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Note 10 - Derivative Financial Instruments

12 Months Ended

Dec. 31, 2021

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

10. DERIVATIVE FINANCIAL INSTRUMENTS

The Company may, from time to time, enter into the following derivative instruments:

Equity Derivatives

A significant portion of the Company’s equity holdings are carried at fair value. The Company hedges a portion of this exposure by entering into equity derivatives such as puts and short call options from time to time. These derivative positions are carried at fair value as a component of other investments, at fair value and other investments sold, not yet purchased in the Company’s consolidated balance sheets. As of December 31, 2021 and December 31, 2020, the Company had short call options representing a notional of $0 and $1,595, respectively. From time to time, the Company may also enter into forward purchase commitments for equity securities. These amounts are included in the tables below.

The Company also hedges a portion of the exposure from these equity investments by entering into short trades. These short trades are not treated as derivatives and are carried as a component of other investments sold, not yet purchased. See Note 7.

TBAs and Other Forward Agency MBS Contracts

The Company enters into TBAs and other forward agency MBS transactions for three main reasons.

	(i)	The Company trades U.S. government agency obligations. In connection with these activities, the Company may be required to maintain inventory in order to facilitate customer transactions. In order to mitigate exposure to market risk, the Company may enter into the purchase and sale of TBAs and other forward agency MBS contracts.
	(ii)	The Company also enters into TBAs and other forward agency MBS contracts in order to assist clients (generally small to mid-size mortgage loan originators) in hedging the interest rate risk associated with the mortgages owned by these clients.
	(iii)	Finally, the Company may enter into TBAs and other forward agency MBS contracts on a speculative basis.

The Company carries the TBAs and other forward agency MBS contracts at fair value and includes them as a component of investments—trading or trading securities sold, not yet purchased in the Company’s consolidated balance sheets. At December 31, 2021, the Company had open TBA and other forward MBS purchase agreements in the notional amount of $1,243,250 and open TBA and other forward MBS sale agreements in the notional amount of $1,283,850. At December 31, 2020, the Company had open TBA and other forward agency MBS purchase agreements in the notional amount of $1,706,834 and open TBA and other forward agency MBS sale agreements in the notional amount of $1,809,550.

Other Extended Settlement Trades

When the Company buys or sells a financial instrument that will not settle in the regular time frame, the Company will account for that purchase and sale on the settlement date rather than the trade date. In those cases, the Company accounts for the transaction between trade date and settlement date as either a forward purchase commitment or a forward sale commitment, both considered derivatives. The Company will record an unrealized gain or unrealized loss on the derivative for the difference between the fair value of the underlying financial instrument as of the reporting date and the agreed upon transaction price. At December 31, 2021, the Company had no open forward purchase or sale commitments. At December 31, 2020, the Company had open forward purchase commitments in the notional amount of $365 and no open sale commitments.

Foreign Currency Forward Contracts

The Company invests in foreign currency denominated investments that expose it to fluctuations in foreign currency rates, and, therefore, the Company may, from time to time, hedge such exposure by using foreign currency forward contracts. The Company carries the foreign currency forward contracts at fair value and includes them as a component of other investments, at fair value in the Company’s consolidated balance sheets. As of December 31, 2021, and 2020, the Company had no outstanding foreign currency forward contracts.

The following table presents the Company’s derivative financial instruments and the amount and location of the fair value (unrealized gain / (loss)) presented in the consolidated balance sheets as of December 31, 2021 and 2020.

DERIVATIVE FINANCIAL INSTRUMENTS-BALANCE SHEET INFORMATION

(Dollars in Thousands)

				As of December 31,
Derivative Financial Instruments Not Designated as Hedging Instruments Under ASC 815		Balance Sheet Classification		2021				2020
TBA and other forward agency MBS		Investments-trading		$	1,275			$	13,717
TBA and other forward agency MBS		Trading securities sold, not yet purchased			(424	)			(11,822	)
Equity derivatives		Other investments sold, not yet purchased			-				(233	)
				$	851			$	1,662

The following table presents the Company’s derivative financial instruments and the amount and location of the net gain (loss) recognized in the consolidated statement of operations.

DERIVATIVE FINANCIAL INSTRUMENTS-STATEMENT OF OPERATIONS INFORMATION

(Dollars in Thousands)

			For the Year Ended December 31,
Derivative Financial Instruments Not Designated as Hedging Instruments Under ASC 815	Income Statement Classification		2021				2020				2019
Foreign currency forward contracts	Principal transactions and other income		$	-			$	-			$	51
Other extended settlement trades	Revenues-net trading			-				-				(70	)
TBA and other forward agency MBS	Revenues-net trading			7,460				5,219				6,545
Equity derivatives	Principal transactions and other income			(233	)			105				-
			$	7,227			$	5,324			$	6,526