NOTE 7 — DERIVATIVES

The following table presents the total notional and fair values of the Company’s derivatives as of December 31, 2014 and 2013.




	December 31, 2014						December 31, 2013
	Notional Amount		Fair Value				Notional Amount		Fair Value
	Notional Amount		Derivative Assets (1)		Derivative Liabilities (1)		Notional Amount		Derivative Assets (1)		Derivative Liabilities (1)
	(In thousands)
Derivatives designated as hedging instruments:
Interest rate swaps on certificates of deposits	$	132,667	$	—	$	9,922	$	135,000	$	—	$	16,906
Total derivatives designated as hedging instruments	$	132,667	$	—	$	9,922	$	135,000	$	—	$	16,906
Derivatives not designated as hedging instruments:
Foreign exchange options	$	85,614	$	6,136	$	—	$	85,614	$	6,290	$	—
Embedded derivative liabilities	47,838		—		3,392		51,505		—		3,655
Interest rate swaps and caps	4,858,391		41,534		41,779		3,834,072		28,078		26,352
Foreign exchange contracts	680,629		8,123		9,171		635,428		6,181		3,349
Total derivatives not designated as hedging instruments	$	5,672,472	$	55,793	$	54,342	$	4,606,619	$	40,549	$	33,356

(1) Derivative assets are included in other assets. Derivative liabilities are included in other liabilities and deposits.

Derivatives Designated as Hedging Instruments

Interest Rate Swaps on Certificates of Deposits — The Company is exposed to changes in the fair value of certain fixed rate certificates of deposits due to changes in the benchmark interest rate, London Interbank Offering Rate (“LIBOR”). Interest rate swaps designated as fair value hedges involve the receipt of fixed rate amounts from a counterparty in exchange for the Company making variable-rate payments over the life of the agreements without the exchange of the underlying notional amount. The interest rate swaps and the related certificates of deposits have the same maturity dates.

In 2014, the Company undesignated one of its existing hedged relationships and simultaneously redesignated into a new hedging relationship in order to realign the hedged notional of its interest rate swap against the outstanding notional balance of the related certificate of deposit, as a result of cumulative death puts on the certificate of deposit. As of December 31, 2014 and 2013, the total notional amounts of the interest rate swaps on certificates of deposits were $132.7 million and $135.0 million, respectively. The fair value liabilities of the interest rate swaps were $9.9 million and $16.9 million as of December 31, 2014 and 2013, respectively.

The following table presents the net gains (losses) recognized in the consolidated statements of income for the years ended December 31, 2014, 2013 and 2012:



	Years ended December 31,
	2014			2013			2012
	(In thousands)
Gains (losses) recorded in interest expense:
Recognized on interest rate swaps	$	6,885		$	(9,255	)	$	(1,076	)
Recognized on certificates of deposits	(6,784		)	9,675			4,686
Net amount recognized on fair value hedges (ineffective portion)	$	101		$	420		$	3,610

Net interest expense recognized on interest rate swaps	$	(6,703	)	$	(3,153	)	$	(3,793	)

Derivatives Not Designated as Hedging Instruments

Foreign Exchange Options — During 2010, the Company entered into foreign exchange option contracts with major brokerage firms to economically hedge against foreign exchange fluctuations in certain certificates of deposits available to its customers. These certificates of deposits have a term of 5 years and pay interest based on the performance of the RMB relative to the USD. Under ASC 815, a certificate of deposit that pays interest based on changes in foreign exchange rates is a hybrid instrument with an embedded derivative that must be accounted for separately from the host contract (i.e., the certificate of deposit). In accordance with ASC 815, both the embedded derivative instruments and the freestanding foreign exchange option contracts are recorded at fair value.

As of December 31, 2014 and 2013, the notional amounts of the foreign exchange options were $85.6 million. As of December 31, 2014 and 2013, the notional amounts of the embedded derivative liabilities were $47.8 million and $51.5 million, respectively. The fair values of the foreign exchange options and the embedded derivative liabilities amounted to a $6.1 million asset and a $3.4 million liability, respectively, as of December 31, 2014. The fair values of the foreign exchange options and embedded derivative liabilities amounted to a $6.3 million asset and a $3.7 million liability, respectively, as of December 31, 2013.

Interest Rate Swaps and Caps — The Company enters into interest rate derivatives including interest rate swaps and caps with its customers to allow them to hedge against the risk of rising interest rates on their variable rate loans. To economically hedge against the interest rate risks in the products offered to its customers, the Company enters into mirror interest rate contracts with institutional counterparties. As of December 31, 2014, the total notional amounts of interest rate swaps and caps, including mirror transactions with institutional counterparties and the Company’s customers totaled to $2.45 billion for derivatives that were in an asset valuation position and $2.40 billion for derivatives that were in a liability valuation position. As of December 31, 2013, the total notional amounts of interest rate swaps and caps, including mirror transactions with institutional counterparties and the Company’s customers totaled to $1.92 billion for derivatives that were in an asset valuation position and $1.91 billion for derivatives that were in a liability valuation position.

The fair values of interest rate swap and cap contracts with institutional counterparties and the Company’s customers amounted to a $41.5 million asset and a $41.8 million liability as of December 31, 2014. The fair values of interest rate swap and cap contracts with institutional counterparties and the Company’s customers amounted to a $28.1 million asset and a $26.4 million liability as of December 31, 2013.

Foreign Exchange Contracts — The Company enters into short-term foreign exchange forward contracts on a regular basis to economically hedge against foreign exchange rate fluctuations. As of December 31, 2014 and 2013, the notional amounts of short-term foreign exchange contracts were $680.6 million and $607.9 million, respectively. The fair values of the short-term foreign exchange contracts recorded were an $8.1 million asset and a $9.2 million liability as of December 31, 2014. The fair values of short-term foreign exchange contracts recorded were a $6.2 million asset and a $3.3 million liability as of December 31, 2013.

The Company also enters into long-term foreign exchange contracts to purchase/sell foreign currencies at set rates in the future. There was no long-term foreign exchange contract outstanding as of December 31, 2014. As of December 31, 2013, the notional amounts of long-term foreign exchange contracts totaled $27.5 million. The fair values of long-term foreign exchange contracts amounted to a $200 thousand asset and a $183 thousand liability as of December 31, 2013.

Equity Swap Agreements — In December 2007, the Company entered into two equity swap agreements with a major investment brokerage firm to economically hedge against market fluctuations in a promotional equity index certificate of deposit product offered to bank customers which has a term of 5 years and pays interest based on the performance of the Hang Seng China Enterprise Index. Under ASC 815, a certificate of deposit that pays interest based on changes in an equity index is a hybrid instrument with an embedded derivative (i.e. equity call option) that must be accounted for separately from the host contract (i.e. the certificate of deposit). In accordance with ASC 815, both the embedded equity call options on the certificates of deposit and the freestanding equity swap agreements are marked-to-market each reporting period with resulting changes in fair value recorded in the consolidated statements of income. These equity swap agreements matured during 2012.

The following table presents the net (losses) gains recognized in the Company’s consolidated statements of income related to derivatives not designated as hedging instruments.



	Location in Consolidated Statements of Income	Year Ended December 31,
	Location in Consolidated Statements of Income	2014			2013		2012
		(In thousands)
Derivatives not designated as hedging instruments:
Equity swap agreements	Other operating income	$	—		$	—	$	2
Foreign exchange options	Foreign exchange income	103			653		389
Foreign exchange options with embedded derivatives	Other operating expense	5			23		101
Interest rate swaps and caps	Other operating income	(1,865		)	1,582		592
Foreign exchange contracts	Foreign exchange income	(3,880		)	2,624		(228		)
	Total net (losses)	$	(5,637	)	$	4,882	$	856

Credit-Risk-Related Contingent Features — Certain OTC derivative contracts of the Company contain early termination provisions that may require the Company to settle any outstanding balances upon the occurrence of a specified credit-risk-related event. These events, which are defined by the existing derivative contracts, primarily relate to downgrades in the credit ratings of East West Bank to below investment grade. In the event that East West Bank’s credit rating had been downgraded to below investment grade, no additional collateral would have been required to be posted since the liabilities related to such contracts were fully collateralized as of December 31, 2014 and 2013.

Balance Sheet Offsetting

Derivatives — The Company has entered into agreements with counterparty financial institutions, which include master netting agreements. However, the Company has elected to account for all derivatives with counterparty institutions on a gross basis. The following tables present gross derivatives in the consolidated balance sheets and the respective collateral received or pledged in the form of other financial instruments, which are generally marketable securities and/or cash. The collateral amounts in these tables are limited to the outstanding balances of the related asset or liability (after netting is applied); thus instances of overcollateralization are not shown.



	As of December 31, 2014
	(In thousands)
	Gross Amounts of Recognized Assets		Gross Amounts Offset on the Consolidated Balance Sheet		Net Amounts of Assets Presented on the Consolidated Balance Sheet		Gross Amounts Not Offset on the Consolidated Balance Sheets
Assets	Gross Amounts of Recognized Assets		Gross Amounts Offset on the Consolidated Balance Sheet				Financial Instruments				Collateral Received				Net Amount
Derivatives	$	12,396	$	—	$	12,396	$	(5,725	)	⁽¹⁾	$	(3,463	)	⁽²⁾	$	3,208

	Gross Amounts of Recognized Liabilities		Gross Amounts Offset on the Consolidated Balance Sheet		Net Amounts of Liabilities Presented on the Consolidated Balance Sheet		Gross Amounts Not Offset on the Consolidated Balance Sheets
Liabilities	Gross Amounts of Recognized Liabilities		Gross Amounts Offset on the Consolidated Balance Sheet				Financial Instruments				Collateral Posted				Net Amount
Derivatives	$	56,505	$	—	$	56,505	$	(5,725	)	⁽¹⁾	$	(49,951	)	⁽³⁾	$	829



	As of December 31, 2013
	(In thousands)
	Gross Amounts of Recognized Assets		Gross Amounts Offset on the Consolidated Balance Sheet		Net Amounts of Assets Presented on the Consolidated Balance Sheet		Gross Amounts Not Offset on the Consolidated Balance Sheets
Assets	Gross Amounts of Recognized Assets		Gross Amounts Offset on the Consolidated Balance Sheet				Financial Instruments				Collateral Received				Net Amount
Derivatives	$	16,043	$	—	$	16,043	$	(11,363	)	⁽¹⁾	$	(4,680	)	⁽²⁾	$	—

	Gross Amounts of Recognized Liabilities		Gross Amounts Offset on the Consolidated Balance Sheet		Net Amounts of Liabilities Presented on the Consolidated Balance Sheet		Gross Amounts Not Offset on the Consolidated Balance Sheets
Liabilities	Gross Amounts of Recognized Liabilities		Gross Amounts Offset on the Consolidated Balance Sheet				Financial Instruments				Collateral Posted				Net Amount
Derivatives	$	33,849	$	—	$	33,849	$	(11,363	)	⁽¹⁾	$	(22,486	)	⁽³⁾	$	—


(1)	Represents the netting of derivative receivable and payable balance for the same counterparty under enforceable master netting arrangements if the Company has elected to net.


(2)	Represents cash and securities received against derivative assets with the same counterparty that are subject to enforceable master netting arrangements. Includes approximately $3.5 million of cash collateral received as of December 31, 2014.


(3)	Represents cash and securities pledged against derivative liabilities with the same counterparty that are subject to enforceable master netting arrangements. Includes approximately $12.8 million and $187 thousand of cash collateral posted as of December 31, 2014 and December 31, 2013, respectively.

Refer to Note 1 for the Company’s accounting policy on derivatives and Note 3 for fair value measurement disclosures on derivatives.