TBA Dollar Roll Transactions
TBA dollar roll transactions represent a form of off-balance sheet financing accounted for as derivative instruments and we may use them as a means of leveraging (or deleveraging) our investment portfolio through the use of long (or short) TBA contracts. (See Notes 3 and 6 in the accompanying consolidated financial statements in this Quarterly Report on Form 10-Q). Inclusive of our net TBA position, as of March 31, 2015, our total "at risk" leverage was 6.4 times our stockholders' equity.
Under certain market conditions, it may be uneconomical for us to roll our TBA contracts into future months and we may need to take or make physical delivery of the underlying securities. If we were required to take physical delivery to settle a long TBA contract, we would have to fund our total purchase commitment with cash or other financing sources and our liquidity position could be negatively impacted. As of March 31, 2015, we had a net long TBA position with a market value and a total contract price of $4.9 billion and $4.8 billion, respectively, and a total net carrying value of $79 million recognized in derivative assets/(liabilities), at fair value on our consolidated balance sheets in this Quarterly Report on Form 10-Q.
Our TBA dollar roll contracts are also subject to margin requirements governed by the Mortgage-Backed Securities Division ("MBSD") of the Fixed Income Clearing Corporation and by our prime brokerage agreements, which may establish margin levels in excess of the MBSD. Such provisions require that we establish an initial margin based on the notional value of the TBA contract, which is subject to increase if the estimated fair value of our TBA contract or the estimated fair value of our pledged collateral declines. The MBSD has the sole discretion to determine the value of our TBA contracts and of the pledged collateral securing such contracts. In the event of a margin call, we must generally provide additional collateral on the same business day.
Settlement of our TBA obligations by taking delivery of the underlying securities as well as satisfying margin requirements could negatively impact our liquidity position. However, since we do not use TBA dollar roll transactions as our primary source of financing, we believe that we will have adequate sources of liquidity to meet such obligations.
Federal Home Loan Bank Membership
In April 2015, our wholly-owned captive insurance subsidiary, Old Georgetown Insurance Co., LLC ("AGNC Captive"), was approved as a member of the Federal Home Loan Bank ("FHLB") of Des Moines. The 12 regional FHLBs provide a variety of products and services to their members, including long-term and short-term secured loans, called "advances." FHLB members may use a variety of real estate related assets, including agency MBS, as collateral for such advances. Membership in the FHLB obligates AGNC Captive to purchase membership stock and activity-based stock in the FHLB, the latter dependent upon the aggregate amount of advances obtained from the FHLB.
FHLB advances collateralized by agency MBS typically require higher effective "haircuts" than those required under our current repurchase agreements as a result of the slightly higher haircuts implemented by the FHLB, coupled with the requirement to acquire activity-based stock in the FHLB concurrent with such borrowings. Consequently, we do not currently anticipate FHLB advances to serve as a primary source of funding for our investment portfolio. In addition, the FHLBs determine the fair value of the securities pledged as collateral and retain the right to adjust collateral haircuts during the term of secured borrowings.
In September 2014, the Federal Housing Financing Authority ("FHFA") issued a Notice of Proposed Rulemaking and Request for Comments Involving Proposed Changes to Regulations Concerning Federal Home Loan Bank Membership Criteria (the "Proposed Rule"). If enacted, the Proposed Rule, among other things, would immediately terminate the membership of captive insurance companies that became members of the FHLB system after publication of the Proposed Rule, which would include AGNC Captive. If AGNC Captive's membership in the FHLB were terminated, the FHLB would have up to five years to redeem the FHLB stock that AGNC Captive purchased and owns as the result of its membership and level of FHLB activity. In addition, if such membership were terminated, AGNC Captive could be required to immediately unwind any outstanding debt advances from the FHLB. It is unclear at this point whether the Proposed Rule will be enacted in its current form. The ultimate content of any rule enacted by FHFA with respect to captive insurance company membership in FHLBs, FHLB advance requirements or standards, or similar matters could have a material impact on AGNC Captive’s ability to procure funding through the FHLB, which could cause us to experience losses and may have a material adverse effect on our business to the extent of our reliance on FHLB advances.