NOTE 8 — DERIVATIVE FINANCIAL INSTRUMENTS

The following table presents the total notional and fair values of the Company’s derivatives as of March 31, 2015 and December 31, 2014:


	Fair Values of Derivative Instruments
	March 31, 2015						December 31, 2014
			Fair Value						Fair Value
($ in thousands)	Notional Amount		Derivative Assets (1)		Derivative Liabilities (1)		Notional Amount		Derivative Assets (1)		Derivative Liabilities (1)
Derivatives designated as hedging instruments:
Interest rate swaps on certificates of deposit	$	129,096	$	—	$	6,370	$	132,667	$	—	$	9,922
Total derivatives designated as hedging instruments	$	129,096	$	—	$	6,370	$	132,667	$	—	$	9,922
Derivatives not designated as hedging instruments:
Foreign exchange options	$	50,000	$	3,683	$	—	$	85,614	$	6,136	$	—
Embedded derivative liabilities	47,794		—		3,412		47,838		—		3,392
Interest rate swaps and caps	5,204,760		66,060		66,914		4,858,391		41,534		41,779
Foreign exchange contracts	1,037,967		13,340		13,080		680,629		8,123		9,171
Total derivatives not designated as hedging instruments	$	6,340,521	$	83,083	$	83,406	$	5,672,472	$	55,793	$	54,342

(1)

Derivative assets are included in Other Assets. Derivative liabilities are included in Accrued Expenses and 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 the first quarter of 2015, the Company terminated $3.6 million of interest rate swaps on certificates of deposits, as a result of certificate of deposit repurchases. As of March 31, 2015 and December 31, 2014, the total notional amounts of interest rate swaps on certificates of deposits were $129.1 million and $132.7 million, respectively. The fair value liabilities of the interest rate swaps were $6.4 million and $9.9 million as of March 31, 2015 and December 31, 2014, respectively.

The following table presents the net gains (losses) recognized in the consolidated statements of income for the three months ended March 31, 2015 and 2014:


	Three Months Ended March 31,
($ in thousands)	2015		2014
Gains (losses) recorded in interest expense
Recognized on interest rate swaps	$	3,048	$	2,704
Recognized on certificates of deposits	(2,695)		(2,937		)
Net amount recognized on fair value hedges (ineffective portion)	$	353	$	(233	)
Reduction in interest expense recognized on interest rate swaps	$	920	$	1,824

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 March 31, 2015 and December 31, 2014, the notional amounts of the foreign exchange options were $50.0 million and $85.6 million, respectively. As of both March 31, 2015 and December 31, 2014, the notional amounts of the embedded derivative liabilities were $47.8 million. The fair values of the foreign exchange options and the embedded derivative liabilities amounted to a $3.7 million asset and a $3.4 million liability, respectively, as of March 31, 2015. The fair values of the foreign exchange options and embedded derivative liabilities amounted to a $6.1 million asset and a $3.4 million liability, respectively, as of December 31, 2014.

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 March 31, 2015, the total notional amounts of interest rate swaps and caps, including mirror transactions with institutional counterparties and the Company’s customers totaled $2.60 billion each for derivatives that were in an asset and a liability valuation position. 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 $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.

The fair values of interest rate swap and cap contracts with institutional counterparties and the Company’s customers amounted to a $66.1 million asset and a $66.9 million liability as of March 31, 2015. 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.

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 March 31, 2015 and December 31, 2014, the notional amounts of short-term foreign exchange contracts were $1.04 billion and $680.6 million, respectively. The fair values of the short-term foreign exchange contracts recorded were a $13.3 million asset and a $13.1 million liability as of March 31, 2015. The fair values of short-term foreign exchange contracts recorded were an $8.1 million asset and a $9.2 million liability as of December 31, 2014.

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


	Location in	Three Months Ended March 31,
	Consolidated
($ in thousands)	Statements of Income	2015		2014
Derivatives not designated as hedging instruments:
Foreign exchange options	Foreign exchange income	$	199	$	(119	)
Foreign exchange options with embedded derivatives	Other operating expense	(141)		1
Interest rate swaps and caps	Other operating income	(594)		(936		)
Foreign exchange contracts	Foreign exchange income	1,308		(2,129		)
Total net gains (losses)		$	772	$	(3,183	)

Credit-Risk-Related Contingent Features — Certain over-the-counter (“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 rating of East West Bank to below investment grade. In the event that East West Bank’s credit rating is downgraded to below investment grade, no additional collateral would be required to be posted since the liabilities related to such contracts were fully collateralized as of March 31, 2015 and December 31, 2014.

Offsetting of 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 collaterals 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:


($ in thousands)	As of March 31, 2015
			Gross Amounts		Net Amounts of Assets Presented		Gross Amounts Not Offset on the Consolidated Balance Sheet
Assets	Gross Amounts of Recognized Assets		Offset on the Consolidated Balance Sheet		on the Consolidated Balance Sheet		Financial Instruments			Collateral Received			Net Amount
Derivatives	$	13,564	$	—	$	13,564	$	(6,002)	(1)	$	(6,480)	(2)	$	1,082

					Net Amounts of Liabilities		Gross Amounts Not Offset on the Consolidated Balance Sheet
Liabilities	Gross Amounts of Recognized Liabilities		Gross Amounts Offset on the Consolidated Balance Sheet		Presented on the Consolidated Balance Sheet		Financial Instruments			Collateral Posted			Net Amount
Derivatives	$	79,890	$	—	$	79,890	$	(6,002)	(1)	$	(72,018)	(3)	$	1,870




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

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

(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 $6.5 million and $3.5 million of cash collateral received against derivative assets with the same counterparty that are subject to enforceable master netting arrangements as of March 31, 2015 and December 31, 2014, respectively.

(3)

Represents cash and securities pledged against derivative liabilities with the same counterparty that are subject to enforceable master netting arrangements. Includes approximately $19.0 million and $12.8 million of cash collateral posted as of March 31, 2015 and December 31, 2014, respectively.

Refer to Note 4 for fair value measurement disclosures on derivatives.