Edgar Filing: American Capital Agency Corp

AGNC 10Q 09/30/13

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________________________________________

FORM 10-Q

__________________________________________________



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-34057

__________________________________________________

AMERICAN CAPITAL AGENCY CORP.

(Exact name of registrant as specified in its charter)

__________________________________________________



Delaware		26-1701984
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

2 Bethesda Metro Center, 14th Floor

Bethesda, Maryland 20814

(Address of principal executive offices)

(301) 968-9300

(Registrant’s telephone number, including area code)

__________________________________________________

Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter earlier period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	ý		Accelerated filer	¨

Non-accelerated filer	¨	(Do not check if a smaller reporting company)	Smaller Reporting Company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

The number of shares of the issuer’s common stock, $0.01 par value, outstanding as of October 31, 2013 was 384,312,664

AMERICAN CAPITAL AGENCY CORP.

TABLE OF CONTENTS



PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements	2
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	47
Item 4.	Controls and Procedures	51

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	52
Item 1A.	Risk Factors	52
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 3.	Defaults upon Senior Securities	52
Item 4.	Mine Safety Disclosures	52
Item 5.	Other Information	52
Item 6.	Exhibits	52

Signatures		54

PART I. - FINANCIAL INFORMATION

Item 1. Financial Statements

AMERICAN CAPITAL AGENCY CORP.

CONSOLIDATED BALANCE SHEETS

(in millions, except per share data)




	September 30, 2013			December 31, 2012
	(Unaudited)
Assets:
Agency securities, at fair value (including pledged securities of $80,721 and $79,966, respectively)	$	83,805		$	83,710
Agency securities transferred to consolidated variable interest entities, at fair value (pledged securities)	1,204			1,535
U.S. Treasury securities (including pledged securities of $4,710)	4,823			—
Cash and cash equivalents	2,129			2,430
Restricted cash	77			399
Derivative assets, at fair value	1,246			301
Receivable for securities sold (including pledged securities of $1,417)	1,807			—
Receivable under reverse repurchase agreements	1,808			11,818
Other assets	372			260
Total assets	$	97,271		$	100,453
Liabilities:
Repurchase agreements	$	82,473		$	74,478
Debt of consolidated variable interest entities, at fair value	736			937
Payable for securities purchased	979			556
Derivative liabilities, at fair value	1,015			1,264
Dividends payable	311			427
Obligation to return securities borrowed under reverse repurchase agreements, at fair value	1,801			11,763
Accounts payable and other accrued liabilities	71			132
Total liabilities	87,386			89,557
Stockholders’ equity:
Preferred stock - $0.01 par value; 10.0 shares authorized:
8.000% Series A Cumulative Redeemable Preferred Stock; 6.9 shares issued and outstanding; liquidation preference of $25 per share ($173)	167			167
Common stock - $0.01 par value; 600.0 shares authorized:
384.3 and 338.9 shares issued and outstanding, respectively	4			3
Additional paid-in capital	10,992			9,460
Retained deficit	(160		)	(289		)
Accumulated other comprehensive (loss) income	(1,118		)	1,555
Total stockholders’ equity	9,885			10,896
Total liabilities and stockholders’ equity	$	97,271		$	100,453

See accompanying notes to consolidated financial statements.

AMERICAN CAPITAL AGENCY CORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(in millions, except per share data)



	Three months ended September 30,						Nine months ended September 30,
	2013			2012			2013			2012
Interest income:
Interest income	$	558		$	520		$	1,650		$	1,538
Interest expense	145			139			416			365
Net interest income	413			381			1,234			1,173
Other (loss) income, net:
(Loss) gain on sale of agency securities, net	(733		)	210			(742		)	843
(Loss) gain on derivative instruments and other securities, net	(339		)	(460		)	1,007			(1,442		)
Total other (loss) income, net	(1,072		)	(250		)	265			(599		)
Expenses:
Management fees	35			32			105			82
General and administrative expenses	7			8			25			22
Total expenses	42			40			130			104
(Loss) income before income tax	(701		)	91			1,369			470
Provision for income taxes, net	—			5			10			4
Net (loss) income	(701		)	86			1,359			466
Dividend on preferred stock	3			3			10			6
Net (loss) income (attributable) available to common shareholders	$	(704	)	$	83		$	1,349		$	460

Net (loss) income	$	(701	)	$	86		$	1,359		$	466
Other comprehensive income (loss):
Unrealized gain (loss) on available-for-sale securities, net	833			1,190			(2,817		)	1,773
Unrealized gain on derivative instruments, net	47			51			144			155
Other comprehensive income (loss)	880			1,241			(2,673		)	1,928
Comprehensive income (loss)	179			1,327			(1,314		)	2,394
Dividend on preferred stock	3			3			10			6
Comprehensive income (loss) available (attributable) to common shareholders	$	176		$	1,324		$	(1,324	)	$	2,388

Weighted average number of common shares outstanding - basic and diluted	390.6			332.8			381.2			291.6
Net (loss) income per common share - basic and diluted	$	(1.80	)	$	0.25		$	3.54		$	1.58
Comprehensive income (loss) per common share - basic and diluted	$	0.45		$	3.98		$	(3.47	)	$	8.19
Dividends declared per common share	$	0.80		$	1.25		$	3.10		$	3.75

See accompanying notes to consolidated financial statements.

AMERICAN CAPITAL AGENCY CORP.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

(in millions)



	Preferred Stock			Common Stock				Additional Paid-in Capital			Retained (Deficit)Earnings			Accumulated Other Comprehensive Income (Loss)			Total
	Shares	Amount		Shares		Amount		Additional Paid-in Capital			Retained (Deficit)Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance, December 31, 2012	6.9	$	167	338.9		$	3	$	9,460		$	(289	)	$	1,555		$	10,896
Net income	—	—		—		—		—			1,359			—			1,359
Other comprehensive income (loss):
Unrealized loss on available-for-sale securities, net	—	—		—		—		—			—			(2,817		)	(2,817		)
Unrealized gain on derivative instruments, net	—	—		—		—		—			—			144			144
Issuance of common stock	—	—		57.5		1		1,802			—			—			1,803
Repurchase of common stock	—	—		(12.1	)	—		(270		)	—			—			(270		)
Preferred dividends declared	—	—		—		—		—			(10		)	—			(10		)
Common dividends declared	—	—		—		—		—			(1,220		)	—			(1,220		)
Balance, September 30, 2013	6.9	$	167	384.3		$	4	$	10,992		$	(160	)	$	(1,118	)	$	9,885

See accompanying notes to consolidated financial statements.

AMERICAN CAPITAL AGENCY CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in millions)



	Nine months ended September 30,
	2013			2012
Operating activities:
Net income	$	1,359		$	466
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of agency securities premiums and discounts, net	400			515
Amortization of accumulated other comprehensive loss on interest rate swaps de-designated as qualifying hedges	144			155
Loss (gain) on sale of agency securities, net	742			(843		)
(Gain) loss on derivative instruments and other securities, net	(1,007		)	1,442
Increase in other assets	(54		)	(79		)
(Decrease) increase in accounts payable and other accrued liabilities	(112		)	25
Accretion of discounts on debt of consolidated variable interest entities	12			2
Net cash provided by operating activities	1,484			1,683
Investing activities:
Purchases of agency securities	(71,313		)	(86,435		)
Proceeds from sale of agency securities	57,992			44,218
Principal collections on agency securities	8,201			6,906
Purchases of U.S. Treasury securities	(59,799		)	(25,894		)
Proceeds from sale of U.S. Treasury securities	45,496			32,243
Net proceeds from (payments made) on reverse repurchase agreements	10,010			(5,946		)
Net payments on other derivative instruments	(696		)	(816		)
(Increase) decrease in restricted cash	322			(33		)
Net cash used in investing activities	(9,787		)	(35,757		)
Financing activities:
Proceeds from repurchase arrangements	421,185			310,225
Payments made on repurchase agreements	(413,190		)	(278,652		)
Proceeds from debt of consolidated variable interest entities	—			1,000
Repayments on debt of consolidated variable interest entities	(180		)	(80		)
Net proceeds from preferred stock issuances	—			167
Net proceeds from common stock issuances	1,803			3,600
Payments made on common stock repurchases	(270		)	—
Cash dividends paid	(1,346		)	(984		)
Net cash provided by financing activities	8,002			35,276
Net change in cash and cash equivalents	(301		)	1,202
Cash and cash equivalents at beginning of period	2,430			1,367
Cash and cash equivalents at end of period	$	2,129		$	2,569

See accompanying notes to consolidated financial statements.

AMERICAN CAPITAL AGENCY CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Unaudited Interim Consolidated Financial Statements

The unaudited interim consolidated financial statements of American Capital Agency Corp. (referred throughout this report as the "Company", "we", "us" and "our") are prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

Our unaudited interim consolidated financial statements include the accounts of our wholly-owned subsidiary, American Capital Agency TRS, LLC, and variable interest entities for which the Company is the primary beneficiary. Significant intercompany accounts and transactions have been eliminated. In the opinion of management, all adjustments, consisting solely of normal recurring accruals, necessary for the fair presentation of financial statements for the interim period have been included. The current period’s results of operations are not necessarily indicative of results that ultimately may be achieved for the year.

Note 2. Organization

We were organized in Delaware on January 7, 2008, and commenced operations on May 20, 2008 following the completion of our initial public offering ("IPO"). Our common stock is traded on The NASDAQ Global Select Market under the symbol "AGNC".

We are externally managed by American Capital AGNC Management, LLC (our "Manager"), an affiliate of American Capital, Ltd. ("American Capital").

We operate so as to qualify to be taxed as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"). As a REIT, we are required to distribute annually 90% of our taxable net income. As long as we continue to qualify as a REIT, we will generally not be subject to U.S. federal or state corporate taxes on our taxable net income to the extent that we distribute all of our annual taxable net income to our stockholders. It is our intention to distribute 100% of our taxable net income, after application of available tax attributes, within the limits prescribed by the Internal Revenue Code, which may extend into the subsequent taxable year.

We earn income primarily from investing on a leveraged basis in agency mortgage-backed securities ("agency MBS"). These investments consist of residential mortgage pass-through securities and collateralized mortgage obligations ("CMOs") for which the principal and interest payments are guaranteed by a government-sponsored enterprise, such as the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), or by a U.S. Government agency, such as the Government National Mortgage Association ("Ginnie Mae") (collectively referred to as "GSEs"). We may also invest in agency debenture securities issued by Freddie Mac, Fannie Mae or the Federal Home Loan Bank ("FHLB"). We refer to agency MBS and agency debenture securities collectively as "investment securities" and we refer to the specific investment securities in which we invest as our "investment portfolio."

Our principal objective is to preserve our net asset value (also referred to as "net book value", "NAV" and "stockholders' equity") while generating attractive risk-adjusted returns for distribution to our stockholders through regular quarterly dividends from the combination of our net interest income and net realized gains and losses on our investments and hedging activities. We fund our investments primarily through short-term borrowings structured as repurchase agreements.

Note 3. Summary of Significant Accounting Policies

Investment Securities

ASC Topic 320, Investments—Debt and Equity Securities ("ASC 320"), requires that at the time of purchase, we designate a security as held-to-maturity, available-for-sale or trading, depending on our ability and intent to hold such security to maturity. Securities classified as trading and available-for-sale are reported at fair value, while securities classified as held-to-maturity are reported at amortized cost. We may, from time to time, sell any of our investment securities as part of our overall management of our investment portfolio. Accordingly, we typically designate our investment securities as available-for-sale. All securities

classified as available-for-sale are reported at fair value, with unrealized gains and losses reported in accumulated other comprehensive income (loss) ("OCI"), a separate component of stockholders’ equity. Upon the sale of a security, we determine the cost of the security and the amount of unrealized gains or losses to reclassify out of accumulated OCI into earnings based on the specific identification method.

Interest-only securities and inverse interest-only securities (collectively referred to as "interest-only securities") represent our right to receive a specified proportion of the contractual interest flows of specific agency CMO securities. Principal-only securities represent our right to receive the contractual principal flows of specific agency CMO securities. Interest-only and principal-only securities are measured at fair value through earnings in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income. Our investments in interest-only and principal-only securities are included in agency securities, at fair value on the accompanying consolidated balance sheets.

We estimate the fair value of our investment securities based on a market approach using Level 2 inputs from third-party pricing services and non-binding dealer quotes derived from common market pricing methods. Such methods incorporate, but are not limited to, reported trades and executable bid and asked prices for similar securities, bench mark interest rate curves, such as the spread to the U.S. Treasury rate and interest rate swap curves, convexity, duration and the underlying characteristics of the particular security, including coupon, periodic and life caps, rate reset period, issuer, additional credit support and expected life of the security. Refer to Note 8 for further discussion of fair value measurements.

We evaluate individual securities for other-than-temporary impairment ("OTTI") on at least a quarterly basis. The determination of whether a security is other-than-temporarily impaired may involve judgments and assumptions based on subjective and objective factors. When a security is impaired, an OTTI is considered to have occurred if any one of the following three conditions exist as of the financial reporting date: (i) we intend to sell the security (that is, a decision has been made to sell the security), (ii) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis or (iii) we do not expect to recover the security's amortized cost basis, even if we do not intend to sell the security and it is not more likely than not that we will be required to sell the security. A general allowance for unidentified impairments in a portfolio of securities is not permitted.

If either of the first two conditions exists as of the financial reporting date, the entire amount of the impairment loss, if any, is recognized in earnings as a realized loss and the cost basis of the security is adjusted to its fair value. If the third condition exists, the OTTI is separated into (i) the amount relating to credit loss (the "credit component") and (ii) the amount relating to all other factors (the "non-credit components"). Only the credit component is recognized in earnings, with the non-credit components recognized in OCI. However, in evaluating if the third condition exists, our investments in agency securities typically would not have a credit component since the principal and interest are guaranteed by a GSE and, therefore, any unrealized loss is not the result of a credit loss. In addition, since we designate our agency securities as available-for-sale securities with unrealized gains and losses already recognized in OCI, any impairment loss for non-credit components is already recognized in OCI.

The liquidity of the agency securities market allows us to obtain competitive bids and execute on a sale transaction typically within a day of making the decision to sell a security and, therefore, we generally do not make decisions to sell specific agency securities until shortly prior to initiating a sell order. In some instances, we may sell specific agency securities by delivering such securities into existing short to-be-announced ("TBA") contracts. TBA market conventions require the identification of the specific securities to be delivered no later than 48 hours prior to settlement. If we settle a short TBA contract through the delivery of securities, we will generally identify the specific securities to be delivered within one to two days of the 48-hour deadline.

Interest Income

Interest income is accrued based on the outstanding principal amount of the investment securities and their contractual terms. Premiums or discounts associated with the purchase of investment securities are amortized or accreted into interest income, respectively, over the projected lives of the securities, including contractual payments and estimated prepayments using the interest method in accordance with ASC Subtopic 310-20, Receivables—Nonrefundable Fees and Other Costs ("ASC 310-20").

We estimate long-term prepayment speeds of our agency securities using a third-party service and market data. The third-party service estimates prepayment speeds using models that incorporate the forward yield curve, current mortgage rates and mortgage rates of the outstanding loans, age and size of the outstanding loans, loan-to-value ratios, volatility and other factors. We review the prepayment speeds estimated by the third-party service and compare the results to market consensus prepayment speeds, if available. We also consider historical prepayment speeds and current market conditions to validate the reasonableness of the prepayment speeds estimated by the third-party service and, based on our Manager’s judgment, we may make adjustments to its estimates. Actual and anticipated prepayment experience is reviewed quarterly and effective yields are recalculated when differences arise between (i) our previously estimated future prepayments and (ii) actual prepayments to date plus currently estimated future prepayments. If the actual and estimated future prepayment experience differs from our prior estimate of

prepayments, we are required to record an adjustment in the current period to the amortization or accretion of premiums and discounts for the cumulative difference in the effective yield through the reporting date.

Derivative Instruments

We use a variety of derivative instruments to economically hedge a portion of our exposure to market risks, including interest rate risk, prepayment risk and extension risk. The objective of our risk management strategy is to reduce fluctuations in net book value over a range of interest rate scenarios. In particular, we attempt to mitigate the risk of the cost of our variable rate liabilities increasing during a period of rising interest rates. The principal instruments that we use are interest rate swaps and options to enter into interest rate swaps ("interest rate swaptions"). We also utilize forward contracts for the purchase or sale of agency MBS securities on a generic pool, or a TBA contract, basis and on a non-generic specified pool basis, and we utilize U.S. Treasury securities and U.S. Treasury futures contracts, primarily through short sales. We may also purchase or write put or call options on TBA securities and we may invest in other types of mortgage derivatives, such as interest-only securities, and synthetic total return swaps, such as the Markit IOS Synthetic Total Return Swap Index ("Markit IOS Index").

We may also enter into TBA contracts as a means of investing in and financing agency securities (thereby increasing our "at risk" leverage) or as a means of disposing of or reducing our exposure to agency securities (thereby reducing our "at risk" leverage). Pursuant to TBA contracts, we agree to purchase or sell, for future delivery, agency securities with certain principal and interest terms and certain types of collateral, but the particular agency securities to be delivered are not identified until shortly before the TBA settlement date. We also may choose, prior to settlement, to move the settlement of these securities out to a later date by entering into an offsetting short or long position (referred to as a "pair off"), net settling the paired off positions for cash, and simultaneously purchasing or selling a similar TBA contract for a later settlement date. This transaction is commonly referred to as a "dollar roll." The agency securities purchased or sold for a forward settlement date are typically priced at a discount to agency securities for settlement in the current month. This difference (or discount) is referred to as the "price drop." The price drop is the economic equivalent of net interest carry income on the underlying agency securities over the roll period (interest income less implied financing cost) and is commonly referred to as "dollar roll income/loss." Consequently, forward purchases of agency securities and dollar roll transactions represent a form of off-balance sheet financing.

We account for derivative instruments in accordance with ASC Topic 815, Derivatives and Hedging ("ASC 815"). ASC 815 requires an entity to recognize all derivatives as either assets or liabilities in the balance sheet and to measure those instruments at fair value.

Our derivative agreements generally contain provisions that allow for netting or setting off derivative assets and liabilities with each counterparty; however, we report related assets and liabilities on a gross basis in our consolidated balance sheets. Derivative instruments in a gain position are reported as derivative assets at fair value and derivative instruments in a loss position are reported as derivative liabilities at fair value in our consolidated balance sheets. Changes in fair value of derivative instruments and periodic settlements related to our derivative instruments are recorded in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income. Cash receipts and payments related to derivative instruments are classified in our consolidated statements of cash flows according to the underlying nature or purpose of the derivative transaction, generally in the investing section.

The use of derivatives creates exposure to credit risk relating to potential losses that could be recognized in the event that the counterparties to these instruments fail to perform their obligations under the contracts. We attempt to minimize this risk by limiting our counterparties to major financial institutions with acceptable credit ratings, monitoring positions with individual counterparties and adjusting posted collateral as required.

Discontinuation of hedge accounting for interest rate swap agreements

Prior to September 30, 2011, we entered into interest rate swap agreements typically with the intention of qualifying for hedge accounting under ASC 815. However, as of September 30, 2011, we elected to discontinue hedge accounting for our interest rate swaps. Upon discontinuation of hedge accounting, the net deferred loss related to our de-designated interest rate swaps remained in accumulated OCI and is being reclassified from accumulated OCI into interest expense on a straight-line basis over the remaining term of each interest rate swap.

Interest rate swap agreements

We use interest rate swaps to economically hedge the variable cash flows associated with borrowings made under our repurchase agreement facilities. Under our interest rate swap agreements, we typically pay a fixed rate and receive a floating rate based on one, three or six-month LIBOR ("payer swaps") with terms up to 20 years. The floating rate we receive under our swap agreements has the effect of offsetting the repricing characteristics of our repurchase agreements and cash flows on such liabilities.

Our swap agreements are privately negotiated in the over−the−counter ("OTC") market and may be centrally cleared through a registered commodities exchange ("centrally cleared swaps").

We estimate the fair value of our centrally cleared swaps using the daily settlement price determined by the respective exchange. Centrally cleared swaps are valued by the exchange using a pricing model that references the underlying rates including the overnight index swap rate and LIBOR forward rate to produce the daily settlement price.

We estimate the fair value of our "non-centrally cleared" swaps using a combination of inputs from counterparty and third-party pricing models to estimate the net present value of the future cash flows using a forward interest rate yield curve in effect as of the end of the measurement period. We also incorporate both our own and our counterparties’ nonperformance risk in estimating the fair value of our interest rate swaps. In considering the effect of nonperformance risk, we consider the impact of netting and credit enhancements, such as collateral postings and guarantees, and have concluded that our own and our counterparty risk is not significant to the overall valuation of these agreements.

Interest rate swaptions

We purchase interest rate swaptions to help mitigate the potential impact of larger increases or decreases in interest rates on the performance of our investment portfolio (referred to as "convexity risk"). The interest rate swaptions provide us the option to enter into an interest rate swap agreement for a predetermined notional amount, stated term and pay and receive interest rates in the future. Our swaption agreements typically provide us the option to enter into a pay fixed rate interest rate swap, which we refer as "payer swaptions". We may also enter into swaption agreements that provide us the option to enter into a receive fixed interest rate swap, which we refer to as "receiver swaptions". The premium paid for interest rate swaptions is reported as an asset in our consolidated balance sheets. The premium is valued at an amount equal to the fair value of the swaption that would have the effect of closing the position adjusted for nonperformance risk, if any. The difference between the premium and the fair value of the swaption is reported in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income. If a swaption expires unexercised, the realized loss on the swaption would be equal to the premium paid. If we sell or exercise a swaption, the realized gain or loss on the swaption would be equal to the difference between the cash or the fair value of the underlying interest rate swap received and the premium paid.

Our interest rates swaption agreements are privately negotiated in the OTC market and are not subject to central clearing. We estimate the fair value of interest rate swaptions using a combination of inputs from counterparty and third-party pricing models based on the fair value of the future interest rate swap that we have the option to enter into as well as the remaining length of time that we have to exercise the option, adjusted for non-performance risk, if any.

TBA securities

A TBA security is a forward contract for the purchase ("long position") or sale ("short position") of agency MBS at a predetermined price, face amount, issuer, coupon and stated maturity on an agreed-upon future date. The specific agency MBS delivered into the contract upon the settlement date, published each month by the Securities Industry and Financial Markets Association, are not known at the time of the transaction. We may enter into TBA contracts as a means of hedging against short-term changes in interest rates. We may also enter into TBA contracts as a means of acquiring or disposing of agency securities and we may from time to time utilize TBA dollar roll transactions to finance agency MBS purchases.

We account for TBA contracts as derivative instruments since we cannot assert that it is probable at inception and throughout the term of the TBA contract that we will take physical delivery of the agency security upon settlement of the contract. We account for TBA dollar roll transactions as a series of derivative transactions. Gains, losses and dollar roll income associated with our TBA contracts and dollar roll transactions are recognized in our consolidated statements of comprehensive income in gain (loss) on derivative instruments and other securities, net.

We estimate the fair value of TBA securities based on similar methods used to value our agency MBS securities.

Forward commitments to purchase or sell specified agency MBS

We enter into forward commitments to purchase or sell specified agency MBS from time to time as a means of acquiring assets or as a hedge against short-term changes in interest rates. Such forward commitments typically require physical settlement. We account for such forward commitments as derivatives if the delivery of the specified agency MBS and settlement extend beyond established market conventions. Realized and unrealized gains and losses associated with forward commitments accounted for as derivatives are recognized in our consolidated statements of comprehensive income in gain (loss) on derivative instruments and other securities, net.

We estimate the fair value of forward commitments to purchase or sell specified agency MBS based on similar methods used to value agency MBS, as well as the remaining length of time of the forward commitment.

U.S. Treasury securities

We purchase or sell short U.S. Treasury securities and U.S. Treasury futures contracts to help mitigate the potential impact of changes in interest rates on the performance of our portfolio. We borrow securities to cover short sales of U.S. Treasury securities under reverse repurchase agreements. We account for these as securities borrowing transactions and recognize an obligation to return the borrowed securities at fair value on the balance sheet based on the value of the underlying borrowed securities as of the reporting date. Gains and losses associated with purchases and short sales of U.S. Treasury securities and U.S. Treasury futures contracts are recognized in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income.

Note 4. Investment Securities

As of September 30, 2013, we had agency MBS at fair value of $85.0 billion, with a total cost basis of $85.8 billion. The net unamortized premium balance on our investment portfolio as of September 30, 2013 was $3.8 billion, including interest-only and principal-only strips. The following tables summarize our investments in agency MBS as of September 30, 2013 (dollars in millions):



	September 30, 2013
Agency MBS	Fannie Mae			Freddie Mac			Ginnie Mae			Total
Available-for-sale agency MBS:
Agency MBS, par	$	63,884		$	17,604		$	237		$	81,725
Unamortized discount	(44		)	(20		)	—			(64		)
Unamortized premium	2,882			795			8			3,685
Amortized cost	66,722			18,379			245			85,346
Gross unrealized gains	452			118			4			574
Gross unrealized losses	(923		)	(428		)	—			(1,351		)
Total available-for-sale agency MBS, at fair value	66,251			18,069			249			84,569
Agency MBS remeasured at fair value through earnings:
Interest-only and principal-only strips, amortized cost ⁽¹⁾	409			34			—			443
Gross unrealized gains	9			2			—			11
Gross unrealized losses	(10		)	(4		)	—			(14		)
Total agency MBS remeasured at fair value through earnings	408			32			—			440
Total agency MBS, at fair value	$	66,659		$	18,101		$	249		$	85,009
Weighted average coupon as of September 30, 2013 ⁽²⁾	3.52		%	3.65		%	3.57		%	3.54		%
Weighted average yield as of September 30, 2013 ⁽³⁾	2.66		%	2.86		%	1.12		%	2.70		%
Weighted average yield for the three months ended September 30, 2013⁽³⁾	2.57		%	2.62		%	1.17		%	2.59		%
Weighted average yield for the nine months ended September 30, 2013 ⁽³⁾	2.73		%	2.83		%	1.28		%	2.75		%

________________________


1.	The underlying unamortized principal balance ("UPB" or "par value") of our interest-only agency MBS strips was $1.3 billion and the weighted average contractual interest we are entitled to receive was 5.80% of this amount as of September 30, 2013. The par value of our principal-only agency MBS strips was $278 million as of September 30, 2013.


2.	The weighted average coupon includes the interest cash flows from our interest-only agency MBS strips taken together with the interest cash flows from our fixed-rate, adjustable-rate and CMO agency MBS as a percentage of the par value of our agency MBS (excluding the UPB of our interest-only securities) as of September 30, 2013.


3.	Incorporates a weighted average future constant prepayment rate assumption of 8% based on forward rates as of September 30, 2013.



	September 30, 2013
Agency MBS	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
Fixed-Rate	$	83,114	$	547	$	(1,351	)	$	82,310
Adjustable-Rate	998		17		—			1,015
CMO	1,234		10		—			1,244
Interest-only and principal-only strips	443		11		(14		)	440
Total agency MBS	$	85,789	$	585	$	(1,365	)	$	85,009

As of December 31, 2012, we had agency MBS at fair value of $85.2 billion, with a total cost basis of $83.2 billion. The net unamortized premium balance on our investment portfolio as of December 31, 2012 was $4.4 billion, including interest-only and principal-only strips. The following tables summarize our investments in agency MBS as of December 31, 2012 (dollars in millions):



	December 31, 2012
Agency MBS	Fannie Mae			Freddie Mac			Ginnie Mae			Total
Available-for-sale agency MBS:
Agency MBS, par	$	58,912		$	19,336		$	238		$	78,486
Unamortized premium	3,208			948			10			4,166
Amortized cost	62,120			20,284			248			82,652
Gross unrealized gains	1,585			481			6			2,072
Gross unrealized losses	(18		)	(7		)	—			(25		)
Total available-for-sale agency MBS, at fair value	63,687			20,758			254			84,699
Agency MBS remeasured at fair value through earnings:
Interest-only and principal-only strips, amortized cost ⁽¹⁾	486			55			—			541
Gross unrealized gains	26			1			—			27
Gross unrealized losses	(9		)	(13		)	—			(22		)
Total agency MBS remeasured at fair value through earnings	503			43			—			546
Total agency MBS, at fair value	$	64,190		$	20,801		$	254		$	85,245
Weighted average coupon as of December 31, 2012 ⁽²⁾	3.70		%	3.67		%	3.77		%	3.69		%
Weighted average yield as of December 31, 2012 ⁽³⁾	2.62		%	2.61		%	1.60		%	2.61		%
Weighted average yield for the year ended December 31, 2012 ⁽³⁾	2.83		%	2.83		%	1.63		%	2.82		%

________________________


1.	The UPB of our interest-only securities was $1.7 billion and the weighted average contractual interest we are entitled to receive was 5.78% of this amount as of December 31, 2012. The par value of our principal-only agency MBS strips was $302 million as of December 31, 2012.


2.	The weighted average coupon includes the interest cash flows from our interest-only securities taken together with the interest cash flows from our fixed-rate, adjustable-rate and CMO securities as a percentage of the par value of our agency securities (excluding the UPB of our interest-only securities) as of December 31, 2012.


3.	Incorporates a weighted average future constant prepayment rate assumption of 11% based on forward rates as of December 31, 2012.



	December 31, 2012
Agency MBS	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
Fixed-Rate	$	81,617	$	2,043	$	(25	)	$	83,635
Adjustable-Rate	865		26		—			891
CMO	170		3		—			173
Interest-only and principal-only strips	541		27		(22		)	546
Total agency MBS	$	83,193	$	2,099	$	(47	)	$	85,245

As of September 30, 2013 and December 31, 2012, we did not have investments in agency debenture securities.

The actual maturities of our agency MBS securities are generally shorter than the stated contractual maturities. Actual maturities are affected by the contractual lives of the underlying mortgages, periodic contractual principal payments and principal prepayments. As of September 30, 2013 and December 31, 2012, our weighted average expected constant prepayment rate ("CPR") over the remaining life of our aggregate agency MBS portfolio was 8% and 11%, respectively. Our estimates differ materially for different types of securities and thus individual holdings have a wide range of projected CPRs. We estimate long-term prepayment assumptions for different securities using a third-party service and market data. The third-party service estimates prepayment speeds using models that incorporate the forward yield curve, current mortgage rates and mortgage rates of the outstanding loans, age and size of the outstanding loans, loan-to-value ratios, volatility and other factors. We review the prepayment speeds estimated by the third-party service and compare the results to market consensus prepayment speeds, if available. We also consider historical prepayment speeds and current market conditions to validate reasonableness. As market conditions may change

rapidly, we may make adjustments for different securities based on our Manager's judgment. Various market participants could use materially different assumptions.

The following table summarizes our agency MBS classified as available-for-sale as of September 30, 2013 and December 31, 2012 according to their estimated weighted average life classification (dollars in millions):



	September 30, 2013						December 31, 2012
Estimated Weighted Average Life of Agency MBS Classified as Available-for-Sale ⁽¹⁾	Fair Value		Amortized Cost		Weighted Average Coupon	Weighted Average Yield	Fair Value		Amortized Cost		Weighted Average Coupon	Weighted Average Yield
≤ 3 years	$	588	$	577	3.89%	2.11%	$	1,119	$	1,108	4.18%	2.14%
> 3 years and ≤ 5 years	26,492		26,146		3.60%	2.56%	27,448		26,750		3.36%	2.29%
> 5 years and ≤10 years	48,453		49,212		3.45%	2.73%	54,054		52,735		3.69%	2.75%
> 10 years	9,036		9,411		3.19%	2.81%	2,078		2,059		3.44%	2.65%
Total	$	84,569	$	85,346	3.46%	2.68%	$	84,699	$	82,652	3.59%	2.59%

_______________________


1.	Excludes interest and principal-only strips.

The weighted average life of our interest-only strips was 6.3 and 5.7 years as of September 30, 2013 and December 31, 2012, respectively. The weighted average life of our principal-only strips was 8.4 and 6.4 years as of September 30, 2013 and December 31, 2012, respectively.

Our agency securities classified as available-for-sale are reported at fair value, with unrealized gains and losses excluded from earnings and reported in accumulated OCI. The following table summarizes changes in accumulated OCI, a separate component of stockholders' equity, for our available-for-sale securities for the three and nine months ended September 30, 2013 and 2012 (in millions):



Agency Securities Classified as Available-for-Sale	Beginning Accumulated OCI Balance			Unrealized Gains and (Losses), Net		Reversal of Unrealized (Gains) and Losses, Net on Realization		Ending Accumulated OCI Balance
Three months ended September 30, 2013	$	(1,610	)	100		733		$	(777	)
Three months ended September 30, 2012	$	1,585		1,400		(210	)	$	2,775
Nine months ended September 30, 2013	$	2,040		(3,559	)	742		$	(777	)
Nine months ended September 30, 2012	$	1,002		2,616		(843	)	$	2,775

The following table presents the gross unrealized loss and fair values of our available-for-sale agency securities by length of time that such securities have been in a continuous unrealized loss position as of September 30, 2013 and December 31, 2012 (in millions):



	Unrealized Loss Position For
	Less than 12 Months					12 Months or More					Total
Agency Securities Classified as Available-for-Sale	Estimated Fair Value		Unrealized Loss			Estimated Fair Value		Unrealized Loss			Estimated Fair Value		Unrealized Loss
September 30, 2013	$	43,570	$	(1,340	)	$	296	$	(11	)	$	43,866	$	(1,351	)
December 31, 2012	$	8,430	$	(25	)	$	—	$	—		$	8,430	$	(25	)

As of September 30, 2013 and December 31, 2012, a decision had not been made to sell any of these agency securities and we do not believe it is more likely than not we will be required to sell the agency securities before recovery of their amortized cost basis. The unrealized losses on these agency securities are not due to credit losses given the GSE guarantees, but are rather due to changes in interest rates and prepayment expectations. Accordingly, we did not recognize any OTTI charges on our investment securities for the three and nine months ended September 30, 2013 and 2012. However, as we continue to actively manage our portfolio, we may recognize additional realized losses on our agency securities upon selecting specific securities to sell.

Gains and Losses

The following table is a summary of our net gain (loss) from the sale of agency MBS for the three and nine months ended September 30, 2013 and 2012 (in millions):



	Three Months Ended						Nine Months Ended
Agency MBS	September 30, 2013			September 30, 2012			September 30, 2013			September 30, 2012
Agency MBS sold, at cost	$	(25,147	)	$	(10,172	)	$	(60,541	)	$	(45,258	)
Proceeds from agency MBS sold ⁽¹⁾	24,414			10,382			59,799			46,101
Net (loss) gain on sale of agency MBS	$	(733	)	$	210		$	(742	)	$	843

Gross gain on sale of agency MBS	$	2		$	210		$	183		$	855
Gross loss on sale of agency MBS	(735		)	—			(925		)	(12		)
Net (loss) gain on sale of agency MBS	$	(733	)	$	210		$	(742	)	$	843

________________________


1.	Proceeds include cash received during the period, plus receivable for agency MBS sold during the period as of period end.

For the three and nine months ended September 30, 2013, we recognized an unrealized gain of $14 million and an unrealized loss of $8 million, respectively, and for the three and nine months ended September 30, 2012, we recognized an unrealized gain of $20 million and $19 million, respectively, in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income for the change in value of investments in interest-only and principal-only strips, net of prior period reversals. For the three and nine months ended September 30, 2013 and 2012, we did not recognize any realized gains or losses on our interest-only or principal-only securities.

Pledged Assets

The following tables summarize our assets pledged as collateral under repurchase agreements, debt of consolidated variable interest entities ("VIEs"), derivative agreements and prime broker agreements by type, including securities pledged related to securities sold but not yet settled, as of September 30, 2013 and December 31, 2012 (in millions):



	September 30, 2013
Assets Pledged	Repurchase Agreements		Debt of Consolidated VIEs		Derivative Agreements		Prime Broker Agreements		Total
Agency MBS - fair value	$	81,745	$	1,204	$	51	$	342	$	83,342
U. S. Treasury securities - fair value	4,648		—		62		—		4,710
Accrued interest on pledged securities	237		4		—		1		242
Restricted cash⁽¹⁾	43		—		290		73		406
Total	$	86,673	$	1,208	$	403	$	416	$	88,700

________________________


1.	Restricted cash in the table above excludes net cash received from counterparties recorded as a contra-asset within restricted cash.



	December 31, 2012
Assets Pledged	Repurchase Agreements		Debt of Consolidated VIEs		Derivative Agreements		Prime Broker Agreements		Total
Agency MBS - fair value	$	78,400	$	1,535	$	1,065	$	501	$	81,501
Accrued interest on pledged securities	217		5		3		1		226
Restricted cash	—		—		249		150		399
Total	$	78,617	$	1,540	$	1,317	$	652	$	82,126

The following table summarizes our securities pledged as collateral under repurchase agreements and debt of consolidated VIEs by remaining maturity, including securities pledged related to sold but not yet settled securities, as of September 30, 2013 and December 31, 2012 (in millions):



	September 30, 2013						December 31, 2012
Agency Securities Pledged by Remaining Maturity of Repurchase Agreements and Debt of Consolidated VIEs	Fair Value of Pledged Securities		Amortized Cost of Pledged Securities		Accrued Interest on Pledged Securities		Fair Value of Pledged Securities		Amortized Cost of Pledged Securities		Accrued Interest on Pledged Securities
Agency MBS:
≤ 30 days	$	31,931	$	32,277	$	89	$	29,284	$	28,525	$	82
> 30 and ≤ 60 days	20,926		21,120		57		21,716		21,251		58
> 60 and ≤ 90 days	15,684		15,857		43		16,188		15,780		45
> 90 days	14,408		14,587		40		12,747		12,447		37
Total agency MBS	82,949		83,841		229		79,935		78,003		222
U.S. Treasury securities:
1 day	4,648		4,596		12		—		—		—
Total	$	87,597	$	88,437	$	241	$	79,935	$	78,003	$	222

As of September 30, 2013 and December 31, 2012, none of our repurchase agreement borrowings backed by agency MBS were due on demand or mature overnight.

Securitizations and Variable Interest Entities

As of September 30, 2013 and December 31, 2012, we held investments in CMO trusts, which are VIEs. We have consolidated certain of these CMO trusts in our consolidated financial statements where we have determined we are the primary beneficiary of the trusts. All of our CMO securities are backed by fixed or adjustable-rate agency MBS. Fannie Mae or Freddie Mac guarantees the payment of interest and principal and acts as the trustee and administrator of their respective securitization trusts. Accordingly, we are not required to provide the beneficial interest holders of the CMO securities any financial or other support. Our maximum exposure to loss related to our involvement with CMO trusts is the fair value of the CMO securities and interest and principal-only securities held by us, less principal amounts guaranteed by Fannie Mae and Freddie Mac.

In connection with our consolidated CMO trusts, as of September 30, 2013 and December 31, 2012, we recognized agency securities with a total fair value of $1.2 billion and $1.5 billion, respectively, and debt, at fair value, of $736 million and $937 million, respectively, in our accompanying consolidated balance sheets. As of September 30, 2013 and December 31, 2012, such agency securities had an aggregate unpaid principal balance of $1.1 billion and $1.4 billion, respectively, and such debt had an aggregate unpaid principal balance of $729 million and $908 million, respectively. We re-measure our consolidated debt at fair value through earnings in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income. For the three months ended September 30, 2013, we did not recognize any gain or loss through earnings associated with our consolidated debt. For the nine months ended September 30, 2013, we recognized a net gain of $33 million in earnings associated with our consolidated debt. For the three and nine months ended September 30, 2012, we recognized a net loss of $24 million and $32 million, respectively. Our involvement with the consolidated trusts is limited to the agency securities transferred by us upon the formation of the trusts and the CMO securities subsequently held by us. There are no arrangements that could require us to provide financial support to the trusts.

As of September 30, 2013 and December 31, 2012, the fair value of our CMO securities and interest and principal-only securities, excluding the consolidated CMO trusts discussed above, was $1.7 billion and $719 million, respectively, or $2.2 billion and $1.3 billion, respectively, including the net asset value of our consolidated CMO trusts discussed above. Our maximum exposure to loss related to our CMO securities and interest and principal-only securities, including our consolidated CMO trusts, was $259 million and $343 million as of September 30, 2013 and December 31, 2012, respectively.

Note 5. Repurchase Agreements and Other Debt

We pledge certain of our securities as collateral under repurchase arrangements with financial institutions, the terms and conditions of which are negotiated on a transaction-by-transaction basis. Interest rates on these borrowings are generally based on LIBOR plus or minus a margin and amounts available to be borrowed are dependent upon the fair value of the securities pledged as collateral, which fluctuates with changes in interest rates, type of security and liquidity conditions within the banking, mortgage finance and real estate industries. In response to declines in fair value of pledged securities, lenders may require us to post additional collateral or pay down borrowings to re-establish agreed upon collateral requirements, referred to as margin calls. As of September 30, 2013 and December 31, 2012, we have met all margin call requirements.

The following table summarizes our borrowings under repurchase arrangements and weighted average interest rates classified by remaining maturities as of September 30, 2013 and December 31, 2012 (dollars in millions):



	September 30, 2013					December 31, 2012
Remaining Maturity	Repurchase Agreements		Weighted Average Interest Rate		Weighted Average Days to Maturity	Repurchase Agreements		Weighted Average Interest Rate		Weighted Average Days to Maturity
Agency MBS:
≤ 1 month	$	30,902	0.41	%	15	$	25,473	0.48	%	17
> 1 to ≤ 3 months	26,291		0.42	%	58	30,402		0.49	%	57
> 3 to ≤ 6 months	11,993		0.47	%	137	7,208		0.53	%	128
> 6 to ≤ 9 months	1,943		0.50	%	233	4,509		0.57	%	234
> 9 to ≤ 12 months	2,089		0.54	%	322	2,149		0.60	%	312
> 12 to ≤ 24 months	2,338		0.61	%	543	2,142		0.65	%	591
> 24 to ≤ 36 months	2,221		0.64	%	815	2,492		0.69	%	1,002
> 36 months	604		0.69	%	1,560	102		0.73	%	1,751
Total agency MBS	78,381		0.44	%	112	74,477		0.51	%	118
U.S. Treasury securities:
1 day	4,092		0.10	%	1	$	—	—	%	—
Total / Weighted Average	$	82,473	0.42	%	106	$	74,477	0.51	%	118

As of September 30, 2013 and December 31, 2012, we did not have an amount at risk with any repurchase agreement counterparty greater than 4% of our stockholders’ equity.

As of September 30, 2013 and December 31, 2012, debt of consolidated VIEs, at fair value ("other debt") was $736 million and $937 million, respectively. As of September 30, 2013 and December 31, 2012, our other debt had a weighted average interest rate of LIBOR plus 42 and 43 basis points, respectively, and a principal balance of $729 million and $908 million, respectively. The actual maturities of our other debt are generally shorter than the stated contractual maturities. The actual maturities are affected by the contractual lives of the underlying agency MBS securitizing our other debt and periodic principal prepayments of such underlying securities. The estimated weighted average life of our other debt as of September 30, 2013 was 6.6 years.

As of September 30, 2013 and December 31, 2012, we also had outstanding forward commitments to purchase and sell agency securities, including TBA dollar roll transactions, (see Notes 3 and 6). These transactions represent a form of off-balance sheet financing and serve to either increase, in the case of forward purchases, or decrease, in the case of forward sales, our "at risk" leverage. However, pursuant to ASC 815, we typically account for such transactions as one or more series of derivative transactions and, consequently, they are not included in our on-balance sheet debt or measurement of commensurate leverage ratios.

Note 6. Derivative and Other Hedging Instruments

In connection with our risk management strategy, we hedge a portion of our interest rate risk by entering into derivative and other hedging instrument contracts. We may enter into agreements for interest rate swaps, interest rate swaptions, interest rate cap or floor contracts and futures or forward contracts. We may also purchase or short TBA and U.S. Treasury securities, purchase or write put or call options on TBA securities or we may invest in other types of mortgage derivative securities, such as interest-only securities, and synthetic total return swaps, such as the Markit IOS Index. Our risk management strategy attempts to manage the overall risk of the portfolio, reduce fluctuations in book value and generate additional income distributable to stockholders. For additional information regarding our derivative instruments and our overall risk management strategy, please refer to the discussion of derivative and other hedging instruments in Note 3.

Prior to September 30, 2011, our interest rate swaps were typically designated as cash flow hedges under ASC 815; however, as of September 30, 2011, we elected to discontinue hedge accounting for our interest rate swaps in order to increase our funding flexibility. For the three and nine months ended September 30, 2013 we reclassified $47 million and $144 million, respectively, and for the three and nine months ended September 30, 2012, we reclassified $51 million and $155 million, respectively, of net deferred losses from accumulated OCI into interest expense related to our de-designated interest rate swaps and recognized an equal, but offsetting, amount in other comprehensive income. Our total net periodic interest costs on our swap portfolio was $178

million and $464 million for the three and nine months ended September 30, 2013, respectively, and $125 million and $330 million for the three and nine months ended September 30, 2012, respectively. The difference of $131 million and $320 million for the three and nine months ended September 30, 2013, respectively, and $74 million and $175 million for the three and nine months ended September 30, 2012, respectively, is reported in our accompanying consolidated statements of comprehensive income in gain (loss) on derivative instruments and other securities, net. As of September 30, 2013, the remaining net deferred loss in accumulated OCI related to de-designated interest rate swaps was $341 million and will be reclassified from OCI into interest expense over a remaining weighted average period of 2.3 years. The net deferred loss expected to be reclassified from OCI into interest expense over the next twelve months is $167 million as of September 30, 2013.

For the current and prior years periods presented below, none of our derivative instruments were designated as cash flow hedges under ASC 815.

Derivative Assets (Liabilities), at Fair Value

The table below summarizes fair value information about our derivative assets and liabilities as of September 30, 2013 and December 31, 2012 (in millions):



Derivatives Instruments	Balance Sheet Location	September 30, 2013			December 31, 2012
Interest rate swaps	Derivative assets, at fair value	$	738		$	14
Payer swaptions	Derivative assets, at fair value	374			171
Purchase of TBA and forward settling agency securities	Derivative assets, at fair value	127			116
Sale of TBA and forward settling agency securities	Derivative assets, at fair value	7			—
		$	1,246		$	301
Interest rate swaps	Derivative liabilities, at fair value	$	(652	)	$	(1,243	)
Purchase of TBA and forward settling agency securities	Derivative liabilities, at fair value	(10		)	(1		)
Sale of TBA and forward settling agency securities	Derivative liabilities, at fair value	(320		)	(20		)
U.S. Treasury futures - short	Derivative liabilities, at fair value	(32		)	—
Put option	Derivative liabilities, at fair value	(1		)	—
		$	(1,015	)	$	(1,264	)

Additionally, as of September 30, 2013 and December 31, 2012, we had obligations to return U.S. Treasury securities borrowed under reverse repurchase agreements accounted for as securities borrowing transactions at a fair value of $1.8 billion and $11.8 billion, respectively. The borrowed securities were used to cover short sales of U.S. Treasury securities from which we received total proceeds of $1.8 billion and $11.7 billion, respectively. The change in fair value of the borrowed securities is recorded in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income.

The following tables summarize our interest rate swap agreements outstanding as of September 30, 2013 and December 31, 2012 (dollars in millions):



	September 30, 2013
Interest Rate Swaps	Notional Amount		Average Fixed Pay Rate		Average Receive Rate		Net Estimated Fair Value			Average Maturity (Years)
≤ 3 years	$	18,050	1.50	%	0.20	%	$	(416	)	1.8
> 3 to ≤ 5 years	13,500		1.19	%	0.26	%	(9		)	4.1
> 5 to ≤ 7 years	5,450		1.71	%	0.28	%	30			5.9
> 7 to ≤ 10 years	10,450		2.16	%	0.27	%	373			9.3
> 10 years	2,750		2.91	%	0.26	%	108			15.2
Total Payer Interest Rate Swaps	$	50,200	1.65	%	0.24	%	$	86		5.2



	December 31, 2012
Interest Rate Swaps ⁽¹⁾	Notional Amount		Average Fixed Pay Rate	Average Receive Rate	Net Estimated Fair Value			Average Maturity (Years)
≤ 3 years	$	14,600	1.23%	0.26%	$	(294	)	2.0
> 3 to ≤ 5 years	20,250		1.48%	0.29%	(666		)	4.1
> 5 to ≤ 7 years	5,600		1.53%	0.34%	(163		)	6.1
> 7 to ≤ 10 years	5,200		1.89%	0.35%	(113		)	9.2
> 10 years	1,200		1.79%	0.31%	7			10.2
Total Payer Interest Rate Swaps	$	46,850	1.46%	0.29%	$	(1,229	)	4.4

________________________


1.	Amounts include forward starting swaps of $1.7 billion ranging up to four months from December 31, 2012.

The following tables summarize our interest rate swaption agreements outstanding as of September 30, 2013 and December 31, 2012 (dollars in millions):



	September 30, 2013
	Option					Underlying Swap
Payer Swaptions	Cost		Fair Value		Average Months to Expiration	Notional Amount		Average Fixed Pay Rate	Average Receive Rate (LIBOR)	Average Term (Years)
≤ 1 year	$	240	$	169	6	$	13,150	2.71%	3M	7.7
> 1 to ≤ 2 years	123		117		21	4,850		3.17%	3M	5.7
> 2 to ≤ 3 years	47		62		32	1,600		3.60%	3M	6.1
> 3 to ≤ 4 years	7		12		41	300		3.27%	3M	5.0
> 4 to ≤ 5 years	8		14		51	300		3.76%	3M	5.7
Total/Wtd Avg	$	425	$374		13	$	20,200	2.92%	3M	7.0



	December 31, 2012
	Option					Underlying Swap
Payer Swaptions	Cost		Fair Value		Average Months to Expiration	Notional Amount		Average Fixed Pay Rate	Average Receive Rate (LIBOR)	Average Term (Years)
≤ 1 year	$	76	$	15	4	$	5,150	2.65%	1M / 3M	8.6
> 1 to ≤ 2 years	65		34		19	4,050		2.82%	3M	6.7
> 2 to ≤ 3 years	97		87		33	3,900		3.51%	3M	8.6
> 3 to ≤ 4 years	12		11		46	450		3.20%	3M	6.1
> 4 to ≤ 5 years	24		24		59	900		3.33%	3M	5.0
Total/Wtd Avg	$	274	$	171	21	$	14,450	2.99%	1M / 3M	7.8

The following table summarizes our contracts to purchase and sell TBA and specified agency securities on a forward basis as of September 30, 2013 and December 31, 2012 (in millions):



	September 30, 2013												December 31, 2012
Purchase and Sale Contracts for TBAs and Forward Settling Securities	Notional Amount ⁽¹⁾			Cost Basis ⁽²⁾			Market Value ⁽³⁾			Net Carrying Value ⁽⁴⁾			Notional Amount ⁽¹⁾			Cost Basis ⁽²⁾			Market Value ⁽³⁾			Net Carrying Value ⁽⁴⁾
TBA securities:
Purchase contracts	$	4,816		$	4,885		$	5,002		$	117		$	21,705		$	22,603		$	22,719		$	116
Sale contracts	(12,142		)	(11,945		)	(12,258		)	(313		)	(9,378		)	(9,991		)	(10,011		)	(20		)
TBA securities, net ⁽⁵⁾	(7,326		)	(7,060		)	(7,256		)	(196		)	12,327			12,612			12,708			96
Forward settling securities:
Purchase contracts	—			—			—			—			150			163			162			(1		)
Forward settling securities, net ⁽⁶⁾	—			—			—			—			150			163			162			(1		)
Total TBA and forward settling securities, net	$	(7,326	)	$	(7,060	)	$	(7,256	)	$	(196	)	$	12,477		$	12,775		$	12,870		$	95

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1.	Notional amount represents the par value (or principal balance) of the underlying agency security.


2.	Cost basis represents the forward price to be paid/(received) for the underlying agency security.


3.	Market value represents the current market value of the TBA contract (or of the underlying agency security) 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 derivative assets / (liabilities), at fair value in our consolidated balance sheets.


5.	Includes 15-year and 30-year TBA securities of varying coupons


6.	Includes 30-year fixed securities of varying coupons

Gain (Loss) From Derivative Instruments and Other Securities, Net

The tables below summarize the effect of derivative instruments on our consolidated statements of comprehensive income for the three and nine months ended September 30, 2013 and 2012 (in millions):



	Three Months Ended September 30, 2013
Derivative and Other Hedging Instruments	Notional Amount Long/(Short) June 30, 2013			Additions		Settlement, Termination, Expiration or Exercise		Notional Amount Long/(Short)September 30, 2013			Amount of Gain/(Loss) Recognized in Income on Derivatives⁽¹⁾
Net TBA and forward settling agency securities	$	14,408		(33,697	)	11,963		$	(7,326	)	$	(82	)
Interest rate swaps	$	(55,650	)	(850	)	6,300		$	(50,200	)	(222		)
Payer swaptions	$	(23,750	)	(9,450	)	13,000		$	(20,200	)	(134		)
U.S. Treasury securities - short position	$	(10,477	)	(11,266	)	19,833		$	(1,910	)	90
U.S. Treasury securities - long position	$	3,750		12,350		(11,249	)	$	4,851		46
U.S. Treasury futures contracts - short position	$	(2,430	)	(3,730	)	4,430		$	(1,730	)	(49		)
TBA put option	$	—		(50	)	—		$	(50	)	—
											$	(351	)

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1.	Excludes a net gain of $14 million from interest-only and principal-only securities re-measured at fair value through earnings and other miscellaneous net losses of $2 million recognized in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income.

Three Months Ended September 30, 2012

Derivative and Other Hedging Instruments

Notional Amount
Long/(Short)
June 30, 2012

Additions

Settlement, Termination,

Expiration or

Exercise

Notional Amount Long/(Short)September 30, 2012