v3.19.1
Financial Derivatives (Tables)
 3 Months Ended
Mar. 31, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Schedule of Derivative Assets at Fair Value
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
)
Schedule of Derivative Liabilities at Fair Value
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
)
Schedule of Derivative Instruments
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
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.
Schedule of Gains and Losses on Derivative Contracts
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.
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.
Derivative activity, volume
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

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
Schedule of Credit Derivatives
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.
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.