Note 7 — Derivatives

The Company uses derivatives to manage exposure to market risk, primarily including interest rate risk and foreign currency risk, and to assist customers with their risk management objectives. The Company’s goal is to manage interest rate sensitivity and volatility so that movements in interest rates are not significant to earnings or capital. The Company also uses foreign exchange contracts to manage the foreign exchange risk associated with certain foreign currency-denominated assets and liabilities, as well as the Company’s investment in its China subsidiary, East West Bank (China) Limited. The Company recognizes all derivatives on the Consolidated Balance Sheets at fair value. While the Company designates certain derivatives as hedging instruments in a qualifying hedge accounting relationship, other derivatives consist of economic hedges. For additional information on the Company’s derivatives and hedging activities, see Note 1 — Summary of Significant Accounting Policies to the Consolidated Financial Statements of the Company’s 2016 Form 10-K.

The following table presents the total notional and fair value of the Company’s derivatives as of September 30, 2017 and December 31, 2016:




($ in thousands)	September 30, 2017							December 31, 2016
	Notional Amount			Fair Value				Notional Amount		Fair Value
	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	$	42,566		$	—	$	6,648	$	48,365	$	—	$	5,976
Foreign currency forward contracts	—			—		—		83,026		4,325		—
Total derivatives designated as hedging instruments	$	42,566		$	—	$	6,648	$	131,391	$	4,325	$	5,976
Derivatives not designated as hedging instruments:
Interest rate swaps and options	$	8,742,980		$	64,822	$	64,212	$	7,668,482	$	67,578	$	65,131
Foreign exchange contracts	1,131,414			14,187		20,054		767,764		11,874		11,213
RPAs	68,387			2		1		71,414		3		3
Warrants	—		⁽²⁾	1,455		—		—		—		—
Total derivatives not designated as hedging instruments	$	9,942,781		$	80,466	$	84,267	$	8,507,660	$	79,455	$	76,347


(1)	Derivative assets and derivative liabilities are included in Other assets and Accrued expenses and other liabilities, respectively, on the Consolidated Balance Sheets.


(2)	The Company held four warrants in public companies and 32 warrants in private companies as of September 30, 2017.

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 Offered Rate. 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.

As of September 30, 2017 and December 31, 2016, the total notional amounts of the interest rate swaps on certificates of deposit were $42.6 million and $48.4 million, respectively. The fair value liabilities of the interest rate swaps were $6.6 million and $6.0 million as of September 30, 2017 and December 31, 2016, respectively.

The following table presents the net gains (losses) recognized on the Consolidated Statements of Income related to the derivatives designated as fair value hedges for the three and nine months ended September 30, 2017 and 2016:




($ in thousands)	Three Months Ended September 30,						Nine Months Ended September 30,
($ in thousands)	2017			2016			2017			2016
Gains (losses) recorded in interest expense:
Recognized on interest rate swaps	$	37		$	(1,327	)	$	(1,486	)	$	3,044
Recognized on certificates of deposit	$	(116	)	$	674		$	1,236		$	(2,688	)

Net Investment Hedges — ASC 830-20, Foreign Currency Matters — Foreign Currency Transactions and ASC 815, Derivatives and Hedging, allow hedging of the foreign currency risk of a net investment in a foreign operation. During the fourth quarter of 2015, the Company began entering into foreign currency forward contracts to hedge its investment in East West Bank (China) Limited, a non-USD functional currency subsidiary in China. The hedging instruments designated as net investment hedges, involve hedging the risk of changes in the USD equivalent value of a designated monetary amount of the Company’s net investment in China, against the risk of adverse changes in the foreign currency exchange rate. The Company recorded the changes in the carrying amount of its China subsidiary in the Foreign currency translation adjustment account within AOCI. Simultaneously, the effective portion of the hedge of this exposure was also recorded in the Foreign currency translation adjustment account and the ineffective portion, if any, was recorded in current earnings. During the first quarter of 2017, the Company discontinued hedge accounting prospectively. The cumulative effective portion of the net investment hedges recorded through the point of dedesignation remained in the Foreign currency translation adjustment account within AOCI, and will be reclassified into earnings only upon the sale or liquidation of the China subsidiary. The Company continues to economically hedge its foreign currency exposure in its China subsidiary through foreign exchange forward contracts, which were included as part of the Derivatives Not Designated as Hedging Instruments — “Foreign Exchange Contracts” caption as of September 30, 2017.

As of September 30, 2017, there were no derivative contracts designated as net investment hedges. As of December 31, 2016, the total notional amount and fair value of the foreign currency forward contracts designated as net investment hedges were $83.0 million and a $4.3 million asset, respectively. The following table presents the gains (losses) recorded in the Foreign currency translation adjustment account within AOCI related to the effective portion of the net investment hedges and the ineffective portion recorded on the Consolidated Statements of Income for the three and nine months ended September 30, 2017 and 2016:




($ in thousands)	Three Months Ended September 30,					Nine Months Ended September 30,
($ in thousands)	2017		2016			2017			2016
Gains (losses) recognized in AOCI on net investment hedges (effective portion)	$	—	$	69		$	(648	)	$	296
Losses recognized in foreign exchange income (ineffective portion)	$	—	$	(236	)	$	(1,953	)	$	(667	)

Derivatives Not Designated as Hedging Instruments

Interest Rate Swaps and Options — The Company enters into interest rate derivatives including interest rate swaps and options 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, 2017, the total notional amounts of interest rate swaps and options, including mirrored transactions with institutional counterparties and the Company’s customers, totaled $4.37 billion for derivatives that were in an asset valuation position and $4.37 billion for derivatives that were in a liability valuation position. As of December 31, 2016, the total notional amounts of interest rate swaps and options, including mirrored transactions with institutional counterparties and the Company’s customers, totaled $3.86 billion for derivatives that were in an asset valuation position and $3.81 billion for derivatives that were in a liability valuation position. The fair value of interest rate swap and option contracts with institutional counterparties and the Company’s customers amounted to a $64.8 million asset and a $64.2 million liability as of September 30, 2017. The fair value of interest rate swap and option contracts with institutional counterparties and the Company’s customers amounted to a $67.6 million asset and a $65.1 million liability as of December 31, 2016.

Foreign Exchange Contracts — The Company enters into foreign exchange contracts with its customers, primarily comprised of forward, swap and spot contracts to enable its customers to hedge their transactions in foreign currencies against fluctuations in foreign exchange rates, and also to allow the Company to economically hedge against foreign currency fluctuations in certain foreign currency denominated deposits that it offers to its customers, as well as the Company’s investment in its China subsidiary, East West Bank (China) Limited. For a majority of the foreign exchange transactions entered with its customers, the Company enters into offsetting foreign exchange contracts with institutional counterparties to mitigate the foreign exchange risk. A majority of these contracts have original maturities of one year or less. As of September 30, 2017 and December 31, 2016, the total notional amounts of the foreign exchange contracts were $1.13 billion and $767.8 million, respectively. The fair values of the foreign exchange contracts recorded were a $14.2 million asset and a $20.1 million liability as of September 30, 2017. The fair values of the foreign exchange contracts recorded were an $11.9 million asset and an $11.2 million liability as of December 31, 2016.

Credit Risk Participation Agreements — The Company has entered into RPAs under which the Company assumed its pro-rata share of the credit exposure associated with the borrower’s performance related to interest rate derivative contracts. The Company may or may not be a party to the interest rate derivative contract and enters into such RPAs in instances where the Company is a party to the related loan participation agreement with the borrower. The Company will make or receive payments under the RPAs if the borrower defaults on its obligation to perform under the interest rate derivative contract. The Company manages its credit risk on the RPAs by monitoring the credit worthiness of the borrowers, which is based on the normal credit review process. The notional amount of the RPAs reflect the Company’s pro-rata share of the derivative instrument. As of September 30, 2017, the notional amount and fair value of the RPAs purchased were $47.8 million and a $1 thousand liability, respectively. As of September 30, 2017, the notional amount and fair value of the RPAs sold were $20.6 million and a $2 thousand asset, respectively. As of December 31, 2016, the notional amount and fair value of the RPAs purchased were $48.3 million and a $3 thousand liability, respectively. As of December 31, 2016, the notional amount and fair value of the RPAs sold were $23.1 million and a $3 thousand asset, respectively. Assuming all underlying borrowers referenced in the interest rate derivative contracts defaulted as of September 30, 2017 and December 31, 2016, the exposures from the RPAs purchased would be $92 thousand and $179 thousand, respectively. As of September 30, 2017 and December 31, 2016, the weighted average remaining maturities of the outstanding RPAs were 3.0 years and 3.7 years, respectively.

Warrants — The Company obtained warrants to purchase preferred and common stock of technology and life sciences companies, as part of the loan origination process. As of September 30, 2017, the Company held four warrants in public companies and 32 warrants in private companies. The fair values of the warrants for public and private companies were an $856 thousand asset and a $599 thousand asset, respectively, totaling $1.5 million as of September 30, 2017.

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, 2017 and 2016:




($ in thousands)	Location in Consolidated Statements of Income	Three Months Ended September 30,					Nine Months Ended September 30,
($ in thousands)	Location in Consolidated Statements of Income	2017			2016		2017			2016
Derivatives not designated as hedging instruments:
Interest rate swaps and options	Derivative fees and other income	$	(94	)	$	411	$	(1,838	)	$	(2,220	)
Foreign exchange contracts	Foreign exchange income	3,720			3,787		17,936			10,982
RPAs	Derivative fees and other income	—			4		1			(7		)
Warrants	Ancillary loan fees and other income	669			—		1,455			—
Net gains		$	4,295		$	4,202	$	17,554		$	8,755

Credit-Risk-Related Contingent Features — Certain over-the-counter 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 a downgrade 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 September 30, 2017 and December 31, 2016.

Offsetting of Derivatives

The Company has entered into agreements with certain 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:




	As of September 30, 2017
($ in thousands)	Total		Contracts Not Subject to Master Netting Arrangements		Contracts Subject to Master Netting Arrangements
	Gross Amounts Recognized		Gross Amounts Recognized		Gross Amounts Recognized		Gross Amounts Offset on the Consolidated Balance Sheets		Net Amounts Presented on the Consolidated Balance Sheets		Gross Amounts Not Offset on the Consolidated Balance Sheets
	Gross Amounts Recognized		Gross Amounts Recognized		Gross Amounts Recognized		Gross Amounts Offset on the Consolidated Balance Sheets		Net Amounts Presented on the Consolidated Balance Sheets		Derivative Amount				Collateral Received				Net Amount
Derivatives Assets	$	80,466	$	57,720	$	22,746	$	—	$	22,746	$	(20,240	)	⁽¹⁾	$	(2,230	)	⁽²⁾	$	276

	Gross Amounts Recognized		Gross Amounts Recognized		Gross Amounts Recognized		Gross Amounts Offset on the Consolidated Balance Sheets		Net Amounts Presented on the Consolidated Balance Sheets		Gross Amounts Not Offset on the Consolidated Balance Sheets
	Gross Amounts Recognized		Gross Amounts Recognized		Gross Amounts Recognized		Gross Amounts Offset on the Consolidated Balance Sheets		Net Amounts Presented on the Consolidated Balance Sheets		Derivative Amount				Collateral Posted				Net Amount
Derivatives Liabilities	$	90,915	$	17,814	$	73,101	$	—	$	73,101	$	(20,240	)	⁽¹⁾	$	(52,851	)	⁽³⁾	$	10




	As of December 31, 2016
($ in thousands)	Total		Contracts Not Subject to Master Netting Arrangements		Contracts Subject to Master Netting Arrangements
	Gross Amounts Recognized		Gross Amounts Recognized		Gross Amounts Recognized		Gross Amounts Offset on the Consolidated Balance Sheets		Net Amounts Presented on the Consolidated Balance Sheets		Gross Amounts Not Offset on the Consolidated Balance Sheets
	Gross Amounts Recognized		Gross Amounts Recognized		Gross Amounts Recognized		Gross Amounts Offset on the Consolidated Balance Sheets		Net Amounts Presented on the Consolidated Balance Sheets		Derivative Amounts				Collateral Received				Net Amount
Derivatives Assets	$	83,780	$	51,218	$	32,562	$	—	$	32,562	$	(20,991	)	⁽¹⁾	$	(10,687	)	⁽²⁾	$	884

	Gross Amounts Recognized		Gross Amounts Recognized		Gross Amounts Recognized		Gross Amounts Offset on the Consolidated Balance Sheets		Net Amounts Presented on the Consolidated Balance Sheets		Gross Amounts Not Offset on the Consolidated Balance Sheets
	Gross Amounts Recognized		Gross Amounts Recognized		Gross Amounts Recognized		Gross Amounts Offset on the Consolidated Balance Sheets		Net Amounts Presented on the Consolidated Balance Sheets		Derivative Amounts				Collateral Posted				Net Amount
Derivatives Liabilities	$	82,323	$	24,097	$	58,226	$	—	$	58,226	$	(20,991	)	⁽¹⁾	$	(36,349	)	⁽³⁾	$	886


(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 cash and securities received against derivative assets with the same counterparty that are subject to enforceable master netting arrangements. No cash collateral was received as of September 30, 2017. Includes $8.1 million of cash collateral received as of December 31, 2016.


(3)	Represents cash and securities pledged against derivative liabilities with the same counterparty that are subject to enforceable master netting arrangements. Includes $18.0 million and $170 thousand of cash collateral posted as of September 30, 2017 and December 31, 2016, respectively.

In addition to the amounts included in the tables above, the Company also has balance sheet netting related to resale and repurchase agreements, refer to Note 5 — Securities Purchased under Resale Agreements and Sold under Repurchase Agreements to the Consolidated Financial Statements for additional information. 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.