into other types of mortgage derivatives such as interest-only securities, credit derivatives referencing the commercial mortgage-backed securities index and synthetic total return swaps. In connection with the Company’s investment/market rate risk management strategy, the Company economically hedges a portion of its interest rate risk by entering into derivative financial instrument contracts, which include interest rate swaps, swaptions and futures contracts. The Company may also enter into TBA derivatives, U.S. Treasury futures contracts, certain forward purchase commitments and credit derivatives to economically hedge its exposure to market risks. The purpose of using derivatives is to manage overall portfolio risk with the potential to generate additional income for distribution to stockholders. These derivatives are subject to changes in market values resulting from changes in interest rates, volatility, Agency mortgage-backed security spreads to U.S. Treasuries and market liquidity. The use of derivatives also creates exposure to credit risk relating to potential losses that could be recognized if the counterparties to these instruments fail to perform their obligations under the stated contract. Additionally, the Company may have to pledge cash or assets as collateral for the derivative transactions, the amount of which may vary based on the market value and terms of the derivative contract. In the case of market agreed coupon (“MAC”) interest rate swaps, the Company may make or receive a payment at the time of entering into such interest rate swaps, which represents fair value of these swaps, to compensate for the out of market nature of such interest rate swaps. Subsequent changes in fair value from inception of these interest rate swaps are reflected within Net gains (losses) on derivatives in the Consolidated Statements of Comprehensive Income (Loss). Similar to other interest rate swaps, the Company may have to pledge cash or assets as collateral for the MAC interest rate swap transactions. In the event of a default by the counterparty, the Company could have difficulty obtaining its pledged collateral as well as receiving payments in accordance with the terms of the derivative contracts. Derivatives are recognized as either assets or liabilities at fair value in the Consolidated Statements of Financial Condition with changes in fair value recognized in the Consolidated Statements of Comprehensive Income (Loss). The changes in the estimated fair value are presented within Net gains (losses) on derivatives. None of the Company’s derivative transactions have been designated as hedging instruments for accounting purposes. The Company also maintains collateral in the form of cash on margin with counterparties to its interest rate swaps and other derivatives. In accordance with a clearing organization’s rulebook, the Company presents the fair value of centrally cleared interest rate swaps net of variation margin pledged or received under such transactions. At September 30, 2024 and December 31, 2023, ($1.8) billion and ($2.4) billion, respectively, of variation margin was reported as an adjustment to interest rate swaps, at fair value. Initial margin is reported in Cash and cash equivalents in the Consolidated Statements of Financial Condition. Interest Rate Swap Agreements – Interest rate swap agreements are the primary instruments used to mitigate interest rate risk. In particular, the Company uses interest rate swap agreements to manage its exposure to changing interest rates on its repurchase agreements by economically hedging cash flows associated with these borrowings. The Company may have outstanding interest rate swap agreements where the floating leg is linked to the SOFR, the overnight index swap rate or another index. Interest rate swap agreements may or may not be cleared through a derivatives clearing organization (“DCO”). Uncleared interest rate swaps are fair valued using internal pricing models and compared to the counterparty market values. Centrally cleared interest rate swaps, including MAC interest rate swaps, are generally fair valued using the DCO’s market values. If an interest rate swap is terminated, the realized gain (loss) on the interest rate swap would be equal to the difference between the cash received or paid and fair value. Swaptions – Swaptions are purchased or sold to mitigate the potential impact of increases or decreases in interest rates. Interest rate swaptions provide the option to enter into an interest rate swap agreement for a predetermined notional amount, stated term and pay and receive interest rates in the future. The Company’s swaptions are not centrally cleared. The premium paid or received for swaptions is reported as an asset or liability in the Consolidated Statements of Financial Condition. If a swaption expires unexercised, the realized gain (loss) on the swaption would be equal to the premium received or paid. If the Company sells or exercises a swaption, the realized gain (loss) on the swaption would be equal to the difference between the cash received or the fair value of the underlying interest rate swap received and the premium paid. The fair value of swaptions are estimated using internal pricing models and compared to the counterparty market values. TBA Dollar Rolls – TBA dollar roll transactions are accounted for as a series of derivative transactions. The fair value of TBA derivatives is based on methods similar to those used to value Agency mortgage-backed securities. Futures Contracts – Futures contracts are derivatives that track the prices of specific assets or benchmark rates. Short sales of futures contracts help to mitigate the potential impact of changes in interest rates on the portfolio performance. The Company maintains margin accounts which are settled daily with Futures Commission Merchants (“FCMs”). The margin requirement varies based on the market value of the open positions and the equity retained in the account. Futures contracts are fair valued based on exchange pricing. Forward Purchase Commitments – The Company may enter into forward purchase commitments with counterparties whereby the Company commits to purchasing residential mortgage loans at a particular price, provided the residential mortgage loans close with the counterparties. The counterparties are required to deliver the committed loans on a “best efforts” basis. Credit Derivatives – The Company may enter into credit derivatives referencing a commercial mortgage-backed securities index, such as the CMBX index, and synthetic total return swaps. The following table summarizes fair value information about the Company’s derivative assets and liabilities at September 30, 2024 and December 31, 2023:
Derivatives Instruments |  |  | September 30, 2024 |  | December 31, 2023
Assets |  |  | (dollars in thousands)
Interest rate swaps |  |  | $ | 3,094 |  |  | $ | 26,344 |
Interest rate swaptions |  |  | 13,068 |  |  | 105,883 |
TBA derivatives |  |  | 2,869 |  |  | 20,689 |
Futures contracts |  |  | 23,256 |  |  | — |
Purchase commitments |  |  | 16,784 |  |  | 9,641 |
Total derivative assets |  |  | $ | 59,071 |  |  | $ | 162,557 |
Liabilities |  |  |  |  |
Interest rate swaps |  |  | $ | 59,297 |  |  | $ | 83,051 |
TBA derivatives |  |  | 8,601 |  |  | 39,070 |
Futures contracts |  |  | 32,117 |  |  | 179,835 |
Purchase commitments |  |  | 2,613 |  |  | 339 |
Total derivative liabilities |  |  | $ | 102,628 |  |  | $ | 302,295 |
The following tables summarize certain characteristics of the Company’s interest rate swaps at September 30, 2024 and December 31, 2023:
September 30, 2024
Maturity | Current Notional (1) |  | Weighted Average Pay Rate |  | Weighted Average Receive Rate |  | Weighted Average Years to Maturity (2)
(dollars in thousands)
0 - 3 years | $ | 19,961,229 |  |  | 3.33 | % |  | 4.95 | % |  | 1.05
3 - 6 years | 13,510,021 |  |  | 3.10 | % |  | 4.94 | % |  | 4.62
6 - 10 years | 20,114,937 |  |  | 2.77 | % |  | 4.95 | % |  | 7.97
Greater than 10 years | 1,559,384 |  |  | 3.44 | % |  | 4.84 | % |  | 23.50
Total / Weighted average | $ | 55,145,571 |  |  | 3.05 | % |  | 4.94 | % |  | 5.08
December 31, 2023
Maturity | Current Notional (1) |  | Weighted Average Pay Rate |  | Weighted Average Receive Rate |  | Weighted Average Years to Maturity (2)
(dollars in thousands)
0 - 3 years | $ | 21,397,358 |  |  | 3.17 | % |  | 5.26 | % |  | 1.23
3 - 6 years | 12,461,799 |  |  | 3.09 | % |  | 5.37 | % |  | 4.75
6 - 10 years | 22,949,150 |  |  | 2.85 | % |  | 5.34 | % |  | 8.02
Greater than 10 years | 2,021,247 |  |  | 3.53 | % |  | 5.27 | % |  | 22.71
Total / Weighted average | $ | 58,829,554 |  |  | 3.04 | % |  | 5.31 | % |  | 5.36
(1) As of September 30, 2024, 7% and 93% of the Company’s interest rate swaps were linked to the Federal funds rate and the SOFR, respectively. As of December 31, 2023, 6% and 94% of the Company’s interest rate swaps were linked to the Federal funds rate and the SOFR, respectively. (2) The weighted average years to maturity of payer interest rate swaps is offset by the weighted average years to maturity of receiver interest rate swaps. As such, the net weighted average years to maturity for each maturity bucket may fall outside of the range listed.
The following tables summarize certain characteristics of the Company’s swaptions at September 30, 2024 and December 31, 2023:
September 30, 2024
|  | Current Underlying Notional |  | Weighted Average Underlying Fixed Rate |  | Weighted Average Underlying Floating Rate |  | Weighted Average Underlying Years to Maturity |  | Weighted Average Months to Expiration
(dollars in thousands)
Long pay |  | $250,000 |  | 2.40% |  | SOFR |  | 5.03 |  | 0.23
December 31, 2023
|  | Current Underlying Notional |  | Weighted Average Underlying Fixed Rate |  | Weighted Average Underlying Floating Rate |  | Weighted Average Underlying Years to Maturity |  | Weighted Average Months to Expiration
(dollars in thousands)
Long pay |  | $1,250,000 |  | 2.21% |  | SOFR |  | 7.69 |  | 8.21
Long receive |  | $500,000 |  | 1.65% |  | SOFR |  | 10.30 |  | 3.53
The following tables summarize certain characteristics of the Company’s TBA derivatives at September 30, 2024 and December 31, 2023:
September 30, 2024
Purchase and Sale Contracts for Derivative TBAs | Notional |  | Implied Cost Basis |  | Implied Market Value |  | Net Carrying Value
(dollars in thousands)
Purchase contracts | $ | 3,319,000 |  |  | $ | 3,333,873 |  |  | $ | 3,328,141 |  |  | $ | (5,732) |
Net TBA derivatives | $ | 3,319,000 |  |  | $ | 3,333,873 |  |  | $ | 3,328,141 |  |  | $ | (5,732) |
December 31, 2023
Purchase and Sale Contracts for Derivative TBAs | Notional |  | Implied Cost Basis |  | Implied Market Value |  | Net Carrying Value
(dollars in thousands)
Purchase contracts | $ | 988,000 |  |  | $ | 920,626 |  |  | $ | 915,790 |  |  | $ | (4,836) |
Sale contracts | (1,491,000) |  |  | (1,475,847) |  |  | (1,489,392) |  |  | (13,545) |
Net TBA derivatives | $ | (503,000) |  |  | $ | (555,221) |  |  | $ | (573,602) |  |  | $ | (18,381) |
The following tables summarize certain characteristics of the Company’s futures derivatives at September 30, 2024 and December 31, 2023:
September 30, 2024
| Notional - Long Positions |  | Notional - Short Positions |  | Weighted Average Years to Maturity
| (dollars in thousands) |  |  |  |
U.S. Treasury futures - 2 year | $ | — |  |  | $ | (16,793,200) |  |  | 1.94
U.S. Treasury futures - 5 year | 3,346,000 |  |  | — |  |  | 4.39
U.S. Treasury futures - 10 year and greater | 621,300 |  |  | (2,285,500) |  |  | 12.41
Total | $ | 3,967,300 |  |  | $ | (19,078,700) |  |  | 3.62
December 31, 2023
| Notional - Long Positions |  | Notional - Short Positions |  | Weighted Average Years to Maturity
| (dollars in thousands) |  |  |  |
U.S. Treasury futures - 2 year | $ | — |  |  | $ | (5,001,400) |  |  | 1.97
U.S. Treasury futures - 10 year and greater | — |  |  | (1,733,600) |  |  | 14.26
Total | $ | — |  |  | $ | (6,735,000) |  |  | 5.13
The Company presents derivative contracts on a gross basis in the Consolidated Statements of Financial Condition. Derivative contracts may contain legally enforceable provisions that allow for netting or setting off receivables and payables with each counterparty. The following tables present information about derivative assets and liabilities that are subject to such provisions and can be offset in the Company’s Consolidated Statements of Financial Condition at September 30, 2024 and December 31, 2023, respectively.
September 30, 2024
|  |  | Amounts Eligible for Offset |  |
| Gross Amounts |  | Financial Instruments |  | Cash Collateral |  | Net Amounts
Assets | (dollars in thousands)
Interest rate swaps, at fair value | $ | 3,094 |  |  | $ | — |  |  | $ | — |  |  | $ | 3,094 |
Interest rate swaptions, at fair value | 13,068 |  |  | — |  |  | (11,100) |  |  | 1,968 |
TBA derivatives, at fair value | 2,869 |  |  | (2,660) |  |  | — |  |  | 209 |
Futures contracts, at fair value | 23,256 |  |  | (20,305) |  |  | — |  |  | 2,951 |
Purchase commitments | 16,784 |  |  | — |  |  | — |  |  | 16,784 |
Liabilities |
Interest rate swaps, at fair value | $ | 59,297 |  |  | $ | (48,713) |  |  | $ | — |  |  | $ | 10,584 |
TBA derivatives, at fair value | 8,601 |  |  | (6,972) |  |  | — |  |  | 1,629 |
Futures contracts, at fair value | 32,117 |  |  | (20,305) |  |  | (11,812) |  |  | — |
Purchase commitments | 2,613 |  |  | — |  |  | — |  |  | 2,613 |
December 31, 2023
|  |  | Amounts Eligible for Offset |  |
| Gross Amounts |  | Financial Instruments |  | Cash Collateral |  | Net Amounts
Assets | (dollars in thousands)
Interest rate swaps, at fair value | $ | 26,344 |  |  | $ | (21,505) |  |  | $ | — |  |  | $ | 4,839 |
Interest rate swaptions, at fair value | 105,883 |  |  | (45,930) |  |  | (57,320) |  |  | 2,633 |
TBA derivatives, at fair value | 20,689 |  |  | (13,282) |  |  | — |  |  | 7,407 |
Purchase commitments | 9,641 |  |  | — |  |  | — |  |  | 9,641 |
Liabilities |
Interest rate swaps, at fair value | $ | 83,051 |  |  | $ | (72,844) |  |  | $ | — |  |  | $ | 10,207 |
TBA derivatives, at fair value | 39,070 |  |  | (34,525) |  |  | — |  |  | 4,545 |
Futures contracts, at fair value | 179,835 |  |  | — |  |  | (179,835) |  |  | — |
Purchase commitments | 339 |  |  | — |  |  | — |  |  | 339 |
The effect of interest rate swaps in the Consolidated Statements of Comprehensive Income (Loss) is as follows:
Location on Consolidated Statements of Comprehensive Income (Loss)
| Net Interest Component of Interest Rate Swaps (1) |  | Realized Gains (Losses) on Termination of Interest Rate Swaps (1) |  | Unrealized Gains (Losses) on Interest Rate Swaps (1)
For the three months ended | (dollars in thousands)
September 30, 2024 | $ | 317,483 |  |  | $ | (94,016) |  |  | $ | (1,582,495) |
September 30, 2023 | $ | 394,677 |  |  | $ | 16,416 |  |  | $ | 1,475,547 |
For the nine months ended |
September 30, 2024 | $ | 946,004 |  |  | $ | (96,532) |  |  | $ | (584,109) |
September 30, 2023 | $ | 1,205,676 |  |  | $ | (81,255) |  |  | $ | 1,360,977 |
(1) Included in Net gains (losses) on derivatives in the Consolidated Statements of Comprehensive Income (Loss).
The effect of other derivative contracts in the Company’s Consolidated Statements of Comprehensive Income (Loss) is as follows:
Three Months Ended September 30, 2024
Derivative Instruments | Realized Gain (Loss) |  | Unrealized Gain (Loss) |  | Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives
(dollars in thousands)
Net TBA derivatives | $ | 40,561 |  |  | $ | (18,181) |  |  | $ | 22,380 |
Net interest rate swaptions | (21,180) |  |  | (113,792) |  |  | (134,972) |
Futures | (362,660) |  |  | 71,146 |  |  | (291,514) |
Purchase commitments | — |  |  | 9,124 |  |  | 9,124 |
Total |  |  |  |  | $ | (394,982) |
Three Months Ended September 30, 2023
Derivative Instruments | Realized Gain (Loss) |  | Unrealized Gain (Loss) |  | Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives
(dollars in thousands)
Net TBA derivatives | $ | (81,964) |  |  | $ | (41,777) |  |  | $ | (123,741) |
Net interest rate swaptions | (27,860) |  |  | (51,041) |  |  | (78,901) |
Futures (1) | 309,397 |  |  | 131,578 |  |  | 440,975 |
Purchase commitments | — |  |  | 2,457 |  |  | 2,457 |
Total |  |  |  |  | $ | 240,790 |
(1) For the three months ended September 30, 2023, includes $13.2 million of unrealized gain and ($18.9) million of realized loss related to SOFR futures options.
Nine Months Ended September 30, 2024
Derivative Instruments | Realized Gain (Loss) |  | Unrealized Gain (Loss) |  | Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives
(dollars in thousands)
Net TBA derivatives | $ | 15,694 |  |  | $ | 12,649 |  |  | $ | 28,343 |
Net interest rate swaptions | (33,511) |  |  | (59,304) |  |  | (92,815) |
Futures (1) | (323,113) |  |  | 170,973 |  |  | (152,140) |
Purchase commitments | — |  |  | 4,870 |  |  | 4,870 |
Total |  |  |  |  | $ | (211,742) |
(1) For the nine months ended September 30, 2024, includes ($6.8) million of realized loss related to SOFR futures options.
Nine Months Ended September 30, 2023
Derivative Instruments | Realized Gain (Loss) |  | Unrealized Gain (Loss) |  | Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives
(dollars in thousands)
Net TBA derivatives | $ | (136,452) |  |  | $ | 12,710 |  |  | $ | (123,742) |
Net interest rate swaptions | (25,538) |  |  | (43,627) |  |  | (69,165) |
Futures (1) | 185,716 |  |  | 229,940 |  |  | 415,656 |
Purchase commitments | — |  |  | (122) |  |  | (122) |
Credit derivatives | (19,282) |  |  | 13,260 |  |  | (6,022) |
Total |  |  |  |  | $ | 216,605 |
(1) For the nine months ended September 30, 2023, includes ($5.6) million of unrealized loss and ($18.9) million of realized loss related to SOFR futures options.
Certain of the Company’s derivative contracts are subject to International Swaps and Derivatives Association Master Agreements or other similar agreements which may contain provisions that grant counterparties certain rights with respect to the applicable agreement upon the occurrence of certain events such as (i) a decline in stockholders’ equity in excess of specified thresholds or dollar amounts over set periods of time, (ii) the Company’s failure to maintain its REIT status, (iii) the Company’s failure to comply with limits on the amount of leverage, and (iv) the Company’s stock being delisted from the New York Stock Exchange. Upon the occurrence of any one of items (i) through (iv), or another default under the agreement, the counterparty to the applicable agreement has a right to terminate the agreement in accordance with its provisions. The aggregate fair value of all derivative instruments with the aforementioned features were in a net liability position at September 30, 2024 of $42.2 million, which represents the maximum amount the Company would be required to pay upon termination. This amount is fully collateralized.

X
- References No definition available. + Details
Name: | us-gaap_DerivativeInstrumentsAndHedgingActivitiesDisclosureAbstract
Namespace Prefix: | us-gaap_
Data Type: | xbrli:stringItemType
Balance Type: | na
Period Type: | duration

X
- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 40 -Name Accounting Standards Codification -Section 50 -Paragraph 5 -Subparagraph (f) -Publisher FASB -URI https://asc.fasb.org/1943274/2147480237/815-40-50-5 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 5C -Subparagraph (b) -Publisher FASB -URI https://asc.fasb.org/1943274/2147480434/815-10-50-5C Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 815 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org/815/tableOfContent + Details
Name: | us-gaap_DerivativeInstrumentsAndHedgingActivitiesDisclosureTextBlock
Namespace Prefix: | us-gaap_
Data Type: | dtr-types:textBlockItemType
Balance Type: | na
Period Type: | duration