Derivative Instruments and Hedging Activities

The Company enters into derivative instruments in connection with its risk management activities. These derivative instruments include interest rate swaps, swaptions, futures and options on futures. The Company may also purchase or sell short TBAs, purchase options on U.S. Treasury futures or invest in other types of mortgage derivative securities.

Derivatives Not Designated as Hedging Instruments

The following table presents the fair value of derivative instruments that were not designated as hedging instruments and their location in our consolidated balance sheets at December 31, 2017 and December 31, 2016, respectively (dollar amounts in thousands):



	Balance Sheet Location	December 31, 2017		December 31, 2016
TBA Securities	Derivative assets	$	—	$	148,139
Eurodollar futures	Derivative assets	—		1,175
Interest rate swap futures	Derivative assets	—		444
Interest rate swaps	Derivative assets	846		—
Swaptions	Derivative assets	—		431
U.S. Treasury futures	Derivative liabilities	—		107
Interest rate swaps⁽¹⁾	Derivative liabilities	—		384


⁽¹⁾	There was no netting of interest rate swaps at December 31, 2016.

The tables below summarize the activity of derivative instruments not designated as hedges for the years ended December 31, 2017 and 2016, respectively (dollar amounts in thousands).



	Notional Amount For the Year Ended December 31, 2017
	December 31, 2016			Additions		Settlement, Expiration or Exercise			December 31, 2017
TBA securities	$	149,000		$	1,881,000	$	(2,030,000	)	$	—
U.S. Treasury futures	17,100			129,100		(146,200		)	—
Interest rate swap futures	(151,700		)	500,700		(349,000		)	—
Eurodollar futures	(2,575,000		)	7,819,000		(5,244,000		)	—
Options on U.S. Treasury futures	—			5,000		(5,000		)	—
Swaptions	154,000			—		(154,000		)	—
Interest rate swaps	15,000			345,500		(15,000		)	345,500



	Notional Amount For the Year Ended December 31, 2016
	December 31, 2015			Additions		Settlement, Expiration or Exercise			December 31, 2016
TBA securities	$	222,000		$	4,070,000	$	(4,143,000	)	$	149,000
U.S. Treasury futures	—			201,900		(184,800		)	17,100
Interest rate swap futures	(137,200		)	868,800		(883,300		)	(151,700		)
Eurodollar futures	(2,769,000		)	6,323,000		(6,129,000		)	(2,575,000		)
Options on U.S. Treasury futures	28,000			111,000		(139,000		)	—
Swaptions	159,000			—		(5,000		)	154,000
Interest rate swaps	10,000			5,000		—			15,000

At December 31, 2016, our consolidated balance sheets include TBA-related liabilities in the amount of $148.0 million included in payable for securities purchased. Open TBA purchases and sales involving the same counterparty, same underlying deliverable and the same settlement date are reflected in our consolidated financial statements on a net basis. There were no open TBA purchases or sales at December 31, 2017. There was $114.4 million netting of TBA sales against TBA purchases of $262.4 million at December 31, 2016.

The following table presents the components of realized and unrealized gains and losses related to our derivative instruments that were not designated as hedging instruments included in other income category in our consolidated statements of operations for the years ended December 31, 2017, 2016 and 2015:



	Years Ended December 31,
	2017						2016						2015
	Realized Gains (Losses)			Unrealized Gains (Losses)			Realized Gains (Losses)			Unrealized Gains (Losses)			Realized Gains (Losses)			Unrealized Gains (Losses)
TBA	$	2,511		$	(141	)	$	3,998		$	534		$	5,244		$	(2,253	)
Eurodollar futures	1,379			(1,175		)	(3,202		)	2,417			(2,321		)	(342		)
Interest rate swaps	(218		)	1,231			—			(126		)	—			(26		)
Swaptions	—			274			—			568			—			(658		)
U.S. Treasury and interest rate swap futures and options	267			(337		)	(2,040		)	(336		)	(9,631		)	579
Total	$	3,939		$	(148	)	$	(1,244	)	$	3,057		$	(6,708	)	$	(2,700	)

Derivatives Designated as Hedging Instruments

Certain of the Company’s interest rate swaps outstanding during 2016 and 2017 to hedge the variable cash flows associated with borrowings made under our variable rate borrowings were designated as cash flow hedges. There were no costs incurred at the inception of the Company's interest rate swaps, under which the Company agrees to pay a fixed rate of interest and receive a variable interest rate based on one month LIBOR, on the notional amount of the interest rate swaps. As of October 31, 2017, there were no outstanding derivatives designated as cash flow hedges.

The Company documents its risk-management policies, including objectives and strategies, as they relate to its hedging activities, and upon entering into hedging transactions, documents the relationship between the hedging instrument and the hedged liability contemporaneously. The Company assesses, both at inception of a hedge and on an on-going basis, whether or not the hedge is “highly effective” when using the matched term basis.

The Company discontinues hedge accounting on a prospective basis and recognizes changes in the fair value through earnings when: (i) it is determined that the derivative is no longer effective in offsetting cash flows of a hedged item (including forecasted transactions); (ii) it is no longer probable that the forecasted transaction will occur; or (iii) it is determined that designating the derivative as a hedge is no longer appropriate. The Company’s derivative instruments are carried on the Company’s balance sheets at fair value, as assets, if their fair value is positive, or as liabilities, if their fair value is negative. For the Company’s derivative instruments that are designated as “cash flow hedges,” changes in their fair value are recorded in accumulated other comprehensive income (loss), provided that the hedges are effective. A change in fair value for any ineffective amount of the Company’s derivative instruments would be recognized in earnings. The Company has not recognized any change in the value of its existing derivative instruments designated as cash flow hedges through earnings as a result of ineffectiveness of any of its hedges.

The following table presents the fair value of derivative instruments designated as hedging instruments and their location in the Company’s consolidated balance sheets at December 31, 2017 and December 31, 2016, respectively (dollar amounts in thousands):



	Balance Sheet Location	December 31, 2017		December 31, 2016
Interest rate swaps	Derivative assets	$	—	$	108
Interest rate swaps	Derivative liabilities	—		6

At December 31, 2016, the Company had netting arrangements by counterparty with respect to its interest rate swaps. Contracts in a liability position of $29.1 thousand have been netted against the asset position of $133.5 thousand in the accompanying consolidated balance sheets at December 31, 2016.

The following table presents the impact of the Company’s interest rate swaps designated as hedging instruments on the Company’s accumulated other comprehensive income (loss) for the years ended December 31, 2017, 2016 and 2015 (dollar amounts in thousands):



	Years Ended December 31,
	2017			2016			2015
Accumulated other comprehensive income (loss) for derivative instruments:
Balance at beginning of the period	$	102		$	304		$	1,135
Unrealized loss on interest rate swaps	(102		)	(202		)	(831		)
Balance at end of the period	$	—		$	102		$	304

The following table details the impact of the Company’s interest rate swaps designated as hedging instruments included in interest income or expense for the years ended December 31, 2017, 2016 and 2015, respectively (dollar amounts in thousands):



	Years Ended December 31,
	2017		2016		2015
Interest Rate Swaps:
Interest income-investment securities	$	267	$	—	$	—
Interest expense-investment securities	—		743		1,619

Outstanding Derivatives

The following table presents information about our interest rate swaps whereby we receive floating rate payments in exchange for fixed rate payments as of December 31, 2017 and December 31, 2016, respectively (dollar amounts in thousands):



	December 31, 2017						December 31, 2016
Swap Maturities	Notional Amount		Weighted Average Fixed Interest Rate		Weighted Average Variable Interest Rate		Notional Amount		Weighted Average Fixed Interest Rate		Weighted Average Variable Interest Rate
2017	$	—	—		—		$	215,000	0.83	%	0.74	%
2019	—		—		—		10,000		2.25	%	0.97	%
2024	98,000		2.18	%	1.36	%	—		—		—
2027	247,500		2.39	%	1.39	%	—		—		—
Total	$	345,500	2.33	%	1.38	%	$	225,000	0.90	%	0.75	%

The following table presents information about our interest rate swaps whereby we receive fixed rate payments in exchange for floating rate payments as of December 31, 2017 and December 31, 2016, respectively (dollar amounts in thousands):



	December 31, 2017				December 31, 2016
Swap Maturities	Notional Amount		Weighted Average Fixed Interest Rate	Weighted Average Variable Interest Rate	Notional Amount		Weighted Average Fixed Interest Rate		Weighted Average Variable Interest Rate
2026	$	—	—	—	$	5,000	1.80	%	1.00	%
Total	$	—	—	—	$	5,000	1.80	%	1.00	%

The use of derivatives exposes the Company to counterparty credit risks in the event of a default by a counterparty. If a counterparty defaults under the applicable derivative agreement, the Company may be unable to collect payments to which it is entitled under its derivative agreements and may have difficulty collecting the assets it pledged as collateral against such derivatives. The Company currently has in place with all counterparties bi-lateral margin agreements requiring a party to post collateral to the Company for any valuation deficit. This arrangement is intended to limit the Company’s exposure to losses in the event of a counterparty default.

The Company is required to pledge assets under a bi-lateral margin arrangement, including either cash or Agency RMBS, as collateral for its interest rate swaps, futures contracts and TBAs, whose collateral requirements vary by counterparty and change over time based on the market value, notional amount, and remaining term of the agreement. In the event the Company is unable to meet a margin call under one of its agreements, thereby causing an event of default or triggering an early termination event under one of its agreements, the counterparty to such agreement may have the option to terminate all of such counterparty’s outstanding transactions with the Company. In addition, under this scenario, any close-out amount due to the counterparty upon termination of the counterparty’s transactions would be immediately payable by the Company pursuant to the applicable agreement. The Company believes it was in compliance with all margin requirements under its agreements as of December 31, 2017 and 2016. The Company had $9.9 million and $6.1 million of restricted cash related to margin posted for its agreements as of December 31, 2017 and 2016, respectively. The restricted cash held by third parties is included in receivables and other assets in the accompanying consolidated balance sheets.