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 2018 Form 10-K.

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 March 31, 2019 and December 31, 2018. 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)	March 31, 2019									December 31, 2018
	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		$	—		$	4,660		$	35,811		$	—		$	5,866
Net investment hedges:
Foreign exchange contracts	92,215			—			18			90,245			—			611
Total derivatives designated as hedging instruments	$	123,241		$	—		$	4,678		$	126,056		$	—		$	6,477

Derivatives not designated as hedging instruments:
Interest rate contracts	$	12,266,761		$	96,256		$	71,912		$	11,695,499		$	69,818		$	69,267
Foreign exchange contracts	3,513,714			30,085			24,900			3,407,522			21,624			19,329
Credit contracts	92,925			1			81			119,320			1			164
Equity contracts	—		⁽¹⁾	2,201			—			—		⁽¹⁾	1,951			—
Commodity contracts	—		⁽²⁾	7,239			8,016			—		⁽²⁾	14,422			23,068
Total derivatives not designated as hedging instruments	$	15,873,400		$	135,782		$	104,909		$	15,222,341		$	107,816		$	111,828
Gross derivative assets/liabilities				$	135,782		$	109,587					$	107,816		$	118,305
Less: Master netting agreements				(39,118		)	(39,118		)				(31,569		)	(31,569		)
Less: Cash collateral received/paid				(920		)	(16,984		)				(13,577		)	(6,833		)
Net derivative assets/liabilities				$	95,744		$	53,485					$	62,670		$	79,903


(1)	The Company held equity contracts in four public companies and 17 private companies as of March 31, 2019. In comparison, the Company held equity contracts in four public companies and 18 private companies as of December 31, 2018.

(2)

The notional amount of the Company’s commodity contracts entered with its customers totaled 4,178 thousand barrels of oil and 20,679 thousand units of natural gas, measured in million British thermal units (“MMBTUs”) as of March 31, 2019. In comparison, the notional amount of the Company’s commodity contracts entered with its customers totaled 2,507 thousand barrels of oil and 14,722 thousand MMBTUs of natural gas 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.

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 enters into interest rate swaps, which are 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 gains (losses) recognized on the Consolidated Statement of Income related to the derivatives designated as fair value hedges for the three months ended March 31, 2019 and 2018:




($ in thousands)	Three Months Ended March 31,
($ in thousands)	2019			2018
Gains (losses) recorded in interest expense:
Recognized on interest rate swaps	$	1,220		$	(1,452	)
Recognized on certificates of deposit	$	(1,261	)	$	1,279

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 March 31, 2019 and December 31, 2018:




($ in thousands)	Carrying Value ⁽¹⁾						Cumulative Fair Value Adjustment ⁽²⁾
($ in thousands)	March 31, 2019			December 31, 2018			March 31, 2019		December 31, 2018
Certificates of deposit	$	(27,804	)	$	(26,877	)	$	2,880	$	4,141


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


(2)	For liabilities, 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 swap contracts to hedge its investment in East West Bank (China) Limited, a non-USD functional currency subsidiary in China. The notional and fair value amounts of the net investment hedges comprising of foreign exchange swaps were $92.2 million and $18 thousand liability as of March 31, 2019. In comparison, 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.

The following table presents the impact of the hedging derivatives used in net investment hedges for the three months ended March 31, 2019 and 2018:




($ in thousands)	Three Months Ended March 31,
($ in thousands)	2019		2018
Losses recognized in AOCI	$	2,005	$	1,154

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. 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 $7.4 million and $32.8 million, respectively, as of March 31, 2019. In comparison, 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 $6.14 billion of interest rates contracts entered with financial counterparties was a notional amount of $1.82 billion of interest rate swaps that cleared through LCH as of March 31, 2019. In comparison, 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 March 31, 2019 and December 31, 2018:




($ in thousands)	March 31, 2019
	Customer Counterparty						($ in thousands)	Financial Counterparty
	Notional Amount		Fair Value					Notional Amount		Fair Value
	Notional Amount		Assets		Liabilities			Notional Amount		Assets		Liabilities
Written options	$	957,000	$	—	$	189	Purchased options	$	957,000	$	193	$	—
Sold collars and corridors	477,225		1,272		67		Collars and corridors	477,225		67		1,297
Swaps	4,695,922		81,642		20,121		Swaps	4,702,389		13,082		50,238
Total	$	6,130,147	$	82,914	$	20,377	Total	$	6,136,614	$	13,342	$	51,535




($ 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

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 enters 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 both March 31, 2019 and 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 have original maturities of one year or less as of March 31, 2019 and December 31, 2018.

The following tables present the notional amounts and the gross fair values of foreign exchange derivative contracts outstanding as of March 31, 2019 and December 31, 2018:




($ in thousands)	March 31, 2019
	Customer Counterparty						($ in thousands)	Financial Counterparty
	Notional Amount		Fair Value					Notional Amount		Fair Value
	Notional Amount		Assets		Liabilities			Notional Amount		Assets		Liabilities
Forwards and spot	$	2,355,139	$	20,016	$	18,852	Forwards and spot	$	239,101	$	2,685	$	1,414
Swaps	31,174		97		223		Swaps	705,716		6,522		3,646
Written options	549		7		—		Purchased options	549		—		7
Collars	90,743		17		741		Collars	90,743		741		17
Total	$	2,477,605	$	20,137	$	19,816	Total	$	1,036,109	$	9,948	$	5,084




($ 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
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

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 March 31, 2019 and December 31, 2018. 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 March 31, 2019 and December 31, 2018:




($ in thousands)	March 31, 2019						December 31, 2018
	Notional Amount		Fair Value				Notional Amount		Fair Value
	Notional Amount		Assets		Liabilities		Notional Amount		Assets		Liabilities
RPAs - protection sold	$	82,211	$	—	$	81	$	108,606	$	—	$	164
RPAs - protection purchased	10,714		1		—		10,714		1		—
Total RPAs	$	92,925	$	1	$	81	$	119,320	$	1	$	164

Assuming all underlying borrowers referenced in the interest rate contracts defaulted as of March 31, 2019 and December 31, 2018, the exposure from the RPAs with protections sold would be $84 thousand and $125 thousand, respectively. As of March 31, 2019 and December 31, 2018, the weighted-average remaining maturities of the outstanding RPAs were 4.9 years and 6.6 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. 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 March 31, 2019, and held warrants in four public companies and 18 private companies as of December 31, 2018. The fair value of the warrants held in public and private companies was a $2.2 million asset and a $2.0 million asset as of March 31, 2019 and December 31, 2018, 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 $2.1 million and $720 thousand, respectively, and a remaining net liability fair value of $12 thousand as of March 31, 2019. The notional quantities that cleared through CME totaled 1,028 thousand barrels of oil and 6,903 thousand MMBTUs of natural gas as of March 31, 2019. In comparison, 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 as of December 31, 2018.

The following tables present the notional amounts and fair values of the commodity derivative positions outstanding as of March 31, 2019 and 2018:




($ and units in thousands)	March 31, 2019
	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	307	$	442	$	303	Purchased options	Barrels	307	$	163	$	424
Collars	Barrels	2,394	2,800		282		Collars	Barrels	2,394	254		2,758
Swaps	Barrels	1,477	719		2,484		Swaps	Barrels	1,477	832		321
Total		4,178	$	3,961	$	3,069	Total		4,178	$	1,249	$	3,503

Natural gas:							Natural gas:
Collars	MMBTUs	6,241	$	128	$	19	Collars	MMBTUs	6,241	$	15	$	117
Swaps	MMBTUs	14,438	817		1,003		Swaps	MMBTUs	14,438	1,069		305
Total		20,679	$	945	$	1,022	Total		20,679	$	1,084	$	422
Total			$	4,906	$	4,091	Total			$	2,333	$	3,925




($ and units in thousands)	December 31, 2018
	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 (losses) gains recognized on the Company’s Consolidated Statement of Income related to derivatives not designated as hedging instruments for the three months ended March 31, 2019 and 2018:




($ in thousands)	Classification on Consolidated Statement of Income	Three Months Ended March 31,
($ in thousands)	Classification on Consolidated Statement of Income	2019			2018
Derivatives not designated as hedging instruments:
Interest rate contracts	Interest rate contracts and other derivative income	$	(1,779	)	$	1,106
Foreign exchange contracts	Foreign exchange income	6,326			3,857
Credit contracts	Interest rate contracts and other derivative income	83			(13		)
Equity contracts	Lending fees	250			(159		)
Commodity contracts	Interest rate contracts and other derivative income	4			—
Net gains		$	4,884		$	4,791

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 March 31, 2019, the net fair value of all derivative instruments with such credit-risk-related contingent features that were in a net liability position was $27.3 million, which included $587 thousand in derivative assets and $27.9 million in derivative liabilities, with collateral posted of $27.1 million. 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 included $2.8 million in derivative assets and $14.2 million in derivative liabilities, with collateral posted of $9.4 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 March 31, 2019 and December 31, 2018.

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 variation margins of clearing organizations as settlements of the related derivative fair values:




($ in thousands)	March 31, 2019
	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	$	135,782	$	(39,118	)	$	(920	)	$	95,744	$	(1,097	)	$	94,647

	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	$	109,587	$	(39,118	)	$	(16,984	)	$	53,485	$	(26,191	)	$	27,294




($ in thousands)	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

(1)

Gross amounts recognized for derivative assets include amounts with counterparties subject to enforceable master netting arrangements or similar agreements of $133.6 million and $105.9 million, respectively, as of March 31, 2019 and December 31, 2018, and amounts with counterparties not subject to enforceable master netting arrangements or similar agreements of $2.2 million and $2.0 million, respectively, as of March 31, 2019 and December 31, 2018.

(2)

Gross amounts recognized for derivative liabilities include amounts with counterparties subject to enforceable master netting arrangements or similar agreements of $109.6 million and $118.2 million, respectively, as of March 31, 2019 and December 31, 2018, and amounts with counterparties not subject to enforceable master netting arrangements or similar agreements of $9 thousand and $102 thousand, respectively, as of March 31, 2019 and December 31, 2018.


(3)	Gross cash collateral received under master netting arrangements or similar agreements were $920 thousand and $15.8 million, respectively, as of March 31, 2019 and December 31, 2018. Of the gross cash collateral received, $920 thousand and $13.6 million were used to offset against derivative assets, respectively, as of March 31, 2019 and December 31, 2018.


(4)	Gross cash collateral pledged under master netting arrangements or similar agreements were $20.0 million and $8.4 million, respectively, as of March 31, 2019 and December 31, 2018. Of the gross cash collateral pledged, $17.0 million and $6.8 million were used to offset against derivative liabilities, respectively, as of March 31, 2019 and December 31, 2018.


(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. 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 5 — Securities Purchased under Resale Agreements and Sold under Repurchase Agreements to the Consolidated Financial Statements in this Form 10-Q for additional information. Refer to Note 4 — Fair Value Measurement and Fair Value of Financial Instruments to the Consolidated Financial Statements in this Form 10-Q for fair value measurement disclosures on derivatives.