NOTE 8 — DERIVATIVES

The following table presents the total notional and fair values of the Company’s derivatives as of September 30, 2015 and December 31, 2014:




	Fair Values of Derivative Instruments
	September 30, 2015						December 31, 2014
	Notional Amount		Fair Value				Notional Amount		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	$	114,088	$	—	$	3,339	$	132,667	$	—	$	9,922
Total derivatives designated as hedging instruments	$	114,088	$	—	$	3,339	$	132,667	$	—	$	9,922
Derivatives not designated as hedging instruments:
Foreign exchange options	$	—	$	—	$	—	$	85,614	$	6,136	$	—
Embedded derivative liabilities	—		—		—		47,838		—		3,392
Interest rate swaps and caps	6,063,494		86,954		87,330		4,858,391		41,534		41,779
Foreign exchange contracts	817,133		9,745		12,373		680,629		8,118		9,163
Total derivatives not designated as hedging instruments	$	6,880,627	$	96,699	$	99,703	$	5,672,472	$	55,788	$	54,334


(1)	Derivative assets are included in Other Assets. Derivative liabilities are included in Accrued Expenses and Other liabilities, and Interest-Bearing Deposits.

Derivatives Designated as Hedging Instruments

Interest Rate Swaps on Certificates of Deposit — The Company is exposed to changes in the fair value of certain fixed rate certificates of deposit 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 deposit have the same maturity dates.

The total notional amounts of the interest rate swaps on certificates of deposit were $114.1 million and $132.7 million, as of September 30, 2015 and December 31, 2014, respectively. The fair value liabilities of the interest rate swaps were $3.3 million and $9.9 million as of September 30, 2015 and December 31, 2014, respectively. In order to realign the hedged notional of the interest rate swaps against the outstanding balances of the related certificates of deposit, the Company dedesignated certain existing hedge relationships of its fixed rate certificates of deposit and simultaneously redesignated them as new hedge relationships during the three and nine months ended September 30, 2015.

The following table presents the net gains (losses) recognized in the Consolidated Statements of Income related to derivatives designated as hedging instruments for the three and nine months ended September 30, 2015 and 2014:




	Three Months Ended September 30,						Nine Months Ended September 30,
($ in thousands)	2015			2014			2015			2014
Gains (losses) recorded in interest expense
Recognized on interest rate swaps	$	4,616		$	(1,668	)	$	5,336		$	4,082
Recognized on certificates of deposit	(4,247		)	1,441			(4,647		)	(3,949		)
Net amount recognized on fair value hedges (ineffective portion)	$	369		$	(227	)	$	689		$	133

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 deposit available to its customers. These certificates of deposit 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.

All of the Company’s foreign exchange option contracts have expired as of September 30, 2015. In addition, there were no embedded derivative liabilities as of September 30, 2015. As of December 31, 2014, the notional amounts and fair values of the foreign exchange options were $85.6 million and a $6.1 million asset, respectively, while the notional amounts and fair values of the embedded derivative liabilities were $47.8 million and a $3.4 million liability, respectively.

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 mirrored interest rate contracts with institutional counterparties. As of September 30, 2015, the total notional amounts of interest rate swaps and caps, including mirrored transactions with institutional counterparties and the Company’s customers totaled $3.00 billion for derivatives that were in an asset valuation position and $3.06 billion for derivatives that were in a liability valuation position. As of December 31, 2014, the total notional amounts of interest rate swaps and caps, including mirrored 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 $87.0 million asset and a $87.3 million liability as of September 30, 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 foreign exchange forward contracts on a regular basis to economically hedge against foreign exchange rate fluctuations. A majority of these contracts have original maturities of one year or less. As of September 30, 2015 and December 31, 2014, the notional amounts of short-term foreign exchange contracts were $817.1 million and $680.6 million, respectively. The fair values of the short-term foreign exchange contracts recorded were a $9.7 million asset and a $12.4 million liability as of September 30, 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 for the three and nine months ended September 30, 2015 and 2014:




	Location in Consolidated Statements of Income	Three Months Ended September 30,						Nine Months Ended September 30,
($ in thousands)	Location in Consolidated Statements of Income	2015			2014			2015			2014
Derivatives not designated as hedging instruments:
Foreign exchange options	Foreign exchange income	$	—		$	37		$	236		$	91
Embedded derivative liabilities	Other operating expense	—			5			(136		)	2
Interest rate swaps and caps	Other fees and other operating income	(864		)	272			(243		)	(794		)
Foreign exchange contracts	Foreign exchange income	(3,764		)	(597		)	(1,548		)	(3,226		)
Total net losses		$	(4,628	)	$	(283	)	$	(1,691	)	$	(3,927	)

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 event that the credit rating of East West Bank falls 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 September 30, 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 on 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:




($ in thousands)	As of September 30, 2015
	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 Sheet
Assets	Gross Amounts of Recognized Assets		Gross Amounts Offset on the Consolidated Balance Sheet				Financial Instruments				Collateral Received				Net Amount
Derivatives	$	6,510	$	—	$	6,510	$	(4,880	)	⁽¹⁾	$	(1,409	)	⁽²⁾	$	221

	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 Sheet
Liabilities	Gross Amounts of Recognized Liabilities		Gross Amounts Offset on the Consolidated Balance Sheet				Financial Instruments				Collateral Posted				Net Amount
Derivatives	$	98,748	$	—	$	98,748	$	(4,880	)	⁽¹⁾	$	(90,622	)	⁽³⁾	$	3,246




($ in thousands)	As of December 31, 2014
	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 Sheet
Assets	Gross Amounts of Recognized Assets		Gross Amounts Offset on the Consolidated Balance Sheet				Financial Instruments				Collateral Received				Net Amount
Derivatives	$	12,383	$	—	$	12,383	$	(5,718	)	⁽¹⁾	$	(3,460	)	⁽²⁾	$	3,205

	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 Sheet
Liabilities	Gross Amounts of Recognized Liabilities		Gross Amounts Offset on the Consolidated Balance Sheet				Financial Instruments				Collateral Posted				Net Amount
Derivatives	$	56,493	$	—	$	56,493	$	(5,718	)	⁽¹⁾	$	(49,948	)	⁽³⁾	$	827


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


(2)	Represents $1.4 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 September 30, 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 $24.7 million and $12.5 million of cash collateral posted as of September 30, 2015 and December 31, 2014, respectively.

Refer to Note 4 — Fair Value Measurement and Fair Value of Financial Instruments to the Consolidated Financial Statements for fair value measurement disclosures on derivatives.