Derivatives

6 Months Ended

Jun. 30, 2018

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives

Derivatives

The Company uses derivatives to manage exposure to market risk, primarily 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 rate 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 Sheet 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 2017 Form 10-K.

The following table presents the total notional and gross fair value of the Company’s derivatives as of June 30, 2018 and December 31, 2017. The derivative asset and liability balances are presented on a gross basis, prior to the application of master netting arrangements, as included in Other assets and Accrued expenses and other liabilities, respectively, on the Consolidated Balance Sheet.

($ in thousands)	June 30, 2018							December 31, 2017
	Notional Amount			Fair Value				Notional Amount			Fair Value
				Derivative Assets		Derivative  Liabilities					Derivative Assets		Derivative  Liabilities
Derivatives designated as hedging instruments:
Fair value hedges:
Interest rate swaps	$	35,811		$	—	$	8,647	$	35,811		$	—	$	6,799
Net investment hedges:
Foreign exchange forwards	95,515			2,316		—		—			—		—
Total derivatives designated as hedging instruments	$	131,326		$	2,316	$	8,647	$	35,811		$	—	$	6,799
Derivatives not designated as hedging instruments:
Interest rate swaps and options	$	11,217,468		$	64,225	$	91,378	$	9,333,860		$	58,633	$	57,958
Foreign exchange forwards, spot and swaps	959,645			9,408		11,281		770,215			5,840		10,170
RPAs	118,024			1		77		49,033			1		8
Equity warrants	—		(1)	1,878		—		—		(1)	1,672		—
Commodity swaps and options	—		(2)	3,628		3,159		—			—		—
Total derivatives not designated as hedging instruments	$	12,295,137		$	79,140	$	105,895	$	10,153,108		$	66,146	$	68,136

(1) The Company held warrants in four public companies and 14 private companies as of June 30, 2018. In comparison, the Company held warrants in four public companies and 11 private companies as of December 31, 2017.

(2) The notional amount of the Company’s commodity contracts entered with its customers totaled 1.8 million barrels of oil and 5.2 million units of natural gas, measured in million British thermal units (“MMBTUs”) as of June 30, 2018. The Company entered into the same notional amounts of commodity contracts with mirrored terms with third party financial institutions to mitigate its exposure.

Derivatives Designated as Hedging Instruments

Fair Value Hedges — 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, the London Interbank Offered Rate. The Company entered into interest rate swaps, which were designated as fair value hedges. The interest rate swaps 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 total notional amounts of the interest rate swaps on certificates of deposit were $35.8 million as of both June 30, 2018 and December 31, 2017. The fair value liabilities of the interest rate swaps were $8.6 million and $6.8 million as of June 30, 2018 and December 31, 2017, respectively.

The following table presents the net (losses) gains recognized on the Consolidated Statement of Income related to the derivatives designated as fair value hedges for the three and six months ended June 30, 2018 and 2017:

($ in thousands)	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
(Losses) gains recorded in interest expense:
Recognized on interest rate swaps	$	(396	)	$	(706	)	$	(1,848	)	$	(1,523	)
Recognized on certificates of deposit	$	440		$	664		$	1,719		$	1,352

The following table presents the carrying amount and associated cumulative basis adjustment related to the application of fair value hedge accounting that is included in the carrying amount of the hedged certificates of deposit as of June 30, 2018:

($ in thousands)	June 30, 2018
	Hedged Items Currently Designated
	Carrying Amount of the Hedged Assets (Liabilities) (1)			Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets (Liabilities)
Certificates of deposit	$	(29,339	)	$	6,464

(1) Represents the full carrying amount of the hedged certificates of deposit as of June 30, 2018.

Net Investment Hedges — ASC 830-20, Foreign Currency Matters — Foreign Currency Transactions, and ASC 815, Derivatives and Hedging, allows hedging of the foreign currency risk of a net investment in a foreign operation. The Company enters into foreign currency forward contracts to hedge its investment in East West Bank (China) Limited, a non-USD functional currency subsidiary of the Company 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 East West Bank (China) Limited, against the risk of adverse changes in the foreign currency exchange rate. The Company may de-designate the net investment hedges when the Company expects the hedge will cease to be highly effective. The portion of the net investment hedges recorded through the point of de-designation is included in the Foreign Currency Translation Adjustment within AOCI and will be reclassified into earnings only upon the sale or liquidation of the China subsidiary. During the first quarter of 2018, the Company entered into new foreign currency forward contracts designated as net investment hedges to hedge against the foreign currency exchange rate risk in connection with its investment in East West Bank (China) Limited.

As of June 30, 2018, the total notional amount and fair value of the foreign currency forward contracts designated as net investment hedges were $95.5 million and a $2.3 million asset, respectively. As of December 31, 2017, there were no derivative contracts designated as net investment hedges. As a result of the adoption of ASU 2017-12 effective January 1, 2018, the Company recorded fair value gains of $4.9 million and $3.8 million in the Foreign Currency Translation Adjustment within AOCI during the three and six months ended June 30, 2018, respectively. During the three months ended June 30, 2017, there were no net investment hedges designated and recorded. During the six months ended June 30, 2017, before the adoption of ASU 2017-12, the Company recorded a loss of $648 thousand in the Foreign Currency Translation Adjustment within AOCI related to the effective portion of the net investment hedges, and a loss of $2.0 million in the Letters of credit fees and foreign exchange income on the Consolidated Statement of Income related to the ineffective portion of the net investment hedges.

Derivatives Not Designated as Hedging Instruments

Interest Rate Swaps and Options — The Company enters into interest rate derivatives, which include 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 offsetting interest rate contracts with third party financial institutions. Beginning in January 2018, the London Clearing House (“LCH”) amended its rulebook to legally characterize variation margin payments made to and received from LCH as settlement of derivatives and not as collateral against derivatives. Applying variation margin payments as settlement to LCH cleared derivative transactions resulted in a reduction in derivative asset and liability fair values of $32.2 million and $2.9 million, respectively, as of June 30, 2018. Included in the total notional amount of $5.61 billion of interest rates swaps and options entered with financial counterparties is a notional amount of $1.55 billion of interest rate swaps that cleared through LCH with a fair value asset of approximately $241 thousand as of June 30, 2018. The following tables represent the notional amounts and the gross fair values of interest rate derivative contracts outstanding as of June 30, 2018 and December 31, 2017, respectively.

($ in thousands)	June 30, 2018
	Customer Counterparties							Financial Counterparties
	Notional Amount		Fair Value					Notional Amount		Fair Value
			Assets		Liabilities					Assets		Liabilities
Written options	$	843,965	$	—	$	696	Purchased options	$	843,965	$	711	$	—
Sold collars and corridors	335,169		147		1,004		Collars and corridors	335,169		1,015		147
Swaps	4,425,902		15,902		76,297		Swaps	4,433,298		46,450		13,234
Total	$	5,605,036	$	16,049	$	77,997	Total	$	5,612,432	$	48,176	$	13,381

($ in thousands)	December 31, 2017
	Customer Counterparties							Financial Counterparties
	Notional Amount		Fair Value					Notional Amount		Fair Value
			Assets		Liabilities					Assets		Liabilities
Written options	$	691,548	$	—	$	223	Purchased options	$	691,548	$	233	$	—
Sold collars and corridors	247,542		204		267		Collars and corridors	247,542		271		211
Swaps	3,724,295		32,241		24,879		Swaps	3,731,385		25,684		32,378
Total	$	4,663,385	$	32,445	$	25,369	Total	$	4,670,475	$	26,188	$	32,589

Foreign Exchange Forwards, Spot and Swaps — The Company enters into foreign exchange contracts with its customers, consisting of forwards, spot and swap contracts to accommodate the business needs of its customers. For a majority of the foreign exchange contracts entered into with its customers, the Company entered into offsetting foreign exchange contracts with third party financial institutions to manage its exposure. The Company also utilizes foreign exchange contracts that are not designated as hedging instruments to mitigate the economic effect of fluctuations in certain foreign currency on-balance sheet assets and liabilities, primarily foreign currency denominated deposits that it offers to its customers. A majority of the foreign exchange contracts have original maturities of one year or less. The following tables represent the notional amounts and the gross fair values of foreign exchange derivative contracts outstanding as of June 30, 2018 and December 31, 2017, respectively:

($ in thousands)	June 30, 2018
	Customer Counterparty						Financial Counterparty
	Notional Amount		Fair Value				Notional Amount		Fair Value
			Assets		Liabilities				Assets		Liabilities
Forwards and spot	$	353,439	$	5,298	$	3,778	$	77,152	$	47	$	462
Swaps	19,031		2		874		510,023		4,061		6,167
Total	$	372,470	$	5,300	$	4,652	$	587,175	$	4,108	$	6,629

($ in thousands)	December 31, 2017
	Customer Counterparty						Financial Counterparty
	Notional Amount		Fair Value				Notional Amount		Fair Value
			Assets		Liabilities				Assets		Liabilities
Forwards and spot	$	163,389	$	2,189	$	752	$	155,872	$	662	$	7,800
Swaps	4,318		—		98		446,636		2,989		1,520
Total	$	167,707	$	2,189	$	850	$	602,508	$	3,651	$	9,320

Credit Risk Participation Agreements — The Company may periodically enter into RPAs to manage the credit exposure on interest rate contracts associated with a syndicated loan.  The Company may enter into protection sold or protection purchased RPAs with institutional counterparties to decrease or increase its exposure to a borrower.  Under the RPA,  the Company will receive or make a payment if a borrower defaults on the related interest rate contract.  The Company manages its credit risk on RPAs by monitoring the creditworthiness of the borrowers and institutional counterparties, which is based on the normal credit review process.  The notional amount of the RPAs reflects the Company’s pro-rata share of the derivative instrument. The following table represents the notional amounts and the gross fair values of RPAs purchased and sold outstanding as of June 30, 2018 and December 31, 2017, respectively:

($ in thousands)	June 30, 2018						December 31, 2017
	Notional Amount		Fair Value				Notional Amount		Fair Value
			Assets		Liabilities				Assets		Liabilities
RPAs - protection sold	$	105,754	$	—	$	77	$	35,208	$	—	$	8
RPAs - protection purchased	12,270		1		—		13,825		1		—
Total RPAs	$	118,024	$	1	$	77	$	49,033	$	1	$	8

Assuming all underlying borrowers referenced in the interest rate derivative contracts defaulted as of June 30, 2018 and December 31, 2017, the exposure from the RPAs with protections sold would be $962 thousand and $419 thousand, respectively.  As of June 30, 2018 and December 31, 2017, the weighted-average remaining maturities of the outstanding RPAs were 6.7 years and 6.0 years, respectively.

Equity Warrants — The Company has obtained warrants to purchase preferred and common stock of technology and life sciences companies, as part of the loan origination process. The Company held warrants in four public companies and 14 private companies as of June 30, 2018, and held warrants in four public companies and 11 private companies as of December 31, 2017. The fair value of the warrants held in public and private companies was a $1.9 million asset and a $1.7 million asset as of June 30, 2018 and December 31, 2017, respectively.

Commodity Swaps and Options — In 2018, the Company entered into energy commodity contracts in the form of swaps and options with its commercial loan customers to allow them to hedge against the risk of fluctuation in energy commodity prices. To economically hedge against the risk of fluctuation in commodity prices in the products offered to its customers, the Company entered into offsetting commodity contracts with third party financial institutions. Beginning in January 2017, the Chicago Mercantile Exchange (“CME”) amended its rulebook to legally characterize variation margin payments made to and received from CME as settlement of derivatives and not as collateral against derivatives. Applying variation margin payments as settlement to CME cleared derivative transactions resulted in a reduction in derivative asset and liability fair values of $271 thousand and $595 thousand, respectively, as of June 30, 2018. As a result, the notional quantity totaling 264 thousand barrels of oil and 5.2 million MMBTUs of natural gas that cleared through CME had an insignificant fair value as of June 30, 2018. The notional amounts and fair values of the commodity derivative positions outstanding as of June 30, 2018 are presented in the following table. The Company did not have any commodity contracts in 2017.

($ in thousands)	June 30, 2018
	Customer Counterparties							Financial Counterparties
	Notional		Fair Value					Notional		Fair Value
	Unit	Amount	Assets		Liabilities			Unit	Amount	Assets		Liabilities
Crude oil:							Crude oil:
Written options	Barrels	736,500	$	576	$	271	Purchased options	Barrels	736,500	$	—	$	510
Collars	Barrels	812,100	1,720		—		Collars	Barrels	812,100	—		1,499
Swaps	Barrels	292,811	925		—		Swaps	Barrels	292,811	—		863
Total		1,841,411	$	3,221	$	271	Total		1,841,411	$	—	$	2,872
Natural gas:							Natural gas:
Collars	MMBTUs	1,540,000	$	85	$	—	Collars	MMBTUs	1,540,000	$	—	$	4
Swaps	MMBTUs	3,650,000	322		—		Swaps	MMBTUs	3,650,000	—		12
Total		5,190,000	$	407	$	—	Total		5,190,000	$	—	$	16
Total			$	3,628	$	271	Total			$	—	$	2,888

The following table presents the net gains (losses) recognized on the Company’s Consolidated Statement of Income related to derivatives not designated as hedging instruments for the three and six months ended June 30, 2018 and 2017:

($ in thousands)	Location in Consolidated Statement of Income	Three Months Ended June 30,						Six Months Ended June 30,
		2018			2017			2018			2017
Derivatives not designated as hedging instruments:
Interest rate swaps and options	Derivative fees and other income	$	88		$	(678	)	$	1,194		$	(1,744	)
Foreign exchange spot and forwards	Letters of credit fees and foreign exchange income	2,646			8,378			6,503			14,216
RPAs	Derivative fees and other income	(56		)	—			(69		)	1
Equity warrants	Ancillary loan fees and other income	598			786			439			786
Commodity swaps and options	Derivative fees and other income	40			—			40			—
Net gains		$	3,316		$	8,486		$	8,107		$	13,259

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. As of June 30, 2018 and December 31, 2017, the aggregate fair value of all derivative instruments with such credit-risk-related contingent features that are in a net liability position was $11.4 million and $6.3 million, respectively, with collateral posted of $11.3 million and $6.2 million, respectively. In the event that East West Bank’s credit rating had been downgraded to below investment grade, the additional collateral that would have been required to be posted as of June 30, 2018 and December 31, 2017 would have been minimal.

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 Sheet 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 June 30, 2018
	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 Sheet		Net Amounts Presented on the Consolidated Balance Sheet		Gross Amounts Not Offset on the Consolidated Balance Sheet
											Derivative Amount				Collateral Received				Net Amount
Derivative Assets	$	81,456	$	27,141	$	54,315	$	—	$	54,315	$	(18,672	)	(1)	$	(33,615	)	(2)	$	2,028
	Gross Amounts Recognized		Gross Amounts Recognized		Gross Amounts Recognized		Gross Amounts Offset on the Consolidated Balance Sheet		Net Amounts Presented on the Consolidated Balance Sheet		Gross Amounts Not Offset on the Consolidated Balance Sheet
											Derivative Amount				Collateral  Pledged				Net Amount
Derivative Liabilities	$	114,542	$	82,965	$	31,577	$	—	$	31,577	$	(18,672	)	(1)	$	(12,889	)	(3)	$	16

($ in thousands)	As of December 31, 2017
	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 Sheet		Net Amounts Presented on the Consolidated Balance Sheet		Gross Amounts Not Offset on the Consolidated Balance Sheet
											Derivative Amounts				Collateral Received				Net Amount
Derivative Assets	$	66,146	$	36,941	$	29,205	$	—	$	29,205	$	(18,955	)	(1)	$	(9,839	)	(2)	$	411
	Gross Amounts Recognized		Gross Amounts Recognized		Gross Amounts Recognized		Gross Amounts Offset on the Consolidated Balance Sheet		Net Amounts Presented on the Consolidated Balance Sheet		Gross Amounts Not Offset on the Consolidated Balance Sheet
											Derivative Amounts				Collateral  Pledged				Net Amount
Derivative Liabilities	$	74,935	$	26,732	$	48,203	$	—	$	48,203	$	(18,955	)	(1)	$	(28,796	)	(3)	$	452

(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, including $10.1 million and $8.6 million of cash collateral received as of June 30, 2018 and December 31, 2017, respectively.

(3) Represents cash and securities pledged against derivative liabilities with the same counterparty that are subject to enforceable master netting arrangements, including $4.1 million and $10.7 million of cash collateral posted as of June 30, 2018 and December 31, 2017, 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.