XML 24 R11.htm IDEA: XBRL DOCUMENT
v3.22.2.2

Derivatives | 9 Months Ended
--- | ---
Sep. 30, 2022
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivatives | DERIVATIVES Types and Uses of Derivatives Instruments Interest Rate Derivatives. As of September 30, 2022, the Company used short positions in U.S. Treasury futures and call options on U.S. Treasury futures to mitigate the impact of changing interest rates on the fair value of its investments and its net interest earnings. 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 exposure to Agency RMBS. 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. The table below provides detail of the Company’s “gain on derivative instruments, net” by type of derivative instrument for the periods indicated:
|  | Three Months Ended |  | Nine Months Ended
|  | September 30, |  | September 30,
Type of Derivative Instrument |  | 2022 |  | 2021 |  | 2022 |  | 2021
U.S. Treasury futures |  | $ | 281,827 |  |  | $ | 11,209 |  |  | $ | 721,236 |  |  | $ | 43,673 |
Interest rate swaptions |  | (4,202) |  |  | 3,985 |  |  | 47,738 |  |  | 42,686 |
Options on U.S. Treasury futures |  | 630 |  |  | (3,226) |  |  | 630 |  |  | (2,141) |
TBA securities |  | (181,308) |  |  | (2,365) |  |  | (346,034) |  |  | (19,755) |
Gain on derivative instruments, net |  | $ | 96,947 |  |  | $ | 9,603 |  |  | $ | 423,570 |  |  | $ | 64,463 |
The table above includes realized gains (losses) of $149,600 and $485,960 for the three and nine months ended September 30, 2022, compared to $(71,708) and $15,962 for the three and nine months ended September 30, 2021 on derivatives designated for tax purposes as hedges of interest rate risk. Though these realized gains (losses) are included in GAAP net income (loss), the majority of these gains are not included in REIT taxable income nor distributable as part of the Company’s dividends until amortized over the original periods hedged, though recognition may be accelerated if the underlying instrument originally hedged is terminated or paid off. The table below provides the carrying amount by type of derivative instrument comprising the Company’s derivative assets and liabilities on its consolidated balance sheets as of the dates indicated:
Type of Derivative Instrument |  | Balance Sheet Location |  | Purpose |  | September 30, 2022 |  | December 31, 2021
Interest rate swaptions |  | Derivative assets |  | Economic hedging |  | $ | — |  |  | $ | 3,202 |
Options on U.S. Treasury futures |  | Derivative assets |  | Economic hedging |  | 3,047 |  |  | — |
TBA securities |  | Derivative assets |  | Investing |  | 10,818 |  |  | 4,767 |
Total derivatives assets |  |  |  |  |  | $ | 13,865 |  |  | $ | 7,969 |
TBA securities |  | Derivative liabilities |  | Investing |  | $ | 99,670 |  |  | — |
Total derivatives liabilities |  |  |  |  |  | $ | 99,670 |  |  | $ | — |
Because the Company’s short positions in U.S. Treasury futures are net settled on a daily basis, the carrying value within “derivative assets” on the Company’s consolidated balance sheet nets to $0. As of September 30, 2022, the amount of cash posted by the Company for its U.S. Treasury futures was $105,062, of which $95,665 is the required margin recorded within “restricted cash,” The excess amount of $9,397 is recorded within “due from counterparties.” The Company’s options on U.S. Treasury futures are recorded at fair value on its consolidated balance sheet as of September 30, 2022. The Company’s cost basis as of September 30, 2022 was $2,417, which represents the premium paid. The following table summarizes information about the Company's long positions in TBA securities as of the dates indicated:
|  | September 30, 2022 |  | December 31, 2021
Implied market value (1) |  | $ | 3,224,087 |  |  | $ | 1,531,188 |
Implied cost basis (2) |  | 3,312,939 |  |  | 1,526,421 |
Net carrying value (3) |  | $ | (88,852) |  |  | $ | 4,767 |
(1) Implied market value represents the estimated fair value of the underlying Agency MBS as of the dates indicated. (2) Implied cost basis represents the forward price to be paid for the underlying Agency MBS as of the dates indicated. (3) Net carrying value is the amount included on the consolidated balance sheets within “derivative assets” and “derivative liabilities” and represents the difference between the implied market value and the implied cost basis of the TBA securities as of the dates indicated. Volume of Activity The table below summarizes changes in the Company’s derivative instruments for the nine months ended September 30, 2022:
Type of Derivative Instrument |  | Beginning Notional Amount-Long (Short) |  | Additions |  | Settlements, Terminations, or Pair-Offs |  | Ending Notional Amount-Long (Short)
Interest rate swaptions |  | $ | 500,000 |  |  | $ | — |  |  | $ | (500,000) |  |  | $ | — |
U.S. Treasury futures |  | (3,890,000) |  |  | 13,480,000 |  |  | (14,750,000) |  |  | (5,160,000) |
Options on U.S. Treasury futures |  | — |  |  | 750,000 |  |  | — |  |  | 750,000 |
TBA securities |  | 1,530,000 |  |  | 27,093,000 |  |  | (25,104,000) |  |  | 3,519,000 |
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. Please see Note 4 for information related to the Company’s repurchase agreements, which are also subject to underlying agreements with master netting or similar arrangements. 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 September 30, 2022 and December 31, 2021:
| 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
September 30, 2022 |  |  |  |  |  |  |  |  |  |  |
Options on U.S. Treasury futures | $ | 3,047 |  |  | $ | — |  |  | $ | 3,047 |  |  | $ | — |  |  | $ | — |  |  | $ | 3,047 |
TBA securities | 10,818 |  |  | — |  |  | 10,818 |  |  | (10,818) |  |  | — |  |  | — |
Derivative assets | $ | 13,865 |  |  | $ | — |  |  | $ | 13,865 |  |  | $ | (10,818) |  |  | $ | — |  |  | $ | 3,047 |
December 31, 2021 |  |  |  |  |  |  |  |  |  |  |
Interest rate swaptions | $ | 3,202 |  |  | $ | — |  |  | $ | 3,202 |  |  | $ | — |  |  | $ | (481) |  |  | $ | 2,721 |
TBA securities | 4,767 |  |  | — |  |  | 4,767 |  |  | — |  |  | (1,353) |  |  | 3,414 |
Derivative assets | $ | 7,969 |  |  | $ | — |  |  | $ | 7,969 |  |  | $ | — |  |  | $ | (1,834) |  |  | $ | 6,135 |
| 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
September 30, 2022 |  |  |  |  |  |  |  |  |  |  |
TBA securities | $ | 99,670 |  |  | $ | — |  |  | $ | 99,670 |  |  | $ | (10,818) |  |  | $ | (77,096) |  |  | $ | 11,756 |
Derivative liabilities | $ | 99,670 |  |  | $ | — |  |  | $ | 99,670 |  |  | $ | (10,818) |  |  | $ | (77,096) |  |  | $ | 11,756 |
December 31, 2021 |  |  |  |  |  |  |  |  |  |  |
Derivative liabilities | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
(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 fair value of financial instruments pledged as collateral for derivatives and repurchase agreements, which is shown parenthetically, and the total cash pledged or received as collateral which is disclosed in “cash collateral posted to/by counterparties.”

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 https://asc.fasb.org/topic&trid=2229140 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 40 -Section 50 -Paragraph 5 -Subparagraph (f) -URI https://asc.fasb.org/extlink&oid=126731327&loc=d3e90205-114008 + Details
Name: | us-gaap_DerivativeInstrumentsAndHedgingActivitiesDisclosureTextBlock
Namespace Prefix: | us-gaap_
Data Type: | dtr-types:textBlockItemType
Balance Type: | na
Period Type: | duration