v3.19.1

Financial Derivatives | 3 Months Ended
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Mar. 31, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Financial Derivatives | Financial Derivatives The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company manages certain risks associated with its investments and borrowings, including interest rate, credit, liquidity, and foreign exchange rate risk primarily by managing the amount, sources, and duration of its investments and borrowings, and through the use of derivative financial instruments. The Company's derivative financial instruments are used to manage differences in the amount, timing, and duration of its known or expected cash receipts and its known or expected cash payments principally related to its investments and borrowings. The following table details the fair value of the Company's holdings of financial derivatives as of March 31, 2019:
|  | March 31, 2019
(In thousands) |  |
Financial derivatives–assets, at fair value: |  |
TBA securities purchase contracts |  | $ | 445 |
TBA securities sale contracts |  | 86 |
Fixed payer interest rate swaps |  | 2,291 |
Fixed receiver interest rate swaps |  | 3,096 |
Basis swaps |  | 4 |
Credit default swaps on asset-backed securities |  | 1,233 |
Credit default swaps on asset-backed indices |  | 3,276 |
Credit default swaps on corporate bonds |  | 715 |
Credit default swaps on corporate bond indices |  | 3,519 |
Total return swaps |  | 123 |
Futures |  | 138 |
Forwards |  | 430 |
Total financial derivatives–assets, at fair value |  | $ | 15,356 |
Financial derivatives–liabilities, at fair value: |  |
TBA securities purchase contracts |  | $ | (33 | )
TBA securities sale contracts |  | (3,042 | )
Fixed payer interest rate swaps |  | (6,243 | )
Fixed receiver interest rate swaps |  | (1,328 | )
Credit default swaps on asset-backed indices |  | (822 | )
Credit default swaps on corporate bonds |  | (945 | )
Credit default swaps on corporate bond indices |  | (11,907 | )
Recovery swaps |  | (8 | )
Futures |  | (2,454 | )
Forwards |  | (122 | )
Total financial derivatives–liabilities, at fair value |  | $ | (26,904 | )
Total |  | $ | (11,548 | )
Interest Rate Swaps The following table provides information about the Company's fixed payer interest rate swaps as of March 31, 2019:
|  |  |  |  |  | Weighted Average
Maturity |  | Notional Amount |  | Fair Value |  | Pay Rate |  | Receive Rate |  | Remaining Years to Maturity
|  | (In thousands) |  |  |  |  |  |
2020 |  | $ | 68,607 |  |  | $ | 549 |  |  | 1.74 | % |  | 2.61 | % |  | 1.00
2021 |  | 121,499 |  |  | (603 | ) |  | 2.71 |  |  | 2.63 |  |  | 1.82
2023 |  | 101,012 |  |  | 858 |  |  | 2.06 |  |  | 2.66 |  |  | 4.04
2024 |  | 77,700 |  |  | (1,021 | ) |  | 2.58 |  |  | 2.76 |  |  | 4.81
2025 |  | 30,023 |  |  | 296 |  |  | 2.09 |  |  | 2.64 |  |  | 6.67
2026 |  | 10,200 |  |  | 191 |  |  | 2.02 |  |  | 2.67 |  |  | 7.44
2028 |  | 69,602 |  |  | (1,975 | ) |  | 2.71 |  |  | 2.68 |  |  | 9.25
2029 |  | 70,000 |  |  | (1,825 | ) |  | 2.70 |  |  | 2.77 |  |  | 9.80
2030 |  | 685 |  |  | 2 |  |  | 2.38 |  |  | 2.68 |  |  | 11.65
2045 |  | 7,896 |  |  | 19 |  |  | 2.54 |  |  | 2.63 |  |  | 26.69
2049 |  | 6,700 |  |  | (443 | ) |  | 2.89 |  |  | 2.80 |  |  | 29.78
Total |  | $ | 563,924 |  |  | $ | (3,952 | ) |  | 2.41 | % |  | 2.68 | % |  | 5.49
The following table provides information about the Company's fixed receiver interest rate swaps as of March 31, 2019:
|  |  |  |  |  | Weighted Average
Maturity |  | Notional Amount |  | Fair Value |  | Pay Rate |  | Receive Rate |  | Remaining Years to Maturity
|  | (In thousands) |  |  |  |  |  |
2021 |  | $ | 5,928 |  |  | $ | (21 | ) |  | 2.61 | % |  | 2.00 | % |  | 2.21
2022 |  | 53,974 |  |  | (761 | ) |  | 2.63 |  |  | 1.85 |  |  | 2.92
2023 |  | 48,657 |  |  | (509 | ) |  | 2.62 |  |  | 2.00 |  |  | 4.01
2024 |  | 68,500 |  |  | 816 |  |  | 2.38 |  |  | 2.56 |  |  | 4.80
2029 |  | 79,550 |  |  | 1,800 |  |  | 2.30 |  |  | 2.66 |  |  | 9.82
2049 |  | 6,700 |  |  | 443 |  |  | 2.80 |  |  | 2.89 |  |  | 29.78
Total |  | $ | 263,309 |  |  | $ | 1,768 |  |  | 2.47 | % |  | 2.34 | % |  | 6.36
The following table provides information about the Company's basis swaps as of March 31, 2019:
|  |  |  |  |  | Weighted Average
Maturity |  | Notional Amount |  | Fair Value |  | Pay Rate |  | Receive Rate |  | Remaining Years to Maturity
|  | (In thousands) |  |  |  |  |  |
2019 |  | $ | (12,900 | ) |  | $ | 4 |  |  | 2.61 | % |  | 2.64 | % |  | 0.21
Total |  | $ | (12,900 | ) |  | $ | 4 |  |  | 2.61 | % |  | 2.64 | % |  | 0.21
Credit Default Swaps The following table provides information about the Company's credit default swaps as of March 31, 2019: March 31, 2019:
Type(1) |  | Notional |  | Fair Value |  | Remaining Term (Years)
|  | (In thousands) |  |
Asset: |  |  |  |  |  |
Long: |  |  |  |  |  |
Credit default swaps on asset-backed indices |  | $ | 837 |  |  | $ | 9 |  |  | 23.57
Credit default swaps on corporate bonds |  | 3,070 |  |  | 296 |  |  | 2.97
Credit default swaps on corporate bond indices |  | 76,904 |  |  | 3,519 |  |  | 4.09
Short: |  |  |  |  |  |
Credit default swaps on asset-backed securities |  | (2,909 | ) |  | 1,233 |  |  | 16.41
Credit default swaps on asset-backed indices |  | (32,326 | ) |  | 3,267 |  |  | 37.60
Credit default swaps on corporate bonds |  | (3,033 | ) |  | 419 |  |  | 1.98
Liability: |  |  |  |  |  |
Long: |  |  |  |  |  |
Credit default swaps on asset-backed indices |  | 5,439 |  |  | (819 | ) |  | 40.73
Credit default swaps on corporate bonds |  | 2,980 |  |  | (407 | ) |  | 1.97
Short: |  |  |  |  |  |
Credit default swaps on asset-backed indices |  | (2,500 | ) |  | (3 | ) |  | 38.58
Credit default swaps on corporate bonds |  | (16,955 | ) |  | (538 | ) |  | 1.14
Credit default swaps on corporate bond indices |  | (223,080 | ) |  | (11,907 | ) |  | 2.47
Recovery swaps |  | (2,600 | ) |  | (8 | ) |  | 0.22
|  | $ | (194,173 | ) |  | $ | (4,939 | ) |  | 7.04
(1) | Long notional represents contracts where the Company has written protection and short notional represents contracts where the Company has purchased protection.
Futures The following table provides information about the Company's short positions in futures as of March 31, 2019: March 31, 2019:
Description |  | Notional Amount |  | Fair Value |  | Remaining Months to Expiration
|  | (In thousands) |  |
U.S. Treasury futures |  | $ | (151,600 | ) |  | $ | (2,380 | ) |  | 2.79
Eurodollar futures |  | (63,000 | ) |  | (74 | ) |  | 5.97
Currency futures |  | (15,840 | ) |  | 138 |  |  | 2.60
Total |  | $ | (230,440 | ) |  | $ | (2,316 | ) |  | 3.64
TBAs The Company transacts in the forward settling TBA market. Pursuant to these TBA transactions, the Company agrees to purchase or sell, for future delivery, Agency RMBS with certain principal and interest terms and certain types of underlying collateral, but the particular Agency RMBS to be delivered is not identified until shortly before the TBA settlement date. TBAs are generally liquid, have quoted market prices, and represent the most actively traded class of MBS. The Company uses TBAs to mitigate interest rate risk, usually by taking short positions. From time to time, the Company also invests in TBAs as a means of acquiring additional exposure to Agency RMBS, or for speculative purposes, including holding long positions. Overall, the Company typically holds a net short position. The Company does not generally take delivery of TBAs; rather, it settles the associated receivable and payable with its trading counterparties on a net basis. Transactions with the same counterparty for the same TBA that result in a reduction of the position are treated as extinguished. As of March 31, 2019, the Company had outstanding contracts to purchase ("long positions") and sell ("short positions") TBA securities as follows:
|  | March 31, 2019
TBA Securities |  | Notional Amount(1) |  | Cost Basis(2) |  | Market Value(3) |  | Net Carrying Value(4)
(In thousands) |  |  |  |  |  |  |  |
Purchase contracts: |  |  |  |  |  |  |  |
Assets |  | $ | 167,641 |  |  | $ | 173,619 |  |  | $ | 174,064 |  |  | $ | 445 |
Liabilities |  | 25,500 |  |  | 25,875 |  |  | 25,842 |  |  | (33 | )
|  | 193,141 |  |  | 199,494 |  |  | 199,906 |  |  | 412 |
Sale contracts: |  |  |  |  |  |  |  |
Assets |  | (155,175 | ) |  | (158,767 | ) |  | (158,681 | ) |  | 86 |
Liabilities |  | (572,003 | ) |  | (589,105 | ) |  | (592,147 | ) |  | (3,042 | )
|  | (727,178 | ) |  | (747,872 | ) |  | (750,828 | ) |  | (2,956 | )
Total TBA securities, net |  | $ | (534,037 | ) |  | $ | (548,378 | ) |  | $ | (550,922 | ) |  | $ | (2,544 | )
(1) | Notional amount represents the principal balance 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 underlying Agency RMBS (on a forward delivery basis) as of period end.
(4) | Net carrying value represents the difference between the market value of the TBA contract as of period end and the cost basis, and is reported in Financial derivatives-assets, at fair value and Financial derivatives-liabilities, at fair value on the Condensed Consolidated Balance Sheet.
Gains and losses on the Company's derivative contracts for the three-month period ended March 31, 2019 are summarized in the tables below:
Derivative Type |  | Primary Risk Exposure |  | Net Realized Gains (Losses) on Periodic Settlements of Interest Rate Swaps |  | Net Realized Gains (Losses) on Financial Derivatives Other Than Periodic Settlements of Interest Rate Swaps(1) |  | Net Realized Gains (Losses) on Financial Derivatives(1) |  | Change in Net Unrealized Gains (Losses) on Accrued Periodic Settlements of Interest Rate Swaps |  | Change in Net Unrealized Gains (Losses) on Financial Derivatives Other Than on Accrued Periodic Settlements of Interest Rate Swaps(2) |  | Change in Net Unrealized Gains (Losses) on Financial Derivatives(2)
(In thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | Interest Rate |  | $ | 719 |  |  | $ | 1,458 |  |  | $ | 2,177 |  |  | $ | (275 | ) |  | $ | (5,774 | ) |  | $ | (6,049 | )
Credit default swaps on asset-backed securities |  | Credit |  |  |  | 275 |  |  | 275 |  |  |  |  | (239 | ) |  | (239 | )
Credit default swaps on asset-backed indices |  | Credit |  |  |  | (746 | ) |  | (746 | ) |  |  |  | (548 | ) |  | (548 | )
Credit default swaps on corporate bond indices |  | Credit |  |  |  | (2,513 | ) |  | (2,513 | ) |  |  |  | (2,407 | ) |  | (2,407 | )
Credit default swaps on corporate bonds |  | Credit |  |  |  | (425 | ) |  | (425 | ) |  |  |  | 766 |  |  | 766 |
Total return swaps |  | Equity Market/Credit |  |  |  | (1,298 | ) |  | (1,298 | ) |  |  |  | 129 |  |  | 129 |
TBAs |  | Interest Rate |  |  |  | (6,435 | ) |  | (6,435 | ) |  |  |  | 1,898 |  |  | 1,898 |
Futures |  | Interest Rate/Currency |  |  |  | (2,433 | ) |  | (2,433 | ) |  |  |  | 359 |  |  | 359 |
Forwards |  | Currency |  |  |  | (114 | ) |  | (114 | ) |  |  |  | 423 |  |  | 423 |
Options |  | Interest Rate |  |  |  | (33 | ) |  | (33 | ) |  |  |  | — |  |  | — |
Total |  |  |  | $ | 719 |  |  | $ | (12,264 | ) |  | $ | (11,545 | ) |  | $ | (275 | ) |  | $ | (5,393 | ) |  | $ | (5,668 | )
(1) | Includes gain/(loss) on foreign currency transactions on financial derivatives in the amount of $25 thousand for the three-month period ended March 31, 2019, which is included on the Condensed Consolidated Statement of Operations in Other, net.
(2) | Includes foreign currency remeasurement on financial derivatives in the amount of $21 thousand for the three-month period ended March 31, 2019, which is included on the Condensed Consolidated Statement of Operations in Other, net.
The table below details the average notional values of the Company's financial derivatives, using absolute value of month end notional values, for the three-month period ended March 31, 2019:
Derivative Type |  | Three-Month Period Ended March 31, 2019
(In thousands) |  |
Interest rate swaps |  | $ | 912,934 |
TBAs |  | 984,292 |
Credit default swaps |  | 403,254 |
Total return swaps |  | 38,400 |
Futures |  | 280,947 |
Options |  | 51,545 |
Forwards |  | 29,078 |
Warrants |  | 2,281 |
From time to time the Company enters into credit derivative contracts for which the Company sells credit protection ("written credit derivatives"). As of March 31, 2019, all of the Company's open written credit derivatives were credit default swaps on either mortgage/asset-backed indices (ABX and CMBX indices) or corporate bond indices (CDX), collectively referred to as credit indices, or on individual corporate bonds, for which the Company receives periodic payments at fixed rates from credit protection buyers, and is obligated to make payments to the credit protection buyer upon the occurrence of a "credit event" with respect to underlying reference assets. Written credit derivatives held by the Company at March 31, 2019 are summarized below:
Credit Derivatives |  | March 31, 2019
(In thousands) |  |
Fair Value of Written Credit Derivatives, Net |  | $ | 2,598 |
Fair Value of Purchased Credit Derivatives Offsetting Written Credit Derivatives with Third Parties (1) |  | (167 | )
Notional Value of Written Credit Derivatives (2) |  | 89,230 |
Notional Value of Purchased Credit Derivatives Offsetting Written Credit Derivatives with Third Parties (1) |  | 13,153 |
(1) | Offsetting transactions with third parties include purchased credit derivatives which have the same reference obligation.
(2) | The notional value is the maximum amount that a seller of credit protection would be obligated to pay, and a buyer of credit protection would receive, upon occurrence of a "credit event." Movements in the value of credit default swap transactions may require the Company or the counterparty to post or receive collateral. Amounts due or owed under credit derivative contracts with an International Swaps and Derivatives Association, or "ISDA," counterparty may be offset against amounts due or owed on other credit derivative contracts with the same ISDA counterparty. As a result, the notional value of written credit derivatives involving a particular underlying reference asset or index has been reduced (but not below zero) by the notional value of any contracts where the Company has purchased credit protection on the same reference asset or index with the same ISDA counterparty.
A credit default swap on a credit index or a corporate bond typically terminates at the stated maturity date in the case of corporate indices or bonds, or, in the case of ABX and CMBX indices, the date that all of the reference assets underlying the index are paid off in full, retired, or otherwise cease to exist. Implied credit spreads may be used to determine the market value of such contracts and are reflective of the cost of buying/selling credit protection. Higher spreads would indicate a greater likelihood that a seller will be obligated to perform (i.e., make protection payments) under the contract. In situations where the credit quality of the underlying reference assets has deteriorated, the percentage of notional values that would be paid up front to enter into a new such contract ("points up front") is frequently used as an indication of credit risk. Credit protection sellers entering the market in such situations would expect to be paid points up front corresponding to the approximate fair value of the contract. For the Company's written credit derivatives that were outstanding at March 31, 2019, implied credit spreads on such contracts ranged between 21.8 and 1,956.0 basis points. Excluded from these spread ranges are contracts outstanding for which the individual spread is greater than 2,000 basis points. The Company believes that these contracts would be quoted based on estimated points up front. The total fair value of contracts with individual implied credit spreads in excess of 2,000 basis points was $(0.2) million as of March 31, 2019. Estimated points up front on these contracts as of March 31, 2019 ranged between 56.3 and 74.7 points. Total net up-front payments (paid) or received relating to written credit derivatives outstanding at March 31, 2019 were $(2.0) million. Financial Derivatives Gains and losses on the Company's derivative contracts for the three-month period March 31, 2018 are summarized in the table below:
|  |  |  | Three-Month Period Ended March 31, 2018
Derivative Type |  | Primary Risk Exposure |  | Net Realized Gain/(Loss)(1) |  | Change in Net Unrealized Gain/(Loss)(2)
(In thousands) |  |  |  |  |  |
Credit default swaps on asset-backed securities |  | Credit |  | $ | 86 |  |  | $ | (71 | )
Credit default swaps on asset-backed indices |  | Credit |  | (1,842 | ) |  | 1,452 |
Credit default swaps on corporate bond indices |  | Credit |  | (1,562 | ) |  | 1,563 |
Credit default swaps on corporate bonds |  | Credit |  | 4,469 |  |  | (3,855 | )
Total return swaps |  | Equity Market/Credit |  | 166 |  |  | 17 |
Interest rate swaps |  | Interest Rate |  | (824 | ) |  | 5,039 |
Futures |  | Interest Rate/Currency |  | (761 | ) |  | (561 | )
Forwards |  | Currency |  | (1,174 | ) |  | 384 |
Options |  | Interest Rate/ Equity Market |  | (61 | ) |  | 76 |
Total |  |  |  | $ | (1,503 | ) |  | $ | 4,044 |
(1) | Includes gain/(loss) on foreign currency transactions on derivatives in the amount of $(0.2) million which is included on the Consolidated Statement of Operations in Realized gain (loss) on foreign currency transactions.
(2) | Includes foreign currency translation on derivatives in the amount of $47 thousand which is included on the Consolidated Statement of Operations in Change in net unrealized gain (loss) on foreign currency translation.
The table below details the average notional values of the Company's financial derivatives, using absolute value of month end notional values, for the year ended December 31, 2018:
Derivative Type |  | Year Ended December 31, 2018
|  | (In thousands)
Interest rate swaps |  | $ | 1,059,756 |
Credit default swaps |  | 566,805 |
Total return swaps |  | 53,603 |
Futures |  | 201,295 |
Options |  | 99,891 |
Forwards |  | 45,522 |
From time to time the Company enters into credit derivative contracts for which the Company sells credit protection ("written credit derivatives"). As of December 31, 2018 all of the Company's open written credit derivatives were credit default swaps on either mortgage/asset-backed indices (ABX and CMBX indices) or corporate bond indices (CDX), collectively referred to as credit indices, or on individual corporate bonds, for which the Company receives periodic payments at fixed rates from credit protection buyers, and is obligated to make payments to the credit protection buyer upon the occurrence of a "credit event" with respect to underlying reference assets. Written credit derivatives held by the Company at December 31, 2018 are summarized below:
Credit Derivatives |  | December 31, 2018
(In thousands) |  |
Fair Value of Written Credit Derivatives, Net |  | $ | (4,339 | )
Fair Value of Purchased Credit Derivatives Offsetting Written Credit Derivatives with Third Parties (1) |  | (284 | )
Notional Value of Written Credit Derivatives (2) |  | 98,586 |
Notional Value of Purchased Credit Derivatives Offsetting Written Credit Derivatives with Third Parties (1) |  | 41,134 |
(1) | Offsetting transactions with third parties include purchased credit derivatives which have the same reference obligation.
(2) | The notional value is the maximum amount that a seller of credit protection would be obligated to pay, and a buyer of credit protection would receive, upon occurrence of a "credit event." Movements in the value of credit default swap transactions may require the Company or the counterparty to post or receive collateral. Amounts due or owed under credit derivative contracts with an International Swaps and Derivatives Association, or "ISDA," counterparty may be offset against amounts due or owed on other credit derivative contracts with the same ISDA counterparty. As a result, the notional value of written credit derivatives involving a particular underlying reference asset or index has been reduced (but not below zero) by the notional value of any contracts where the Company has purchased credit protection on the same reference asset or index with the same ISDA counterparty.
A credit default swap on a credit index or a corporate bond typically terminates at the stated maturity date in the case of corporate indices or bonds, or, in the case of ABX and CMBX indices, the date that all of the reference assets underlying the index are paid off in full, retired, or otherwise cease to exist. Implied credit spreads may be used to determine the market value of such contracts and are reflective of the cost of buying/selling credit protection. Higher spreads would indicate a greater likelihood that a seller will be obligated to perform (i.e., make protection payments) under the contract. In situations where the credit quality of the underlying reference assets has deteriorated, the percentage of notional values that would be paid up front to enter into a new such contract ("points up front") is frequently used as an indication of credit risk. Credit protection sellers entering the market in such situations would expect to be paid points up front corresponding to the approximate fair value of the contract. For the Company's written credit derivatives that were outstanding at December 31, 2018, implied credit spreads on such contracts ranged between 42.6 and 815.1 basis points. Excluded from this spread range are contracts outstanding for which the individual spread is greater than 2,000 basis points. The Company believes that these contracts would be quoted based on estimated points up front. The total fair value of contracts with individual implied credit spreads in excess of 2,000 basis points was $(1.0) million as of December 31, 2018. Estimated points up front on these contracts as of December 31, 2018 ranged between 36.9 and 75.2 points. Total net up-front payments (paid) or received relating to written credit derivatives outstanding at December 31, 2018 were $(2.0) million.

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