Portfolio/Operational Risk Management

Risk management and mitigation is a core focus of AGNC and is one of the pillars of our value proposition to our stockholders.  We utilize a comprehensive risk management framework that is predicated on careful asset selection, disciplined hedging and diversified funding to preserve our net asset value over a wide range of market scenarios and deliver attractive results to our stockholders.

We employ an active management strategy designed to achieve our principal objectives of generating attractive risk-adjusted returns and managing our net book value within reasonable bands. We invest in securities based on our assessment of the relative risk-return profile of the securities and our ability to effectively hedge a portion of the securities’ exposure to market risks. The composition of our portfolio and strategies that we use will vary based on our view of prevailing market conditions and the availability of suitable investment, hedging and funding opportunities.

As a REIT, we are exposed to market risks, primarily interest rate risk and associated risks, including prepayment and extension risk, as well as credit risk, and therefore use a variety of strategies to reduce our exposure to these risks.  Our investment strategies are based on our assessment of these risks, the cost of hedging transactions and our intention to qualify as a REIT.

Interest Rate Risk
We seek to manage interest rate risk, and the associated prepayment and extension risks, by primarily utilizing instruments to hedge a portion of our exposure to these risks, mainly through interest rate swaps and interest rate swaptions.  We also utilize TBA contracts, U.S. Treasury securities, and U.S. Treasury futures contracts, primarily through short sales.

Credit Risk
We seek to manage credit risk through prudent asset selection, pre-acquisition due diligence, post-acquisition performance monitoring, and sale of assets where we identify negative credit trends.  We may also manage credit risk with credit default swaps or other financial derivatives that we believe are appropriate.  Additionally, we may vary the mix of our Agency and non-Agency mortgage investments or our duration gap, when we believe credit performance is inversely correlated with changes in interest rates, to adjust our credit exposure and/or to improve the return profile of our investment portfolio.

Cyber Security Risk
In addition to market risks, we seek to mitigate cyber security risk through information systems, software, tools and monitoring to provide security for the processing, encryption, transmission and storage of confidential data. We contract with third party security firms to provide threat detection and conduct annual testing on our systems.  The Board reviews cyber security and receives reports from the Company’s Senior Vice President for Information Technology on an annual basis as well when necessary.  Although our primary business involves investment in mortgages and mortgage-related instruments, we do not receive personal information on individual mortgage borrowers as part of our regular operations, as we do not perform mortgage servicing, maintain customer accounts, or provide any direct mortgage lending.