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 — Derivatives to the Consolidated Financial Statements of the Company’s 2017 Form 10-K.

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




($ in thousands)	September 30, 2018							December 31, 2017
	Notional Amount			Fair Value				Notional Amount			Fair Value
	Notional Amount			Derivative Assets		Derivative Liabilities		Notional Amount			Derivative Assets		Derivative Liabilities
Derivatives designated as hedging instruments:
Fair value hedges:
Interest rate contracts	$	31,026		$	—	$	7,696	$	35,811		$	—	$	6,799
Net investment hedges:
Foreign exchange contracts	89,621			61		—		—			—		—
Total derivatives designated as hedging instruments	$	120,647		$	61	$	7,696	$	35,811		$	—	$	6,799

Derivatives not designated as hedging instruments:
Interest rate contracts	$	11,729,334		$	72,618	$	106,962	$	9,333,860		$	58,633	$	57,958
Foreign exchange contracts	1,405,339			11,034		11,075		770,215			5,840		10,170
Credit contracts	120,058			1		57		49,033			1		8
Equity contracts	—		⁽¹⁾	2,409		—		—		⁽¹⁾	1,672		—
Commodity contracts	—		⁽²⁾	12,980		7,912		—			—		—
Total derivatives not designated as hedging instruments	$	13,254,731		$	99,042	$	126,006	$	10,153,108		$	66,146	$	68,136


(1)	The Company held equity contracts in four public companies and 17 private companies as of September 30, 2018. In comparison, the Company held equity contracts 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 2,667 thousand barrels of oil and 9,860 thousand units of natural gas, measured in million British thermal units (“MMBTUs”) as of September 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 certificates of deposit due to changes in the benchmark interest rates. The Company entered into interest rate swaps, which were designated as fair value hedges. The interest rate swaps involve the exchange of variable rate payments over the life of the agreements without the exchange of the underlying notional amounts.

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 nine months ended September 30, 2018 and 2017:




($ in thousands)	Three Months Ended September 30,						Nine Months Ended September 30,
($ in thousands)	2018			2017			2018			2017
(Losses) gains recorded in interest expense:
Recognized on interest rate swaps	$	(241	)	$	37		$	(2,089	)	$	(1,486	)
Recognized on certificates of deposit	$	520		$	(116	)	$	2,239		$	1,236

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 September 30, 2018:




($ in thousands)	September 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	$	(24,953	)	$	6,065


(1)	Represents the full carrying amount of the hedged certificates of deposit as of September 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 swap 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 Adjustments 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 swap 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 December 31, 2017, the Company economically hedged 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 December 31, 2017, as discussed below.

The following table presents the gains (losses) recorded on net investment hedges on a pre-tax basis for the three and nine months ended September 30, 2018 and 2017:




($ in thousands)	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands)	2018		2017		2018		2017
Gains (losses) recognized in AOCI	$	2,960	$	—	$	6,745	$	(648	)
Gains (losses) recognized in Letters of credit fees and foreign exchange income⁽¹⁾	$	—	$	—	$	—	$	(1,953	)


(1)	Represents the gains (losses) recorded in the Consolidated Statement of Income related to the ineffective portion of net investment hedges prior to the adoption of ASU 2017-12, effective as of January 1, 2018. After the adoption, the fair value gains (losses) are recorded in the Foreign Currency Translation Adjustments within AOCI.

Derivatives Not Designated as Hedging Instruments

Interest Rate Contracts — The Company enters into interest rate contracts, 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 settlements 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 $38.7 million and $1.8 million, respectively, as of September 30, 2018. Included in the total notional amount of $5.87 billion of interest rates contracts entered with financial counterparties was a notional amount of $1.67 billion of interest rate swaps that cleared through LCH as of September 30, 2018. The following tables present the notional amounts and the gross fair values of interest rate derivative contracts outstanding as of September 30, 2018 and December 31, 2017, respectively:




($ in thousands)	September 30, 2018
	Customer Counterparties						($ in thousands)	Financial Counterparties
	Notional Amount		Fair Value					Notional Amount		Fair Value
	Notional Amount		Assets		Liabilities			Notional Amount		Assets		Liabilities
Written options	$	907,651	$	—	$	782	Purchased options	$	907,651	$	795	$	—
Sold collars and corridors	379,257		169		1,343		Collars and corridors	379,257		1,354		172
Swaps	4,574,216		8,520		97,897		Swaps	4,581,302		61,780		6,768
Total	$	5,861,124	$	8,689	$	100,022	Total	$	5,868,210	$	63,929	$	6,940




($ in thousands)	December 31, 2017
	Customer Counterparties						($ in thousands)	Financial Counterparties
	Notional Amount		Fair Value					Notional Amount		Fair Value
	Notional Amount		Assets		Liabilities			Notional Amount		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 Contracts — The Company enters into foreign exchange contracts with its customers, consisting of forwards, spot, swap and option 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 on certain foreign currency denominated on-balance sheet assets and liabilities, primarily foreign currency denominated deposits that it offers to its customers. As of December 31, 2017, the Company economically hedged its foreign currency exposure in its China subsidiary through foreign exchange forward contracts comprising $95.2 million and $7.2 million in notional value and fair value liability, respectively. A majority of the foreign exchange contracts have original maturities of one year or less. The following tables present the notional amounts and the gross fair values of foreign exchange derivative contracts outstanding as of September 30, 2018 and December 31, 2017, respectively:




($ in thousands)	September 30, 2018
	Customer Counterparty						Financial Counterparty
	Notional Amount		Fair Value				Notional Amount		Fair Value
	Notional Amount		Assets		Liabilities		Notional Amount		Assets		Liabilities
Forwards and spot	$	648,305	$	6,780	$	4,815	$	115,547	$	127	$	213
Swaps	15,683		—		90		624,644		4,125		5,955
Collars	580		2		—		580		—		2
Total	$	664,568	$	6,782	$	4,905	$	740,771	$	4,252	$	6,170




($ in thousands)	December 31, 2017
	Customer Counterparty						Financial Counterparty
	Notional Amount		Fair Value				Notional Amount		Fair Value
	Notional Amount		Assets		Liabilities		Notional Amount		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 Contracts — The Company may periodically enter into RPA contracts to manage the credit exposure on interest rate contracts associated with syndicated loans. The Company may enter into protection sold or protection purchased RPAs with institutional counterparties. 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 referenced entities of the RPAs were investment grade as of both September 30, 2018 and December 31, 2017. The notional amount of the RPAs reflects the Company’s pro-rata share of the derivative instrument. The following table presents the notional amounts and the gross fair values of RPAs sold and purchased outstanding as of September 30, 2018 and December 31, 2017, respectively:




($ in thousands)	September 30, 2018						December 31, 2017
	Notional Amount		Fair Value				Notional Amount		Fair Value
	Notional Amount		Assets		Liabilities		Notional Amount		Assets		Liabilities
RPAs - protection sold	$	109,344	$	—	$	57	$	35,208	$	—	$	8
RPAs - protection purchased	10,714		1		—		13,825		1		—
Total RPAs	$	120,058	$	1	$	57	$	49,033	$	1	$	8

Assuming all underlying borrowers referenced in the interest rate contracts defaulted as of September 30, 2018 and December 31, 2017, the exposure from the RPAs with protections sold would be $1.3 million and $419 thousand, respectively. As of September 30, 2018 and December 31, 2017, the weighted-average remaining maturities of the outstanding RPAs were 6.9 years and 6.0 years, respectively.

Equity Contracts — The Company has obtained equity warrants to purchase preferred and common stock of technology and life sciences companies, as part of the loan origination process with these companies. The Company’s equity warrants grant the Company the right to buy a certain class of the underlying company’s equity at a certain price before expiration. The Company held warrants in four public companies and 17 private companies as of September 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 $2.4 million asset and a $1.7 million asset as of September 30, 2018 and December 31, 2017, respectively.

Commodity Contracts — 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 settlements of derivatives and not as collateral against derivatives. Applying variation margin payments as settlement to CME cleared derivative transactions resulted in a reduction in gross derivative asset and liability fair values of $127 thousand and $5.5 million, respectively, and a remaining net liability fair value of $855 thousand as of September 30, 2018. The notional quantities that cleared through CME totaled 965 thousand barrels of oil and 6,825 thousand MMBTUs of natural gas. The following table presents the notional amounts and fair values of the commodity derivative positions outstanding as of September 30, 2018. The Company did not have any commodity contracts in 2017.




($ and units in thousands)	September 30, 2018
	Customer Counterparties						($ and units in thousands)	Financial Counterparties
	Notional		Fair Value					Notional		Fair Value
	Unit	Amount	Assets		Liabilities			Unit	Amount	Assets		Liabilities
Crude oil:							Crude oil:
Written options	Barrels	725	$	842	$	128	Purchased options	Barrels	725	$	—	$	767
Collars	Barrels	802	3,363		—		Collars	Barrels	802	—		3,067
Swaps	Barrels	1,140	8,128		—		Swaps	Barrels	1,140	—		3,716
Total		2,667	$	12,333	$	128	Total		2,667	$	—	$	7,550

Natural gas:							Natural gas:
Collars	MMBTUs	1,360	$	65	$	—	Collars	MMBTUs	1,360	$	—	$	10
Swaps	MMBTUs	8,500	517		4		Swaps	MMBTUs	8,500	65		220
Total		9,860	$	582	$	4	Total		9,860	$	65	$	230

Total			$	12,915	$	132	Total			$	65	$	7,780

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 nine months ended September 30, 2018 and 2017:




($ in thousands)	Location in Consolidated Statement of Income	Three Months Ended September 30,						Nine Months Ended September 30,
($ in thousands)	Location in Consolidated Statement of Income	2018			2017			2018			2017
Derivatives not designated as hedging instruments:
Interest rate contracts	Derivative fees and other income	$	653		$	(94	)	$	1,847		$	(1,838	)
Foreign exchange contracts	Letters of credit fees and foreign exchange income	4,612			3,720			11,115			17,936
Credit contracts	Derivative fees and other income	20			—			(49		)	1
Equity contracts	Ancillary loan fees and other income	531			669			970			1,455
Commodity contracts	Derivative fees and other income	(45		)	—			(5		)	—
Net gains		$	5,771		$	4,295		$	13,878		$	17,554

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 September 30, 2018 and December 31, 2017, the aggregate fair values of all derivative instruments with such credit-risk-related contingent features that were in a net liability position were $8.1 million and $14.4 million, respectively, with collateral posted of $7.6 million and $14.6 million, respectively. In the event that the credit rating of East West Bank had been downgraded to below investment grade, the additional collateral that would have been required to be posted as of September 30, 2018 and December 31, 2017 would have been minimal.

Offsetting of Derivatives

The Company enters into International Swaps and Derivatives Association, Inc. (“ISDA”) master netting arrangements or similar agreements with a portion of the Company’s derivative counterparties. Where legally enforceable, these master netting agreements give the Company, in the event of default by the counterparty, the right to liquidate securities and offset cash with the same counterparty. Under ASC 815-10-45, payables and receivables with respect to cash collateral received from or paid to a given counterparty can be offset against derivative fair values under a master netting arrangement or similar agreement. GAAP does not permit similar offsetting for security collateral. The Company presents derivative fair values on a gross basis on its Consolidated Balance Sheets, prior to the application of counterparty and cash collateral netting. 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 addition, the following tables reflect rule changes adopted by clearing organizations that require or allow entities to elect to treat derivative assets, liabilities and the related variation margin as settlement of the related derivative fair values for legal and accounting purposes, as opposed to presenting gross derivative assets and liabilities that are subject to collateral, whereby the counterparties would record a related collateral payable or receivable.




($ in thousands)	As of September 30, 2018
($ 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 Sheet		Net Amounts Presented on the Consolidated Balance Sheet		Gross Amounts Not Offset on the Consolidated Balance Sheet
	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		Derivative Amount				Collateral Received				Net Amount
Derivative Assets	$	99,103	$	2,751	$	96,352	$	—	$	96,352	$	(19,470	)	⁽¹⁾	$	(52,262	)	⁽²⁾	$	24,620

	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
	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		Derivative Amount				Collateral Pledged				Net Amount
Derivative Liabilities	$	133,702	$	88	$	133,614	$	—	$	133,614	$	(19,470	)	⁽¹⁾	$	(10,931	)	⁽³⁾	$	103,213




($ in thousands)	As of December 31, 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 Sheet		Net Amounts Presented on the Consolidated Balance Sheet		Gross Amounts Not Offset on the Consolidated Balance Sheet
	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		Derivative Amounts				Collateral Received				Net Amount
Derivative Assets	$	66,146	$	2,322	$	63,824	$	—	$	63,824	$	(20,242	)	⁽¹⁾	$	(9,839	)	⁽²⁾	$	33,743

	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
	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		Derivative Amounts				Collateral Pledged				Net Amount
Derivative Liabilities	$	74,935	$	523	$	74,412	$	—	$	74,412	$	(20,242	)	⁽¹⁾	$	(28,796	)	⁽³⁾	$	25,374


(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 $10.9 million and $8.6 million of cash collateral received as of September 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 $3.4 million and $10.7 million of cash collateral pledged as of September 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.