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Derivatives | 3 Months Ended
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Mar. 31, 2018
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivatives | 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 to the Consolidated Financial Statements of the Company’s 2017 Form 10-K. The following table presents the total notional and gross fair value of the Company’s derivatives as of March 31, 2018 and December 31, 2017. The derivative asset and liability balances are presented on a gross basis, prior to the application of master netting arrangements, as included in Other assets and Accrued expenses and other liabilities, respectively, on the Consolidated Balance Sheet.
($ in thousands) |  | March 31, 2018 |  | December 31, 2017
| Notional Amount |  | Fair Value |  | Notional Amount |  | Fair Value
|  | Derivative Assets |  | Derivative Liabilities |  |  | Derivative Assets |  | Derivative Liabilities
Derivatives designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |
Fair value hedges: |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | $ | 35,811 |  |  | $ | — |  |  | $ | 8,251 |  |  | $ | 35,811 |  |  | $ | — |  |  | $ | 6,799 |
Net investment hedges: |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange forwards |  | 97,464 |  |  | — |  |  | 1,154 |  |  | — |  |  | — |  |  | — |
Total derivatives designated as hedging instruments |  | $ | 133,275 |  |  | $ | — |  |  | $ | 9,405 |  |  | $ | 35,811 |  |  | $ | — |  |  | $ | 6,799 |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps and options |  | $ | 10,155,401 |  |  | $ | 51,933 |  |  | $ | 72,893 |  |  | $ | 9,333,860 |  |  | $ | 58,633 |  |  | $ | 57,958 |
Foreign exchange spot and forwards |  | 895,788 |  |  | 6,087 |  |  | 4,066 |  |  | 770,215 |  |  | 5,840 |  |  | 10,170 |
Credit risk participation agreements |  | 81,928 |  |  | 1 |  |  | 21 |  |  | 49,033 |  |  | 1 |  |  | 8 |
Equity warrants |  | — |  | (1) | 1,513 |  |  | — |  |  | — |  | (1) | 1,672 |  |  | — |
Commodity options |  | — |  | (2) | 297 |  |  | 288 |  |  | — |  |  | — |  |  | — |
Total derivatives not designated as hedging instruments |  | $ | 11,133,117 |  |  | $ | 59,831 |  |  | $ | 77,268 |  |  | $ | 10,153,108 |  |  | $ | 66,146 |  |  | $ | 68,136 |
(1) | The Company held four warrants in public companies and 24 warrants in private companies as of March 31, 2018. The Company held four warrants in public companies and 23 warrants in private companies as of December 31, 2017.
(2) | The notional amount of the Company’s commodity option contracts entered with its customers and Chicago Mercantile Exchange (“CME”) totaled 216,000 barrels of oil each as of March 31, 2018.
Derivatives Designated as Hedging Instruments Fair Value Hedges — 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, the London Interbank Offered Rate. The Company entered into interest rate swaps, which were designated as fair value hedges. The interest rate swaps 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 total notional amounts of the interest rate swaps on certificates of deposit were $35.8 million as of both March 31, 2018 and December 31, 2017. The fair value liabilities of the interest rate swaps were $8.3 million and $6.8 million as of March 31, 2018 and December 31, 2017, respectively. The following table presents the net (losses) gains recognized on the Consolidated Statement of Income related to the derivatives designated as fair value hedges for the three months ended March 31, 2018 and 2017:
($ in thousands) |  | Three Months Ended March 31,
| 2018 |  | 2017
(Losses) gains recorded in interest expense: |  |  |  |
Recognized on interest rate swaps |  | $ | (1,452 | ) |  | $ | (817 | )
Recognized on certificates of deposit |  | $ | 1,279 |  |  | $ | 688 |
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, 2018:
($ in thousands) |  | March 31, 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 |  | $ | (29,779 | ) |  | $ | 6,024 |
(1) | The balance represents the full carrying amount of the hedged certificates of deposit as of the balance sheet date.
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 forward 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. During the first quarter of 2017, the Company discontinued hedge accounting of the foreign currency forward contracts and continued 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 section. The cumulative effective portion of the net investment hedges recorded through the point of de-designation 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. During the first quarter of 2018, the Company entered into new foreign currency forward 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 March 31, 2018, the total notional amount and fair value of the foreign currency forward contracts designated as the net investment hedges were $97.5 million and a $1.2 million liability, respectively. As of December 31, 2017, there were no derivative contracts designated as net investment hedges. As a result of the adoption of ASU 2017-12, the Company recorded the total fair value change of $1.2 million in the Foreign Currency Translation Adjustment account within AOCI during the three months ended March 31, 2018. During the three months ended March 31, 2017, before the adoption of ASU 2017-12, the Company recorded a loss of $648 thousand in the Foreign Currency Translation Adjustment account within AOCI related to the effective portion of the net investment hedges, and a loss of $2.0 million in the Letters of credit fees and foreign exchange income on the Consolidated Statement of Income related to the ineffective portion of the net investment hedges. 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 such as LCH, as a central counterparty. As of March 31, 2018, the total notional amounts of interest rate swaps and options, including mirrored transactions with institutional counterparties and the Company’s customers, totaled $5.11 billion for derivatives that were in an asset valuation position and $5.05 billion for derivatives that were in a liability valuation position. 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. The fair value of interest rate swap and option contracts with institutional counterparties and the Company’s customers amounted to a $51.9 million asset and a $72.9 million liability as of March 31, 2018. 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. Beginning in January 2018, LCH amended its rulebook to legally characterize variation margin payments made to and received from LCH as settlement 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 $25.7 million and $3.0 million, respectively, as of March 31, 2018. Included in the total notional amount of $10.16 billion of interest rates swaps and options is a notional amount of $1.40 billion of interest rate swaps that cleared through LCH with a fair value of approximately zero as of March 31, 2018. Foreign Exchange Spot and Forwards — The Company enters into foreign exchange contracts with its customers, primarily comprised of spot and forward 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. 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 rate risk. A majority of these contracts have original maturities of one year or less. As of March 31, 2018 and December 31, 2017, the total notional amounts of the foreign exchange contracts were $895.8 million and $770.2 million, respectively. The fair value of the foreign exchange contracts recorded were a $6.1 million asset and a $4.1 million liability as of March 31, 2018. The fair value of the foreign exchange contracts recorded were a $5.8 million asset and a $10.2 million liability as of December 31, 2017. Credit Risk Participation Agreements — The Company has entered into RPAs with institutional counterparties, under which the Company assumed its pro-rata share of the credit exposure associated with a 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 March 31, 2018, the notional amount and fair value of the RPAs purchased were $68.9 million and a $21 thousand liability, respectively. As of March 31, 2018, the notional amount and fair value of the RPAs sold were $13.0 million and a $1 thousand asset, respectively. 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. Assuming all underlying borrowers referenced in the interest rate derivative contracts defaulted as of March 31, 2018 and December 31, 2017, the exposures from the RPAs purchased would be $756 thousand and $419 thousand, respectively. As of March 31, 2018 and December 31, 2017, the weighted-average remaining maturities of the outstanding RPAs were 6.7 years and 6.0 years, respectively. Equity 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 March 31, 2018, the Company held four warrants in public companies and 24 warrants in private companies. The fair value of the warrants for public and private companies were a $582 thousand asset and a $931 thousand asset, respectively, totaling $1.5 million as of March 31, 2018. 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 were a $993 thousand asset and a $679 thousand asset, respectively, totaling $1.7 million as of December 31, 2017. Commodity Options — In 2018, the Company entered into energy commodity contracts in the form of 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 mirrored commodity contracts with CME. As of March 31, 2018, the total notional amount of the commodity contracts include 216,000 barrels of crude oil options with customers and 216,000 barrels of crude oil options with CME. The fair value of the commodity contracts recorded were a $297 thousand asset and a $288 thousand liability as of March 31, 2018. Beginning in January 2017, CME amended its rulebook to legally characterize variation margin payments made to and received from CME as settlement of derivatives and not as collateral against derivatives. Applying variation margin payments as settlement to CME cleared derivative transactions resulted in a reduction in derivative asset and liability fair values of $276 thousand and $297 thousand, respectively, as of March 31, 2018. As a result, the notional quantity totaling 216,000 barrels of oil that cleared through CME had an insignificant fair value as of March 31, 2018. The Company did not have any commodity contracts in 2017. The following table presents the net gains (losses) recognized on the Company’s Consolidated Statement of Income related to derivatives not designated as hedging instruments for the three months ended March 31, 2018 and 2017:
($ in thousands) |  | Location in Consolidated Statement of Income |  | Three Months Ended March 31,
|  | 2018 |  | 2017
Derivatives not designated as hedging instruments: |  |  |  |  |  |
Interest rate swaps and options |  | Derivative fees and other income |  | $ | 1,106 |  |  | $ | (1,066 | )
Foreign exchange spot and forwards |  | Letters of credit fees and foreign exchange income |  | 3,857 |  |  | 5,838 |
Credit risk participation agreements |  | Derivative fees and other income |  | (13 | ) |  | 1 |
Equity warrants |  | Ancillary loan fees and other income |  | (159 | ) |  | — |
Commodity options |  | Derivative fees and other income |  | — |  |  | — |
Net gains |  |  |  | $ | 4,791 |  |  | $ | 4,773 |
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, 2018 and December 31, 2017, the aggregate fair value of all derivative instruments with such credit-risk-related contingent features that are in a net liability position was $14.9 million and $6.3 million, respectively, with collateral posted of $12.3 million and $6.2 million, respectively. In the event that East West Bank’s credit rating had been downgraded to below investment grade, approximately $3.5 million of collateral would have been required to be posted as of March 31, 2018. Minimal additional collateral would have been required to be posted as of December 31, 2017. Offsetting of Derivatives The Company has entered into agreements with certain counterparty financial institutions, which include master netting agreements. However, the Company has elected to account for all derivatives with counterparty institutions on a gross basis. The following tables present gross derivatives on the Consolidated Balance Sheet and the respective collateral received or pledged in the form of other financial instruments, which are generally marketable securities and/or cash. The collateral amounts in these tables are limited to the outstanding balances of the related asset or liability (after netting is applied); thus instances of overcollateralization are not shown:
($ in thousands) |  | As of March 31, 2018
| 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 |  |
|  |  |  |  |  | Derivative Amount |  | Collateral Received |  | Net Amount
Derivative Assets |  | $ | 59,831 |  |  | $ | 20,954 |  |  | $ | 38,877 |  |  | $ | — |  |  | $ | 38,877 |  |  | $ | (12,957 | ) | (1) | $ | (23,810 | ) | (2) | $ | 2,110 |
|  | 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 |  |
|  |  |  |  |  | Derivative Amount |  | Collateral Posted |  | Net Amount
Derivative Liabilities |  | $ | 86,673 |  |  | $ | 61,135 |  |  | $ | 25,538 |  |  | $ | — |  |  | $ | 25,538 |  |  | $ | (12,957 | ) | (1) | $ | (12,038 | ) | (3) | $ | 543 |
($ 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 |  |
|  |  |  |  |  |  | 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 |  |
|  |  |  |  |  | Derivative Amounts |  | Collateral Posted |  | Net Amount
Derivative Liabilities |  | $ | 74,935 |  |  | $ | 26,732 |  |  | $ | 48,203 |  |  | $ | — |  |  | $ | 48,203 |  |  | $ | (18,955 | ) | (1) | $ | (28,796 | ) | (3) | $ | 452 |
(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 $6.9 million and $8.6 million of cash collateral received as of March 31, 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 $1.5 million and $10.7 million of cash collateral posted as of March 31, 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.

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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 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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