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DERIVATIVE FINANCIAL INSTRUMENTS | 3 Months Ended
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Mar. 31, 2015
DERIVATIVE FINANCIAL INSTRUMENTS |
DERIVATIVE FINANCIAL INSTRUMENTS | NOTE 8 — DERIVATIVE FINANCIAL INSTRUMENTS The following table presents the total notional and fair values of the Company’s derivatives as of March 31, 2015 and December 31, 2014:
|  | Fair Values of Derivative Instruments |
|  | March 31, 2015 |  | December 31, 2014 |
|  |  |  | Fair Value |  |  |  | Fair Value |
($ in thousands) |  | 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 |  | $ | 129,096 |  | $ | — |  | $ | 6,370 |  | $ | 132,667 |  | $ | — |  | $ | 9,922 |
Total derivatives designated as hedging instruments |  | $ | 129,096 |  | $ | — |  | $ | 6,370 |  | $ | 132,667 |  | $ | — |  | $ | 9,922 |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange options |  | $ | 50,000 |  | $ | 3,683 |  | $ | — |  | $ | 85,614 |  | $ | 6,136 |  | $ | — |
Embedded derivative liabilities |  | 47,794 |  | — |  | 3,412 |  | 47,838 |  | — |  | 3,392 |
Interest rate swaps and caps |  | 5,204,760 |  | 66,060 |  | 66,914 |  | 4,858,391 |  | 41,534 |  | 41,779 |
Foreign exchange contracts |  | 1,037,967 |  | 13,340 |  | 13,080 |  | 680,629 |  | 8,123 |  | 9,171 |
Total derivatives not designated as hedging instruments |  | $ | 6,340,521 |  | $ | 83,083 |  | $ | 83,406 |  | $ | 5,672,472 |  | $ | 55,793 |  | $ | 54,342 |
| (1) |  | Derivative assets are included in Other Assets. Derivative liabilities are included in Accrued Expenses and Other liabilities, and Deposits.
Derivatives Designated as Hedging Instruments Interest Rate Swaps on Certificates of Deposits — The Company is exposed to changes in the fair value of certain fixed rate certificates of deposits due to changes in the benchmark interest rate, London Interbank Offering 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. The interest rate swaps and the related certificates of deposits have the same maturity dates. In the first quarter of 2015, the Company terminated $3.6 million of interest rate swaps on certificates of deposits, as a result of certificate of deposit repurchases. As of March 31, 2015 and December 31, 2014, the total notional amounts of interest rate swaps on certificates of deposits were $129.1 million and $132.7 million, respectively. The fair value liabilities of the interest rate swaps were $6.4 million and $9.9 million as of March 31, 2015 and December 31, 2014, respectively. The following table presents the net gains (losses) recognized in the consolidated statements of income for the three months ended March 31, 2015 and 2014:
|  | Three Months Ended March 31, |
($ in thousands) |  | 2015 |  | 2014 |
Gains (losses) recorded in interest expense |  |  |  |  |
Recognized on interest rate swaps |  | $ | 3,048 |  | $ | 2,704 |
Recognized on certificates of deposits |  | (2,695) |  | (2,937 | )
Net amount recognized on fair value hedges (ineffective portion) |  | $ | 353 |  | $ | (233 | )
Reduction in interest expense recognized on interest rate swaps |  | $ | 920 |  | $ | 1,824 |
Derivatives Not Designated as Hedging Instruments 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 deposits available to its customers. These certificates of deposits have a term of 5 years and pay 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., the certificate of deposit). In accordance with ASC 815, both the embedded derivative instruments and the freestanding foreign exchange option contracts are recorded at fair value. As of March 31, 2015 and December 31, 2014, the notional amounts of the foreign exchange options were $50.0 million and $85.6 million, respectively. As of both March 31, 2015 and December 31, 2014, the notional amounts of the embedded derivative liabilities were $47.8 million. The fair values of the foreign exchange options and the embedded derivative liabilities amounted to a $3.7 million asset and a $3.4 million liability, respectively, as of March 31, 2015. The fair values of the foreign exchange options and embedded derivative liabilities amounted to a $6.1 million asset and a $3.4 million liability, respectively, as of December 31, 2014. Interest Rate Swaps and Caps — The Company enters into interest rate derivatives including interest rate swaps and caps 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 mirror interest rate contracts with institutional counterparties. As of March 31, 2015, the total notional amounts of interest rate swaps and caps, including mirror transactions with institutional counterparties and the Company’s customers totaled $2.60 billion each for derivatives that were in an asset and a liability valuation position. As of December 31, 2014, the total notional amounts of interest rate swaps and caps, including mirror transactions with institutional counterparties and the Company’s customers totaled $2.45 billion for derivatives that were in an asset valuation position and $2.40 billion for derivatives that were in a liability valuation position. The fair values of interest rate swap and cap contracts with institutional counterparties and the Company’s customers amounted to a $66.1 million asset and a $66.9 million liability as of March 31, 2015. The fair values of interest rate swap and cap contracts with institutional counterparties and the Company’s customers amounted to a $41.5 million asset and a $41.8 million liability as of December 31, 2014. Foreign Exchange Contracts — The Company enters into short-term foreign exchange forward contracts on a regular basis to economically hedge against foreign exchange rate fluctuations. As of March 31, 2015 and December 31, 2014, the notional amounts of short-term foreign exchange contracts were $1.04 billion and $680.6 million, respectively. The fair values of the short-term foreign exchange contracts recorded were a $13.3 million asset and a $13.1 million liability as of March 31, 2015. The fair values of short-term foreign exchange contracts recorded were an $8.1 million asset and a $9.2 million liability as of December 31, 2014. The following table presents the net gains (losses) recognized on the Company’s consolidated statements of income related to derivatives not designated as hedging instruments:
|  | Location in |  | Three Months Ended March 31, |
|  | Consolidated |  |  |  |  |
($ in thousands) |  | Statements of Income |  | 2015 |  | 2014 |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |
Foreign exchange options |  | Foreign exchange income |  | $ | 199 |  | $ | (119 | )
Foreign exchange options with embedded derivatives |  | Other operating expense |  | (141) |  | 1 |
Interest rate swaps and caps |  | Other operating income |  | (594) |  | (936 | )
Foreign exchange contracts |  | Foreign exchange income |  | 1,308 |  | (2,129 | )
Total net gains (losses) |  |  |  | $ | 772 |  | $ | (3,183 | )
Credit-Risk-Related Contingent Features — Certain over-the-counter (“OTC”) 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 downgrades in the credit rating of East West Bank to below investment grade. In the event that East West Bank’s credit rating is downgraded to below investment grade, no additional collateral would be required to be posted since the liabilities related to such contracts were fully collateralized as of March 31, 2015 and December 31, 2014. Offsetting of Derivatives The Company has entered into agreements with 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 in the consolidated balance sheets and the respective collaterals 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 March 31, 2015 |
|  |  |  | Gross Amounts |  | Net Amounts of Assets Presented |  | Gross Amounts Not Offset on the Consolidated Balance Sheet |  |  |
Assets |  | Gross Amounts of Recognized Assets |  | Offset on the Consolidated Balance Sheet |  | on the Consolidated Balance Sheet |  | Financial Instruments |  | Collateral Received |  | Net Amount |
Derivatives |  | $ | 13,564 |  | $ | — |  | $ | 13,564 |  | $ | (6,002) | (1) | $ | (6,480) | (2) | $ | 1,082 |
|  |  |  |  |  | Net Amounts of Liabilities |  | Gross Amounts Not Offset on the Consolidated Balance Sheet |  |  |
Liabilities |  | Gross Amounts of Recognized Liabilities |  | Gross Amounts Offset on the Consolidated Balance Sheet |  | Presented on the Consolidated Balance Sheet |  | Financial Instruments |  | Collateral Posted |  | Net Amount |
Derivatives |  | $ | 79,890 |  | $ | — |  | $ | 79,890 |  | $ | (6,002) | (1) | $ | (72,018) | (3) | $ | 1,870 |
($ in thousands) |  | As of December 31, 2014 |
|  |  |  | Gross Amounts |  | Net Amounts of Assets Presented |  | Gross Amounts Not Offset on the Consolidated Balance Sheet |  |  |
Assets |  | Gross Amounts of Recognized Assets |  | Offset on the Consolidated Balance Sheet |  | on the Consolidated Balance Sheet |  | Financial Instruments |  | Collateral Received |  | Net Amount |
Derivatives |  | $ | 12,396 |  | $ | — |  | $ | 12,396 |  | $ | (5,725) | (1) | $ | (3,463) | (2) | $ | 3,208 |
|  |  |  |  |  | Net Amounts of Liabilities |  | Gross Amounts Not Offset on the Consolidated Balance Sheet |  |  |
Liabilities |  | Gross Amounts of Recognized Liabilities |  | Gross Amounts Offset on the Consolidated Balance Sheet |  | Presented on the Consolidated Balance Sheet |  | Financial Instruments |  | Collateral Posted |  | Net Amount |
Derivatives |  | $ | 56,505 |  | $ | — |  | $ | 56,505 |  | $ | (5,725) | (1) | $ | (49,951) | (3) | $ | 829 |
| (1) |  | Represents the netting of derivative receivable and payable balance for the same counterparty under enforceable master netting arrangements if the Company has elected to net.
| (2) |  | Represents $6.5 million and $3.5 million of cash collateral received against derivative assets with the same counterparty that are subject to enforceable master netting arrangements as of March 31, 2015 and December 31, 2014, respectively.
| (3) |  | Represents cash and securities pledged against derivative liabilities with the same counterparty that are subject to enforceable master netting arrangements. Includes approximately $19.0 million and $12.8 million of cash collateral posted as of March 31, 2015 and December 31, 2014, respectively.
Refer to Note 4 for fair value measurement disclosures on derivatives.

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=35736893&loc=d3e80748-113994 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4A -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5618551-113959 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4K -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5708775-113959 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 25 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6886632&loc=d3e76258-113986 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4E -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5624181-113959 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 45 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6441202&loc=d3e80720-113993 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4H -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5624258-113959 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4B -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5624163-113959 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(n)) -URI http://asc.fasb.org/extlink&oid=26873400&loc=d3e23780-122690 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4J -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5708773-113959 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=35736893&loc=d3e80784-113994 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4D -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5624177-113959 Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=35706170&loc=d3e41620-113959 Reference 14: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1A -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5579245-113959 Reference 15: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1B -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5580258-113959 Reference 16: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5579240-113959 Reference 17: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=35706170&loc=d3e41641-113959 Reference 18: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=35706170&loc=d3e41638-113959 Reference 19: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4C -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5624171-113959 + Details
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