XML 19 R11.htm IDEA: XBRL DOCUMENT
v3.20.1

Derivatives (Notes) | 3 Months Ended
--- | ---
Mar. 31, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivatives | DERIVATIVES Types and Uses of Derivatives Instruments Interest Rate Derivatives. Prior to the end of the first quarter of 2020, the Company primarily used interest rate swaps as economic hedges to mitigate declines in book value and to protect some portion of the Company's earnings from rising interest rates; however, the Company substantially reduced its notional balance of interest rate swaps late in the first quarter of 2020 due to the significant reduction of its MBS portfolio. In addition, counterparties began expanding initial margin requirements for interest rate swaps. The Company added short positions in U.S. Treasury futures and increased its holdings of put options on U.S. Treasury futures as these derivative instruments are viewed by management as more liquid and having more favorable margin requirements versus interest rate swaps. TBA Transactions. The Company purchases TBA securities as a means of investing in non-specified fixed-rate Agency RMBS and may also periodically sell TBA securities as a means of economically hedging its book value exposure to Agency RMBS as well as earnings exposure from rising financing costs. The Company holds long and short positions in TBA securities by executing a series of transactions, commonly referred to as “dollar roll” transactions, which effectively delay the settlement of a forward purchase (or sale) of a non-specified Agency RMBS by entering into an offsetting TBA position, net settling the paired-off positions in cash, and simultaneously entering into an identical TBA long (or short) position with a later settlement date. TBA securities purchased (or sold) for a forward settlement date are generally priced at a discount relative to TBA securities settling in the current month. This discount, often referred to as “drop income” represents the economic equivalent of net interest income (interest income less implied financing cost) on the underlying Agency security from trade date to settlement date. The Company accounts for all TBAs (whether net long or net short positions, or collectively “TBA dollar roll positions”) as derivative instruments because it cannot assert that it is probable at inception and throughout the term of an individual TBA transaction that its settlement will result in physical delivery of the underlying Agency RMBS, or that the individual TBA transaction will not settle in the shortest period possible. Loss on Derivative Instruments, Net The table below provides detail of the Company’s “loss on derivative instruments, net” by type of derivative for the periods indicated:
|  | Three Months Ended |  |  |
|  | March 31, |  |  |
Type of Derivative Instrument |  | 2020 |  | 2019 |
Interest rate swaps |  | $ | (182,181) |  |  | $ | (71,764) |  |
Interest rate swaptions |  | (573) |  |  | — |  |
U.S. Treasury futures |  | (8,447) |  |  | (109) |  |
Options on U.S. Treasury futures |  | (10,727) |  |  | — |  |
TBA securities - long positions |  | 18,432 |  |  | 10,176 |  |
TBA securities - short positions |  | (12,071) |  |  | — |  |
Loss on derivative instruments, net |  | $ | (195,567) |  |  | $ | (61,697) |  |
The table below summarizes information about the fair value by type of derivative instrument on the Company’s consolidated balance sheets as of the dates indicated:
Type of Derivative Instrument |  | Balance Sheet Location |  | Purpose |  | March 31, 2020 |  | December 31, 2019
Options on U.S. Treasury futures |  | Derivative assets |  | Economic hedging |  | $ | 3,031 |  |  | $ | 2,883 |
Interest rate swaptions |  | Derivative assets |  | Economic hedging |  | — |  |  | 573 |
TBA securities - long positions |  | Derivative assets |  | Investing |  | — |  |  | 834 |
Total derivatives assets |  |  |  |  |  | $ | 3,031 |  |  | $ | 4,290 |
U.S. Treasury futures |  | Derivative liabilities |  | Economic hedging |  | $ | (8,438) |  |  | $ | — |
TBA securities - short positions |  | Derivative liabilities |  | Economic hedging |  | (5,202) |  |  | (974) |
Total derivatives liabilities |  |  |  |  |  | $ | (13,640) |  |  | $ | (974) |
Interest Rate Swaps The Company has interest rate swap agreements outstanding with various counterparties which are centrally cleared through the CME. As explained in Note 1, the exchange of variation margin for CME cleared interest rate swaps is legally considered to be the settlement of the derivative itself as opposed to a pledge of collateral. Because the Company accounts for this daily exchange of variation margin for its CME cleared interest rate swaps as an increase or decrease to the carrying value of the related derivative asset or liability, the fair value of the interest rate swaps nets to $0 on the Company’s consolidated balance sheet. The Company had net settlement amounts of $(1,557) and $(9,265) in variation margin for its interest rate swaps as of March 31, 2020 and December 31, 2019, respectively. The following tables present information about the Company’s interest rate swaps as of the dates indicated:
|  | March 31, 2020 |  |  |  |  |  | December 31, 2019 |  |  |  |
|  |  |  | Weighted-Average |  |  |  |  |  | Weighted-Average |  |
Years to Maturity: |  | Notional Amount |  | Pay Rate |  | Life Remaining (in Years) |  | Notional Amount |  | Pay Rate |  | Life Remaining (in Years)
< 3 years |  | $ | 150,000 |  |  | 1.61 | % |  | 0.3 |  | $ | 2,860,000 |  |  | 1.58 | % |  | 1.5
>3 and < 6 years |  | — |  |  | — | % |  | — |  |  | 700,000 |  |  | 1.43 | % |  | 4.7
>6 and < 10 years |  | 80,000 |  |  | 0.83 | % |  | 9.9 |  | 545,000 |  |  | 1.78 | % |  | 9.4
>10 years |  | — |  |  | — | % |  | — |  |  | 120,000 |  |  | 2.84 | % |  | 27.7
Total |  | $ | 230,000 |  |  | 1.34 | % |  | 3.6 |  | $ | 4,225,000 |  |  | 1.62 | % |  | 3.8
U.S. Treasury Futures and Options The following table presents information about the Company’s U.S. Treasury futures and options outstanding as of the dates indicated:
| Cost Basis |  | Fair Value |  | Notional Amount
As of March 31, 2020: |  |  |  |  |
Options on U.S. Treasury futures (1) | $ | 14,884 |  |  | $ | 3,031 |  |  | 1,700,000 |
U.S. Treasury futures - short positions | n/a |  |  | (8,438) |  |  | 1,177,500 |
As of December 31, 2019: |  |  |  |  |  |
Options on U.S. Treasury futures (2) | $ | 4,359 |  |  | $ | 2,883 |  |  | $ | 1,350,000 |
Pay-fixed interest rate swaptions (2) | 6,180 |  |  | 573 |  |  | 750,000 |
(1) All futures and options outstanding as of March 31, 2020 will expire in June of 2020. (2) All options outstanding as of December 31, 2019 expired during the first quarter of 2020. TBA Securities The following table summarizes information about the Company's TBA securities as of the dates indicated:
| March 31, 2020 |  |  |  | December 31, 2019 |  |
| Long Positions |  | Short Positions |  | Long Positions |  | Short Positions
Implied market value (1) | $ | — |  |  | $ | (549,521) |  |  | $ | 442,161 |  |  | $ | (520,117) |
Implied cost basis (2) | — |  |  | (544,319) |  |  | 441,327 |  |  | (519,143) |
Net carrying value (3) | $ | — |  |  | $ | (5,202) |  |  | $ | 834 |  |  | $ | (974) |
(1) Implied market value represents the estimated fair value of the underlying Agency MBS as if settled as of the date indicated. (2) Implied cost basis represents the forward price to be paid for the underlying Agency MBS as if settled as of the date indicated. (3) Net carrying value is the amount included on the consolidated balance sheets within “derivative assets (liabilities)” and represents the difference between the implied market value and the implied cost basis of the TBA security as of the date indicated. Volume of Activity The tables below summarize changes in the Company’s derivative instruments for the period indicated:
Type of Derivative Instrument |  | Notional Amount as of December 31, 2019 |  | Additions |  | Settlements, Terminations, or Pair-Offs |  | Notional Amount as of March 31, 2020
Interest rate swaps |  | $ | 4,225,000 |  |  | $ | 2,570,000 |  |  | $ | (6,565,000) |  |  | $ | 230,000 |
Interest rate swaptions |  | 750,000 |  |  | — |  |  | (750,000) |  |  | — |
U.S. Treasury futures |  | — |  |  | 1,477,500 |  |  | (300,000) |  |  | 1,177,500 |
Options on U.S. Treasury futures |  | 1,350,000 |  |  | 2,000,000 |  |  | (1,650,000) |  |  | 1,700,000 |
TBA - long positions |  | 435,000 |  |  | 1,905,000 |  |  | (2,340,000) |  |  | — |
TBA - short positions |  | (500,000) |  |  | (830,000) |  |  | 815,000 |  |  | (515,000) |
Offsetting The Company's derivatives are subject to underlying agreements with master netting or similar arrangements, which provide for the right of offset in the event of default or in the event of bankruptcy of either party to the transactions. The Company reports its derivative assets and liabilities subject to these arrangements on a gross basis. The following tables present information regarding those derivative assets and liabilities subject to such arrangements as if the Company had presented them on a net basis as of March 31, 2020 and December 31, 2019:
| Offsetting of Assets |  |  |  |  |  |  |  |  |  |
| Gross Amount of Recognized Assets |  | Gross Amount Offset in the Balance Sheet |  | Net Amount of Assets Presented in the Balance Sheet |  | Gross Amount Not Offset in the Balance Sheet (1) |  |  |  | Net Amount
|  |  |  |  |  |  | Financial Instruments Received as Collateral |  | Cash Received as Collateral |  |
March 31, 2020 |  |  |  |  |  |  |  |  |  |  |
Options on U.S. Treasury futures | $ | 3,031 |  |  | — |  |  | $ | 3,031 |  |  | $ | — |  |  | $ | — |  |  | $ | 3,031 |
Derivative assets | $ | 3,031 |  |  | $ | — |  |  | $ | 3,031 |  |  | $ | — |  |  | $ | — |  |  | $ | 3,031 |
December 31, 2019 |  |  |  |  |  |  |  |  |  |  |
Interest rate swaptions | $ | 573 |  |  | $ | — |  |  | $ | 573 |  |  | $ | — |  |  | $ | — |  |  | $ | 573 |
Options on U.S. Treasury futures | 2,883 |  |  | — |  |  | 2,883 |  |  | — |  |  | — |  |  | 2,883 |
TBA - long positions | 834 |  |  | — |  |  | 834 |  |  | (380) |  |  | — |  |  | 454 |
Derivative assets | $ | 4,290 |  |  | $ | — |  |  | $ | 4,290 |  |  | $ | (380) |  |  | $ | — |  |  | $ | 3,910 |
| Offsetting of Liabilities |  |  |  |  |  |  |  |  |  |
| Gross Amount of Recognized Liabilities |  | Gross Amount Offset in the Balance Sheet |  | Net Amount of Liabilities Presented in the Balance Sheet |  | Gross Amount Not Offset in the Balance Sheet (1) |  |  |  | Net Amount
|  |  |  |  |  |  | Financial Instruments Posted as Collateral |  | Cash Posted as Collateral |  |
March 31, 2020 |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury futures | $ | (8,438) |  |  | — |  |  | $ | (8,438) |  |  | $ | — |  |  | $ | 8,438 |  |  | $ | — |
TBA - short positions | (5,202) |  |  | — |  |  | (5,202) |  |  | — |  |  | 1,235 |  |  | (3,967) |
Derivative liabilities | $ | (13,640) |  |  | $ | — |  |  | $ | (13,640) |  |  | $ | — |  |  | $ | 9,673 |  |  | $ | (3,967) |
December 31, 2019 |  |  |  |  |  |  |  |  |  |  |
TBA - short positions | $ | (974) |  |  | — |  |  | $ | (974) |  |  | $ | 380 |  |  | — |  |  | $ | (594) |
Derivative liabilities | $ | (974) |  |  | $ | — |  |  | $ | (974) |  |  | $ | 380 |  |  | $ | — |  |  | $ | (594) |
(1) Amounts disclosed for collateral received by or posted to the same counterparty include cash and the fair value of MBS up to and not exceeding the net amount of the derivative asset or liability presented in the balance sheet. The fair value of the total collateral received by or posted to the same counterparty may exceed the amounts presented. Please refer to the consolidated balance sheets for the total cash posted as collateral, which is recorded as "restricted cash," and the total fair value of financial instruments pledged as collateral for derivatives and repurchase agreements, which is shown parenthetically. Please see Note 3 for information related to the Company’s repurchase agreements which are also subject to underlying agreements with master netting or similar arrangements.

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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
Name: | us-gaap_DerivativeInstrumentsAndHedgingActivitiesDisclosureTextBlock
Namespace Prefix: | us-gaap_
Data Type: | nonnum:textBlockItemType
Balance Type: | na
Period Type: | duration