Derivative Instruments and Hedging Activities

The Company enters into derivative instruments in connection with its risk management activities. These derivative instruments may include interest rate swaps, swaptions, futures and options on futures. The Company may also purchase or sell 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 condensed consolidated balance sheets at March 31, 2018 and December 31, 2017, respectively (dollar amounts in thousands):



Derivatives Not Designated as Hedging Instruments	Balance Sheet Location	March 31, 2018		December 31, 2017
Interest rate swaps ⁽¹⁾	Derivative assets	$	9,815	$	846


⁽¹⁾	There was no netting of interest rate swaps at March 31, 2018 and December 31, 2017.

There were no open TBA purchases or sales as of March 31, 2018 and December 31, 2017.

The tables below summarize the activity of derivative instruments not designated as hedges for the three months ended March 31, 2018 and 2017, respectively (dollar amounts in thousands):



	Notional Amount For the Three Months Ended March 31, 2018
Derivatives Not Designated as Hedging Instruments	December 31, 2017		Additions		Settlement, Expiration or Exercise		March 31, 2018
Interest rate swaps	$	345,500	$	—	$	—	$	345,500



	Notional Amount For the Three Months Ended March 31, 2017
Derivatives Not Designated as Hedging Instruments	December 31, 2016			Additions		Settlement, Expiration or Exercise			March 31, 2017
TBA securities ⁽¹⁾	$	149,000		$	548,000	$	(588,000	)	$	109,000
U.S. Treasury futures	17,100			70,300		(58,700		)	28,700
Interest rate swap futures	(151,700		)	182,200		(146,000		)	(115,500		)
Eurodollar futures	(2,575,000		)	2,627,000		(1,890,000		)	(1,838,000		)
Swaptions	154,000			—		—			154,000
Interest rate swaps	15,000			—		—			15,000


⁽¹⁾	Open TBA purchases and sales involving the same counterparty, same underlying deliverable and the same settlement date are reflected in our condensed consolidated financial statements on a net basis.

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 condensed consolidated statements of operations for the three months ended March 31, 2018 and 2017 (dollar amounts in thousands):



	Three Months Ended March 31,
	2018				2017
	Realized Gains (Losses)		Unrealized Gains (Losses)		Realized Gains (Losses)			Unrealized Gains (Losses)
TBA securities	$	—	$	—	$	(215	)	$	200
Eurodollar futures	—		—		555			(380		)
Interest rate swaps	—		8,969		—			26
Swaptions	—		—		—			(87		)
U.S. Treasury and interest rate swap futures and options	—		—		158			107
Total	$	—	$	8,969	$	498		$	(134	)

Derivatives Designated as Hedging Instruments

The Company may use interest rate swaps to hedge the variable cash flows associated with borrowings made under our variable rate borrowings and designate them as cash flow hedges. There are 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 LIBOR, on the notional amount of the interest rate swaps.

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 had no derivative instruments designated as hedging instruments as of March 31, 2018 and December 31, 2017.

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 three months ended March 31, 2018 and 2017, respectively (dollar amounts in thousands):



	Three Months Ended March 31,
Derivatives Designated as Hedging Instruments	2018		2017
Accumulated other comprehensive income for derivative instruments:
Balance at beginning of the period	$	—	$	102
Unrealized loss on interest rate swaps	—		164
Balance at end of the period	$	—	$	266

The following table details the impact of the Company’s interest rate swaps designated as hedging instruments included in interest expense for the three months ended March 31, 2018 and 2017, respectively (dollar amounts in thousands):



	Three Months Ended March 31,
	2018		2017
Net Interest Expense	$	—	$	(27	)

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 March 31, 2018 and December 31, 2017, respectively (dollar amounts in thousands):



	March 31, 2018						December 31, 2017
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
2024	$	98,000	2.18	%	1.73	%	$	98,000	2.18	%	1.36	%
2027	247,500		2.39	%	1.79	%	247,500		2.39	%	1.39	%
Total	$	345,500	2.33	%	1.77	%	$	345,500	2.33	%	1.38	%

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 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. Currently, all of the Company's interest rate swaps outstanding are cleared through the CME Group Inc. ("CME Clearing") which is the parent company of the Chicago Mercantile Exchange Inc. The CME Clearing serves as the counterparty to every cleared transaction, becoming the buyer to each seller and the seller to each buyer, limiting the credit risk by guaranteeing the financial performance of both parties and netting down exposures.

The Company is required to pledge assets under a 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 derivative agreement. In the event the Company is unable to meet a margin call under one of its derivative agreements, thereby causing an event of default or triggering an early termination event under one of its derivative agreements, the counterparty to such derivative 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 derivative agreement. The Company believes it was in compliance with all margin requirements under its derivative agreements as of March 31, 2018 and December 31, 2017. The Company had $0.1 million and $9.9 million of restricted cash related to margin posted for its agreements as of March 31, 2018 and December 31, 2017, respectively. The restricted cash held by third parties is included in receivables and other assets in the accompanying condensed consolidated balance sheets.