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 — Significant Accounting Policies — Derivatives to the Consolidated Financial Statements.

The following table presents the total notional amounts and gross fair values of the Company’s derivatives, as well as the balance sheet netting adjustments on an aggregate basis to take into consideration the effects of legally enforceable master netting agreements and cash collateral received or paid as of December 31, 2018 and 2017. The resulting net derivative asset and liability fair values are included in Other assets and Accrued expenses and other liabilities, respectively, on the Consolidated Balance Sheet.




($ in thousands)	December 31, 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	$	35,811		$	—		$	5,866		$	35,811		$	—		$	6,770
Net investment hedges:
Foreign exchange contracts	90,245			—			611			—			—			—
Total derivatives designated as hedging instruments	$	126,056		$	—		$	6,477		$	35,811		$	—		$	6,770

Derivatives not designated as hedging instruments:
Interest rate contracts	$	11,695,499		$	69,818		$	69,267		$	9,333,860		$	59,564		$	58,890
Foreign exchange contracts	3,407,522			21,624			19,329			770,215			5,840			10,170
Credit contracts	119,320			1			164			49,033			1			8
Equity contracts	—		⁽¹⁾	1,951			—			—		⁽¹⁾	1,672			—
Commodity contracts	—		⁽²⁾	14,422			23,068			—			—			—
Total derivatives not designated as hedging instruments	$	15,222,341		$	107,816		$	111,828		$	10,153,108		$	67,077		$	69,068
Gross derivative assets/liabilities				$	107,816		$	118,305					$	67,077		$	75,838
Less: Master netting agreements				(31,569		)	(31,569		)				(20,662		)	(20,662		)
Less: Cash collateral received/paid				(13,577		)	(6,833		)				(8,024		)	(10,680		)
Net derivative assets/liabilities				$	62,670		$	79,903					$	38,391		$	44,496


(1)	The Company held equity contracts in four public companies and 18 private companies as of December 31, 2018. In comparison, the Company held equity contracts in four public companies and 12 private companies as of December 31, 2017.

(2)

The notional amount of the Company’s commodity contracts entered with its customers totaled 2,507 thousand barrels of oil and 14,722 thousand units of natural gas, measured in million British thermal units (“MMBTUs”) as of December 31, 2018. The Company entered into the same notional amounts of commodity contracts with mirrored terms with third-party financial institutions to mitigate its exposure. The Company did not have any commodity contracts as of December 31, 2017.

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 years ended December 31, 2018, 2017 and 2016:




($ in thousands)	Year Ended December 31,
($ in thousands)	2018			2017			2016
(Losses) gains recorded in interest expense:
Recognized on interest rate swaps	$	(93	)	$	(2,734	)	$	(794	)
Recognized on certificates of deposit	$	278		$	2,271		$	157

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 December 31, 2018 and 2017:




($ in thousands)	Carrying Value ⁽¹⁾						Cumulative Fair Value Adjustment⁽²⁾
	December 31,						December 31,
	2018			2017			2018		2017
Certificates of deposit	$	(26,877	)	$	(31,058	)	$	4,141	$	4,745


(1)	Represents the full carrying amount of the hedged certificates of deposit.


(2)	For liabilities, (increase) decrease to carrying value.

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. The Company enters into foreign currency contracts to hedge its investment in East West Bank (China) Limited, a non-USD functional currency subsidiary of the Company in China. The notional and fair value amounts of the net investment hedges comprising of foreign exchange swaps were $90.2 million and $611 thousand liability as of December 31, 2018. 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.

During the first quarter of 2017, the company discontinued hedge accounting of the foreign currency contracts, and economically hedged its foreign currency exposure in its China subsidiary through foreign exchange forward contracts as discussed in the Derivatives Not Designated as Hedging Instruments — Foreign Exchange Contracts section below.

As a result of the adoption of ASU 2017-12 effective as of January 1, 2018, the gains and losses of the net investment hedges were recorded in the Foreign Currency Translation Adjustment account within AOCI. Before the adoption of ASU 2017-12, the effective portion of the net investment hedges were recorded in the Foreign Currency Translation Adjustment account within AOCI whereas the ineffective portion of the net investment hedges was recorded in the Letters of credit fees and foreign exchange income on the Consolidated Statement of Income.

The following table presents the gains (losses) recorded on net investment hedges on a pre-tax basis for the years ended December 31, 2018, 2017 and 2016:




($ in thousands)	Year Ended December 31,
($ in thousands)	2018		2017			2016
Gains (losses) recognized in AOCI	$	6,072	$	(648	)	$	2,908
Gains (losses) recognized in Letters of credit fees and foreign exchange income ⁽¹⁾	$	—	$	(1,953	)	$	1,124


(1)	Represents the gains (losses) recorded in the Consolidated Statement of Income related to the ineffective portion of the net investment hedges prior to the adoption of ASU 2017-12, effective January 1, 2018. After the adoption, the fair value gains (losses) are recorded in 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 including with central counterparties (“CCP”). Beginning 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 $16.4 million and $16.0 million, respectively, as of December 31, 2018. Included in the total notional amount of $5.85 billion of interest rates contracts entered with financial counterparties was a notional amount of $1.66 billion of interest rate swaps that cleared through LCH as of December 31, 2018. The following tables present the notional amounts and the gross fair values of interest rate derivative contracts outstanding as of December 31, 2018 and 2017, respectively:




($ in thousands)	December 31, 2018
	Customer Counterparty						($ in thousands)	Financial Counterparty
	Notional Amount		Fair Value					Notional Amount		Fair Value
	Notional Amount		Assets		Liabilities			Notional Amount		Assets		Liabilities
Written options	$	931,601	$	—	$	492	Purchased options	$	931,601	$	503	$	—
Sold collars and corridors	429,879		1,121		305		Collars and corridors	429,879		308		1,140
Swaps	4,482,881		41,457		41,545		Swaps	4,489,658		26,429		25,785
Total	$	5,844,361	$	42,578	$	42,342	Total	$	5,851,138	$	27,240	$	26,925




($ in thousands)	December 31, 2017
	Customer Counterparty						($ in thousands)	Financial Counterparty
	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		33,417		24,636		Swaps	3,731,385		25,439		33,553
Total	$	4,663,385	$	33,621	$	25,126	Total	$	4,670,475	$	25,943	$	33,764

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 portion 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 as needed. 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. As of December 31, 2018, the foreign exchange contracts the Company entered into to hedge its China subsidiary were designated as net investment hedges which were included in the Derivatives Designated as Hedging Instruments - Net Investment Hedges caption as discussed above. A majority of the foreign exchange contracts had original maturities of one year or less as of both December 31, 2018 and 2017.

The following tables present the notional amounts and the gross fair values of foreign exchange derivative contracts outstanding as of December 31, 2018 and 2017, respectively:




($ in thousands)	December 31, 2018
	Customer Counterparty						Financial Counterparty
	Notional Amount		Fair Value					Notional Amount		Fair Value
	Notional Amount		Assets		Liabilities		($ in thousands)	Notional Amount		Assets		Liabilities
Forwards and spot	$	2,023,425	$	11,719	$	13,079	Forwards and spot	$	506,342	$	3,407	$	2,285
Swaps	21,108		348		243		Swaps	687,845		5,764		3,336
Written options	537		16		—		Purchased options	537		—		16
Collars	83,864		—		370		Collars	83,864		370		—
Total	$	2,128,934	$	12,083	$	13,692	Total	$	1,278,588	$	9,541	$	5,637




($ 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 December 31, 2018 and 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 December 31, 2018 and 2017, respectively:




($ in thousands)	December 31, 2018						December 31, 2017
	Notional Amount		Fair Value				Notional Amount		Fair Value
	Notional Amount		Assets		Liabilities		Notional Amount		Assets		Liabilities
RPAs - protection sold	$	108,606	$	—	$	164	$	35,208	$	—	$	8
RPAs - protection purchased	10,714		1		—		13,825		1		—
Total RPAs	$	119,320	$	1	$	164	$	49,033	$	1	$	8

Assuming all underlying borrowers referenced in the interest rate contracts defaulted as of December 31, 2018 and 2017, the exposure from the RPAs with protections sold would be $125 thousand and $419 thousand, respectively. As of December 31, 2018 and 2017, the weighted-average remaining maturities of the outstanding RPAs were 6.6 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 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 18 private companies as of December 31, 2018, and held warrants in four public companies and 12 private companies as of December 31, 2017. The fair value of the warrants held in public and private companies was a $2.0 million asset and a $1.7 million asset as of December 31, 2018 and 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 including with CCP. 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 $10.4 million and $582 thousand, respectively, and a remaining net asset fair value of $622 thousand as of December 31, 2018. The notional quantities that cleared through CME totaled 778 thousand barrels of oil and 6,290 thousand MMBTUs of natural gas. The Company did not have any commodity contracts in 2017.

The following table presents the notional amounts and fair values of the commodity derivative positions outstanding as of December 31, 2018.




	December 31, 2018
($ and units in thousands)	Customer Counterparty						($ and units in thousands)	Financial Counterparty
	Notional		Fair Value					Notional		Fair Value
	Unit	Amount	Assets		Liabilities			Unit	Amount	Assets		Liabilities
Crude oil:							Crude oil:
Written options	Barrels	524	$	—	$	2,628	Purchased options	Barrels	524	$	2,251	$	—
Collars	Barrels	872	—		3,772		Collars	Barrels	872	3,225		—
Swaps	Barrels	1,111	—		14,278		Swaps	Barrels	1,111	5,799		—
Total		2,507	$	—	$	20,678	Total		2,507	$	11,275	$	—

Natural gas:							Natural gas:
Collars	MMBTUs	3,063	$	78	$	152	Collars	MMBTUs	3,063	$	151	$	64
Swaps	MMBTUs	11,659	1,049		1,857		Swaps	MMBTUs	11,659	1,869		317
Total		14,722	$	1,127	$	2,009	Total		14,722	$	2,020	$	381
Total			$	1,127	$	22,687	Total			$	13,295	$	381

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 years ended December 31, 2018, 2017 and 2016:




($ in thousands)	Location in Consolidated Statement of Income	Year Ended December 31,
($ in thousands)	Location in Consolidated Statement of Income	2018			2017			2016
Derivatives not designated as hedging instruments:
Interest rate contracts	Derivative fees and other income	$	280		$	(1,772	)	$	2,557
Foreign exchange contracts	Letters of credit fees and foreign exchange income	16,784			22,076			12,632
Credit contracts	Derivative fees and other income	(156		)	(7		)	—
Equity contracts	Ancillary loan fees and other income	512			1,672			—
Commodity contracts	Derivative fees and other income	(11		)	—			—
Net gains		$	17,409		$	21,969		$	15,189

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 December 31, 2018, the net fair value of all derivative instruments with such credit-risk-related contingent features that were in a net liability position was $11.4 million, which includes $2.8 million in derivative assets and $14.2 million in derivative liabilities, with collateral posted of $9.4 million. As of December 31, 2017, the net fair value of all derivative instruments with the credit-risk-related contingent features that were in a net liability position was $7.6 million, which includes $159 thousand derivative assets and $7.8 million in derivative liabilities, with collateral posted of $7.3 million. In the event that the credit rating of East West Bank had been downgraded to below investment grade, additional minimal collateral would have been required to be posted as of December 31, 2018 and 2017.

Offsetting of Derivatives

The following tables present the gross derivative fair values, the balance sheet netting adjustments and the resulting net fair values recorded on the consolidated balance sheet, as well as the cash and non-cash collateral associated with master netting arrangements. 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 December 31, 2018
	Gross Amounts Recognized⁽¹⁾		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			Net Amount
	Gross Amounts Recognized⁽¹⁾		Master Netting Arrangements			Cash Collateral Received⁽³⁾			Net Amounts Presented on the Consolidated Balance Sheet		Security Collateral Received ⁽⁵⁾			Net Amount
Derivative assets	$	107,816	$	(31,569	)	$	(13,577	)	$	62,670	$	(13,975	)	$	48,695

	Gross Amounts Recognized⁽²⁾		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			Net Amount
	Gross Amounts Recognized⁽²⁾		Master Netting Arrangements			Cash Collateral Pledged⁽⁴⁾			Net Amounts Presented on the Consolidated Balance Sheet		Security Collateral Pledged ⁽⁵⁾			Net Amount
Derivative liabilities	$	118,305	$	(31,569	)	$	(6,833	)	$	79,903	$	(11,231	)	$	68,672




($ in thousands)	As of December 31, 2017
	Gross Amounts Recognized⁽¹⁾		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			Net Amount
	Gross Amounts Recognized⁽¹⁾		Master Netting Arrangements			Cash Collateral Received⁽³⁾			Net Amounts Presented on the Consolidated Balance Sheet		Security Collateral Received ⁽⁵⁾			Net Amount
Derivative assets	$	67,077	$	(20,662	)	$	(8,024	)	$	38,391	$	(1,153	)	$	37,238

	Gross Amounts Recognized⁽²⁾		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			Net Amount
	Gross Amounts Recognized⁽²⁾		Master Netting Arrangements			Cash Collateral Pledged⁽⁴⁾			Net Amounts Presented on the Consolidated Balance Sheet		Security Collateral Pledged ⁽⁵⁾			Net Amount
Derivative liabilities	$	75,838	$	(20,662	)	$	(10,680	)	$	44,496	$	(18,610	)	$	25,886

(1)

Gross amounts recognized for derivative assets include amounts with counterparties subject to enforceable master netting arrangements or similar agreements of $105.9 million and $64.8 million, respectively, as of December 31, 2018 and 2017, and amounts with counterparties not subject to enforceable master netting arrangements or similar agreements of $2.0 million and $2.3 million, respectively, as of December 31, 2018 and 2017.

(2)

Gross amounts recognized for derivative liabilities include amounts with counterparties subject to enforceable master netting arrangements or similar agreements of $118.2 million and $75.3 million, respectively, as of December 31, 2018 and 2017, and amounts with counterparties not subject to enforceable master netting arrangements or similar agreements of $102 thousand and $523 thousand, respectively, as of December 31, 2018 and 2017.


(3)	Gross cash collateral received under master netting arrangements or similar agreements were $15.8 million and $9.2 million, respectively, as of December 31, 2018 and 2017. Of the gross cash collateral received, $13.6 million and $8.0 million were used to offset against derivative assets, respectively, as of December 31, 2018 and 2017.


(4)	Gross cash collateral pledged under master netting arrangements or similar agreements were $8.4 million and $10.7 million, respectively, as of December 31, 2018 and 2017. Of the gross cash collateral pledged, $6.8 million and $10.7 million were used to offset against derivative liabilities, respectively, as of December 31, 2018 and 2017.


(5)	Represents the fair value of security collateral received and pledged limited to derivative assets and liabilities that are subject to enforceable master netting arrangements or similar agreements. U.S. GAAP does not permit the netting of non-cash collateral on the consolidated balance sheet but requires disclosure of such amounts.

In addition to the amounts included in the tables above, the Company also has balance sheet netting related to the resale and repurchase agreements. Refer to Note 4 — Securities Purchased under Resale Agreements and Sold under Repurchase Agreements to the Consolidated Financial Statements for additional information. Refer to Note 3 — Fair Value Measurement and Fair Value of Financial Instruments to the Consolidated Financial Statements for fair value measurement disclosures on derivatives.