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 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.

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




($ in thousands)	December 31, 2017							December 31, 2016
	Notional Amount			Fair Value				Notional Amount		Fair Value
	Notional Amount			Derivative Assets ⁽¹⁾		Derivative Liabilities ⁽¹⁾		Notional Amount		Derivative Assets ⁽¹⁾		Derivative Liabilities ⁽¹⁾
Derivatives designated as hedging instruments:
Interest rate swaps on certificates of deposit	$	35,811		$	—	$	6,799	$	48,365	$	—	$	5,976
Foreign currency forward contracts	—			—		—		83,026		4,325		—
Total derivatives designated as hedging instruments	$	35,811		$	—	$	6,799	$	131,391	$	4,325	$	5,976
Derivatives not designated as hedging instruments:
Interest rate swaps and options	$	9,333,860		$	58,633	$	57,958	$	7,668,482	$	67,578	$	65,131
Foreign exchange contracts	770,215			5,840		10,170		767,764		11,874		11,213
RPAs	49,033			1		8		71,414		3		3
Warrants	—		⁽²⁾	1,672		—		—		—		—
Total derivatives not designated as hedging instruments	$	10,153,108		$	66,146	$	68,136	$	8,507,660	$	79,455	$	76,347


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


(2)	The Company held four warrants in public companies and 23 warrants in private companies as of December 31, 2017.

Derivatives Designated as Hedging Instruments

Interest Rate Swaps on Certificates of Deposit — The Company is exposed to changes in the fair value of certain fixed rate certificates of deposit due to changes in the benchmark interest rate, London Interbank Offered Rate (“LIBOR”). Interest rate swaps designated as fair value hedges involve the receipt of fixed rate amounts from a counterparty in exchange for the Company making variable rate payments over the life of the agreements without the exchange of the underlying notional amount.

As of December 31, 2017 and 2016, the total notional amounts of the interest rate swaps on certificates of deposit were $35.8 million and $48.4 million, respectively. The fair value liabilities of the interest rate swaps were $6.8 million and $6.0 million as of December 31, 2017 and 2016, 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 years ended December 31, 2017, 2016 and 2015:




($ in thousands)	Year Ended December 31,
($ in thousands)	2017			2016			2015
(Losses) gains recorded in interest expense:
Recognized on interest rate swaps	$	(2,734	)	$	(794	)	$	3,452
Recognized on certificates of deposit	$	2,271		$	157		$	(3,190	)

For the years ended December 31, 2017, 2016, and 2015, the Company also recognized net reductions to interest expense of $1.0 million, $3.0 million, and $3.6 million, respectively, primarily related to net settlements of the derivatives.

Net Investment Hedges — ASC 830-20, Foreign Currency Matters — Foreign Currency Transactions and ASC 815, Derivatives and Hedging, allow hedging of the foreign currency risk of a net investment in a foreign operation. During the fourth quarter of 2015, the Company began entering into foreign currency forward contracts to hedge its investment in East West Bank (China) Limited, a non-USD functional currency subsidiary in China. The hedging instruments designated as net investment hedges, involve hedging the risk of changes in the USD equivalent value of a designated monetary amount of the Company’s net investment in China, against the risk of adverse changes in the foreign currency exchange rate. The Company recorded the changes in the carrying amount of its China subsidiary in the Foreign currency translation adjustment account within AOCI. Simultaneously, the effective portion of the hedge of this exposure was also recorded in the Foreign currency translation adjustment account and the ineffective portion, if any, was recorded in current earnings. During the first quarter of 2017, the Company discontinued hedge accounting prospectively. The cumulative effective portion of the net investment hedges recorded through the point of dedesignation remained in the Foreign currency translation adjustment account within AOCI, and will be reclassified into earnings only upon the sale or liquidation of the China subsidiary. The Company continues to economically hedge its foreign currency exposure in its China subsidiary through foreign exchange forward contracts, which were included as part of the Derivatives Not Designated as Hedging Instruments — Foreign Exchange Contracts caption as of December 31, 2017.

As of December 31, 2017, there were no derivative contracts designated as net investment hedges. As of December 31, 2016, the total notional amount and fair value of the foreign currency forward contracts designated as net investment hedges were $83.0 million and a $4.3 million asset, respectively. The following table presents the (losses) gains recorded in the Foreign currency translation adjustment account within AOCI related to the effective portion of the net investment hedges and the ineffective portion recorded on the Consolidated Statement of Income for the years ended December 31, 2017, 2016 and 2015:




($ in thousands)	Year Ended December 31,
($ in thousands)	2017			2016		2015
(Losses) gains recognized in AOCI on net investment hedges (effective portion)	$	(648	)	$	2,908	$	1,485
(Losses) gains recognized in foreign exchange income (ineffective portion)	$	(1,953	)	$	1,124	$	880

Derivatives Not Designated as Hedging Instruments

Interest Rate Swaps and Options — The Company enters into interest rate derivatives including interest rate swaps and options with its customers to allow them to hedge against the risk of rising interest rates on their variable rate loans. To economically hedge against the interest rate risks in the products offered to its customers, the Company enters into mirrored interest rate contracts with institutional counterparties. As of December 31, 2017, the total notional amounts of interest rate swaps and options, including mirrored transactions with institutional counterparties and the Company’s customers, totaled $4.69 billion for derivatives that were in an asset valuation position and $4.65 billion for derivatives that were in a liability valuation position. As of December 31, 2016, the total notional amounts of interest rate swaps and options, including mirrored transactions with institutional counterparties and the Company’s customers, totaled $3.86 billion for derivatives that were in an asset valuation position and $3.81 billion for derivatives that were in a liability valuation position. The fair value of interest rate swap and option contracts with institutional counterparties and the Company’s customers amounted to a $58.6 million asset and a $58.0 million liability as of December 31, 2017. The fair value of interest rate swap and option contracts with institutional counterparties and the Company’s customers amounted to a $67.6 million asset and a $65.1 million liability as of December 31, 2016.

Foreign Exchange Contracts — The Company enters into foreign exchange contracts with its customers, primarily comprised of forward, swap and spot contracts to enable its customers to hedge their transactions in foreign currencies against fluctuations in foreign exchange rates, and also to allow the Company to economically hedge against foreign currency fluctuations in certain foreign currency denominated deposits that it offers to its customers, as well as the Company’s investment in its China subsidiary, East West Bank (China) Limited. For a majority of the foreign exchange transactions entered with its customers, the Company enters into offsetting foreign exchange contracts with institutional counterparties to mitigate the foreign exchange risk. A majority of these contracts have original maturities of one year or less. As of December 31, 2017 and 2016, the total notional amounts of the foreign exchange contracts were $770.2 million and $767.8 million, respectively. The fair value of the foreign exchange contracts recorded was a $5.8 million asset and a $10.2 million liability as of December 31, 2017. The fair value of the foreign exchange contracts recorded was an $11.9 million asset and an $11.2 million liability as of December 31, 2016.

Credit Risk Participation Agreements — The Company has entered into RPAs under which the Company assumed its pro-rata share of the credit exposure associated with the borrower’s performance related to interest rate derivative contracts. The Company may or may not be a party to the interest rate derivative contract and enters into such RPAs in instances where the Company is a party to the related loan participation agreement with the borrower. The Company will make or receive payments under the RPAs if the borrower defaults on its obligation to perform under the interest rate derivative contract. The Company manages its credit risk on the RPAs by monitoring the credit worthiness of the borrowers, which is based on the normal credit review process. The notional amount of the RPAs reflects the Company’s pro-rata share of the derivative instrument. As of December 31, 2017, the notional amount and fair value of the RPAs purchased were $35.2 million and an $8 thousand liability, respectively. As of December 31, 2017, the notional amount and fair value of the RPAs sold were $13.8 million and a $1 thousand asset, respectively. As of December 31, 2016, the notional amount and fair value of the RPAs purchased were $48.3 million and a $3 thousand liability, respectively. As of December 31, 2016, the notional amount and fair value of the RPAs sold were $23.1 million and a $3 thousand asset, respectively. Assuming all underlying borrowers referenced in the interest rate derivative contracts defaulted as of December 31, 2017 and 2016, the exposures from the RPAs purchased would be $419 thousand and $179 thousand, respectively. As of December 31, 2017 and 2016, the weighted-average remaining maturities of the outstanding RPAs were 6.0 years and 3.7 years, respectively.

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. As of December 31, 2017, the Company held four warrants in public companies and 23 warrants in private companies. The fair value of the warrants for public and private companies was a $993 thousand asset and a $679 thousand asset, respectively, totaling $1.7 million as of December 31, 2017.

Foreign Exchange Options — During 2010, the Company entered into foreign exchange option contracts with major brokerage firms to economically hedge against foreign exchange fluctuations in certain certificates of deposit available to its customers. These certificates of deposit had a term of five years and paid interest based on the performance of the RMB relative to the USD. Under ASC 815, a certificate of deposit that pays interest based on changes in foreign exchange rates is a hybrid instrument with an embedded derivative that must be accounted for separately from the host contract (i.e., certificates of deposit). In accordance with ASC 815, both the embedded derivative instruments and the freestanding foreign exchange option contracts are recorded at fair value. These instruments expired in the second quarter of 2015.

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, 2017, 2016 and 2015:




($ in thousands)	Location in Consolidated Statement of Income	Year Ended December 31,
($ in thousands)	Location in Consolidated Statement of Income	2017			2016		2015
Derivatives not designated as hedging instruments:
Interest rate swaps and options	Derivative fees and other income	$	(1,772	)	$	2,557	$	65
Foreign exchange contracts	Foreign exchange income	22,076			12,632		4,235
Foreign exchange options	Foreign exchange income	—			—		236
RPAs	Derivative fees and other income	(7		)	—		—
Warrants	Ancillary loan fees and other income	1,672			—		—
Embedded derivative liabilities	Other operating expense	—			—		(136		)
Total net gains		$	21,969		$	15,189	$	4,400

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, 2017 and 2016, the aggregate fair value of all derivative instruments with such credit-risk-related contingent features that are in a net liability position was $6.3 million and $7.1 million, respectively, with collateral posted of $6.2 million and $9.1 million, respectively. In the event that East West Bank’s credit rating is downgraded to below investment grade, minimal additional collateral would have been required to be posted as of December 31, 2017 and 2016.

Offsetting of Derivatives

The Company has entered into agreements with certain counterparty financial institutions, which include master netting agreements. However, the Company has elected to account for all derivatives with counterparty institutions on a gross basis. The following tables present gross derivatives on the Consolidated Balance 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 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								Net Amount
	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	$	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								Net Amount
	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 Posted				Net Amount
Derivative liabilities	$	74,935	$	26,732	$	48,203	$	—	$	48,203	$	(18,955	)	⁽¹⁾	$	(28,796	)	⁽³⁾	$	452




($ in thousands)	As of December 31, 2016
	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								Net Amount
	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	$	83,780	$	51,218	$	32,562	$	—	$	32,562	$	(20,991	)	⁽¹⁾	$	(10,687	)	⁽²⁾	$	884

	Gross Amounts Recognized		Gross Amounts Recognized		Gross Amounts Recognized		Gross Amounts Offset on the Consolidated Balance Sheet		Net Amounts Presented on the Consolidated Balance Sheet		Gross Amounts Not Offset on the Consolidated Balance Sheet								Net Amount
	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 liabilities	$	82,323	$	24,097	$	58,226	$	—	$	58,226	$	(20,991	)	⁽¹⁾	$	(36,349	)	⁽³⁾	$	886


(1)	Represents the netting of derivative receivable and payable balances for the same counterparty under enforceable master netting arrangements if the Company has elected to net.


(2)	Represents cash and securities received against derivative assets with the same counterparty that are subject to enforceable master netting arrangements, including $8.6 million and $8.1 million of cash collateral received as of December 31, 2017 and 2016, respectively.


(3)	Represents cash and securities pledged against derivative liabilities with the same counterparty that are subject to enforceable master netting arrangements, including $10.7 million and $170 thousand of cash collateral posted as of December 31, 2017 and 2016, respectively.

In addition to the amounts included in the tables above, the Company also has balance sheet netting related to resale and repurchase agreements. Refer to Note 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.