v3.25.4
Note 10 - Derivative Financial Instruments
 12 Months Ended
Dec. 31, 2025
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.  From time to time, the Company hedges a portion of this exposure by entering into equity derivatives such as puts and short call options.  These derivative positions are held 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, 2025 and December 31, 2024, the Company had no options. From time to time, the Company may also enter into forward purchase commitments for equity securities.  

 

In addition, the Company may engage in advisory transactions that result in receivables that can be paid in cash or a variable number of equity instruments.  In such instances, the Company would record the receivable as a component of other assets in its consolidated balance sheets and record the equity component as an embedded derivative.  All equity derivatives are carried at fair value as a component of other investments, at fair value or other investments sold, not yet purchased in the Company’s consolidated balance sheets.  As of  December 31, 2025 and December 31, 2024, the Company had equity derivatives included in other investments at fair value of $73 and $73, respectively.

 

The Company may hedge 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 in the Company's consolidated balance sheets.  See note 8.

 

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, 2025, the Company had open TBA and other forward MBS purchase agreements in the notional amount of $1,179,500 and open TBA and other forward MBS sale agreements in the notional amount of $1,197,975. At December 31, 2024, the Company had open TBA and other forward agency MBS purchase agreements in the notional amount of $852,450 and open TBA and other forward agency MBS sale agreements in the notional amount of $883,900. 

 

Other Extended Settlement Trades 

 

When the Company buys or sells a financial instrument that will not settle in the regular time period, 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.  As of December 31, 2025 and 2024, the Company had no open forward purchase 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, 2025 and 2024, 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, 2025 and 2024.  

 

 

 

DERIVATIVE FINANCIAL INSTRUMENTS-BALANCE SHEET INFORMATION

(Dollars in Thousands)

 

Derivative Financial Instruments Not Designated as Hedging Instruments Under ASC 815

 

Balance Sheet Classification

 

December 31, 2025

  

December 31, 2024

 

TBAs and other forward agency MBS

 

Investments-trading

 $4,651  $4,836 

TBAs and other forward agency MBS

 

Trading securities sold, not yet purchased

  (4,245)  (4,050)

Equity derivatives

 

Other investments, at fair value

  19,997   1,587 

Share forward liabilities

 

Other investments sold, not yet purchased, at fair value

  -   (470)
    $20,403  $1,903 

 

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

 

2025

  

2024

  

2023

 

TBAs and other forward agency MBS

Revenues-net trading

 $3,039  $5,230  $3,933 

Equity derivatives

Principal transactions and other income (loss)

  2,586   (11)  603 

Share forward liabilities

Principal transactions and other income (loss)

  -   22,871   108,084 
   $5,625  $28,090  $112,620 

 

The share forward liabilities offset certain long positions included as a component of other investments, at fair value.  The offsetting long positions had income / (loss) of $0, ( $20,919), and ( $83,707) for the twelve months ended December 31, 2025, 2024, and  2023, respectively.  

 

SFAs

 

The Company had engaged in several transactions known as SFAs. In a typical SFA transaction, the Company acquires an interest in a publicly traded company (referred to as the “SFA Counterparty”) through open market purchases, direct acquisitions from the SFA Counterparty, or a combination thereof. These interests can take the form of unrestricted common shares, restricted common shares, equity derivatives, or notes receivable. Upon acquiring these interests, the Company enters into an SFA derivative arrangement with the SFA Counterparty. In cases where the Company acquires its interests in the SFA Counterparty through open market purchases, the SFA generally requires an up-front payment to the Company from the SFA Counterparty. The amount of this payment equals the cost paid by the Company paid for those interests, less a shortfall amount in certain cases. To fund the shortfall portion of the initial investment, the Company will utilize available cash on hand or available financing.

 

The SFA stipulates that the Company must make a payment to the SFA Counterparty on a certain maturity date. Depending on the terms of the SFA, this payment may be made in cash, by returning the acquired interests, or through a combination of both. In some cases, the SFA requires the payment to be made exclusively in cash.

 

Importantly, the SFA does not obligate the Company to hold the interests that it acquired in the SFA Counterparty. Following the execution of the SFA, the Company is free to sell the interests in the SFA Counterparty (assuming the interests themselves are not restricted from transfer). Additionally, SFAs generally include a feature whereby if the Company holds the interests  in the SFA Counterparty that it acquired until maturity or another agreed-upon date, the Company becomes eligible to receive an additional payment from the SFA Counterparty, either in cash or in additional interests in the SFA Counterparty. Such a payment is known as the “Maturity Consideration.”

 

Furthermore, SFAs usually include a provision allowing the Company to terminate the SFA, either in whole or in part, before its maturity by making an agreed-upon payment based on an amount defined in the SFA (the “Reset Price”). The Reset Price may either remain fixed throughout the term of the SFA, or fluctuate based on certain calculations within the SFA.

 

SFAs also impose various obligations on the SFA Counterparty, that   may include registering a predetermined number of the interests in the SFA Counterparty (subject to the SFA) with the SEC, maintaining a listing of the SFA Counterparty securities on a national exchange, and/or that the closing price of the SFA Counterparty’s shares on the public exchange does not fall below a predetermined price for a specific period of time. If any of these SFA Counterparty obligations are breached or not satisfied, the Company  may have the right to terminate the SFA early and accelerate the payment of the Maturity Consideration upon termination. The SFAs provide the right of set off in the case of Maturity Consideration, thereby allowing the Company to keep the interests it holds in the SFA Counterparty and offset the Maturity Consideration it is owed following termination of the applicable SFA.

 

The Company accounts for SFA transactions as follows.

 

 

●

The interests in public companies that it owns are carried at fair value. Refer to note 9 for further details on determining the fair value of unrestricted common shares, restricted common shares, equity derivatives, or note receivable.

 

 

●

The derivative obligation arising from the SFA is also carried at fair value. Fair value represents the amount the Company would need to pay to settle the SFA obligation at any reporting period date. If the SFA allows the Company multiple methods of settling the obligation, the Company will choose the most advantageous one to value the derivative obligation. In performing this calculation, only settlement methods contractually available to the Company at the reporting date will be considered (i.e., ones available at some future date will not be considered). For instance, if the Company may terminate the SFA early by either returning common shares or making a cash payment based on the Reset Price, the liability will be valued at the lower of: (i) the fair value of the common shares and (ii) the cash amount based on the Reset Price.

 

 

●

The Company does not recognize any Maturity Consideration as revenue until it is earned under the contract, either by meeting the hold period requirement or due to a breach of obligation by the SFA Counterparty that enables the Company to terminate the SFA early.  

 

 

●

In cases where the Company earns Maturity Consideration and the amount it is owed exceeds the fair value of the interest it owns that is available to offset, the Company will consider the probability of payment of the remaining Maturity Consideration based on the credit quality of the SFA Counterparty and general market conditions.  If the Company determines that the collection of the remaining Maturity Consideration owed is not probable, the Company will not record the unpaid portion.  

 

The following table shows the carrying value of the assets and liabilities of SFA transactions as of the reporting period dates.

 

SHARE FORWARD ARRANGEMENTS

(Dollars in Thousands)

 

  

December 31, 2025

  

December 31, 2024

 

Equity securities

 $-  $470 

Net fair value of share forward arrangements

 $-  $470 
         
         
         

 

The Company entered into SFAs primarily through its consolidated subsidiary, Vellar GP.  See notes 4 and 31 for a discussion of the sale of the Company's interest in Vellar GP. Therefore, the Company does not expect to have significant SFA activity in the future.