
9.	Derivative Financial Instruments

We primarily use derivative financial instruments to manage currency exchange rate risk and to assist customers with their risk management objectives, which may include currency exchange rate risks and interest rate risks. Also, in connection with negotiating credit facilities and certain other services, we often obtain equity warrant assets giving us the right to acquire stock in private, venture-backed companies in the technology and life science/healthcare industries.

Currency Exchange Risk

We enter into foreign exchange forward contracts to economically reduce our foreign exchange exposure risk associated with the net difference between foreign currency denominated assets and liabilities. We do not designate any foreign exchange forward contracts as derivative instruments that qualify for hedge accounting. Gains or losses from changes in currency rates on foreign currency denominated instruments are recorded in the line item “other” as part of noninterest income, a component of consolidated net income. We may experience ineffectiveness in the economic hedging relationship, because the instruments are revalued based upon changes in the currency’s spot rate on the principal value, while the forwards are revalued on a discounted cash flow basis. We record forward agreements in gain positions in other assets and loss positions in other liabilities, while net changes in fair value are recorded in the line item “other” as part of noninterest income, a component of consolidated net income.

Other Derivative Instruments

Also included in our derivative instruments are equity warrant assets and client forward and option contracts, and client interest rate contracts. For further description of these other derivative instruments, refer to Note 2-“Summary of Significant Accounting Policies" under Part II, Item 8 of our 2017 Form 10-K.

Counterparty Credit Risk

We are exposed to credit risk if counterparties to our derivative contracts do not perform as expected. We mitigate counterparty credit risk through credit approvals, limits, monitoring procedures and obtaining collateral, as appropriate. With respect to measuring counterparty credit risk for derivative instruments, we measure the fair value of a group of financial assets and financial liabilities on a net risk basis by counterparty portfolio.

The total notional or contractual amounts and fair value of our derivative financial instruments at March 31, 2018 and December 31, 2017 were as follows:



	March 31, 2018						December 31, 2017
	Notional or Contractual Amount		Fair Value				Notional or Contractual Amount		Fair Value
(Dollars in thousands)	Notional or Contractual Amount		Derivative Assets (1)		Derivative Liabilities (1)		Notional or Contractual Amount		Derivative Assets (1)		Derivative Liabilities (1)
Derivatives not designated as hedging instruments:
Currency exchange risks:
Foreign exchange forwards	$	490,255	$	6,713	$	—	$	50,889	$	414	$	—
Foreign exchange forwards	393,082		—		10,244		425,055		—		5,201
Other derivative instruments:
Equity warrant assets	222,373		135,669		—		211,253		123,763		—
Client foreign exchange forwards	2,159,827		99,905		—		2,203,643		95,035		—
Client foreign exchange forwards	2,077,802		—		92,195		2,092,207		—		90,253
Client foreign currency options	146,954		1,886		—		102,678		1,187		—
Client foreign currency options	146,954		—		1,886		102,678		—		1,187
Client interest rate derivatives (2)	287,489		5,070		—		726,984		11,753		—
Client interest rate derivatives	770,653		—		13,369		782,586		—		11,940
Total Derivatives not designated as hedging instruments			$	249,243	$	117,694			$	232,152	$	108,581


(1)	Derivative assets and liabilities are included in "other interest receivables and other assets" and "other liabilities", respectively, on our consolidated balance sheets.

(2)

The amount reported for March 31, 2018 reflects rule changes implemented by two central clearing houses that 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. As a result, client interest rate derivatives at March 31, 2018, reflect reductions of approximately $8.6 million of derivative assets that previously would have been reported on a gross basis and approximately $433.6 million in related notional amounts for these derivative assets cleared through central clearing houses.

A summary of our derivative activity and the related impact on our consolidated statements of income for the three months ended March 31, 2018 and 2017 is as follows:



		Three months ended March 31,
(Dollars in thousands)	Statement of income location	2018			2017
Derivatives designated as hedging instruments:
Interest rate risks:
Net cash benefit associated with interest rate swaps	Interest expense—borrowings	$	—		$	554
Changes in fair value of interest rate swaps	Other noninterest income	—			(1		)
Net gains associated with interest rate risk derivatives		$	—		$	553
Derivatives not designated as hedging instruments:
Currency exchange risks:
Gains on revaluations of internal foreign currency instruments, net	Other noninterest income	$	2,926		$	4,108
Losses on internal foreign exchange forward contracts, net	Other noninterest income	(3,512		)	(3,245		)
Net (losses) gains associated with internal currency risk		$	(586	)	$	863
Other derivative instruments:
Gains on revaluations of client foreign currency instruments, net	Other noninterest income	$	7,653		$	2,754
Losses on client foreign exchange forward contracts, net	Other noninterest income	(7,114		)	(2,289		)
Net gains associated with client currency risk		$	539		$	465
Net gains on equity warrant assets	Gains on equity warrant assets, net	$	19,191		$	6,690
Net gains (losses) on other derivatives	Other noninterest income	$	431		$	(276	)

Balance Sheet Offsetting

Certain of our derivative and other financial instruments are subject to enforceable master netting arrangements with our counterparties. These agreements provide for the net settlement of multiple contracts with a single counterparty through a single payment, in a single currency, in the event of default on or termination of any one contract.

The following table summarizes our assets subject to enforceable master netting arrangements as of March 31, 2018 and December 31, 2017:



	Gross Amounts of Recognized Assets		Gross Amounts offset in the Statement of Financial Position		Net Amounts of Assets Presented in the Statement of Financial Position		Gross Amounts Not Offset in the Statement of Financial Position But Subject to Master Netting Arrangements						Net Amount
(Dollars in thousands)	Gross Amounts of Recognized Assets		Gross Amounts offset in the Statement of Financial Position				Financial Instruments			Cash Collateral Received (1)			Net Amount
March 31, 2018
Derivative Assets:
Foreign exchange forwards	$	106,618	$	—	$	106,618	$	(17,027	)	$	(5,264	)	$	84,327
Foreign currency options	1,886		—		1,886		(574		)	—			1,312
Client interest rate derivatives	5,070		—		5,070		(3,194		)	(1,876		)	—
Total derivative assets	113,574		—		113,574		(20,795		)	(7,140		)	85,639
Reverse repurchase, securities borrowing, and similar arrangements	375,180		—		375,180		(375,180		)	—			—
Total	$	488,754	$	—	$	488,754	$	(395,975	)	$	(7,140	)	$	85,639
December 31, 2017
Derivative Assets:
Foreign exchange forwards	$	95,449	$	—	$	95,449	$	(14,570	)	$	(3,616	)	$	77,263
Foreign currency options	1,187		—		1,187		(557		)	—			630
Client interest rate derivatives	11,753		—		11,753		(11,627		)	(114		)	12
Total derivative assets	108,389		—		108,389		(26,754		)	(3,730		)	77,905
Reverse repurchase, securities borrowing, and similar arrangements	247,876		—		247,876		(247,876		)	—			—
Total	$	356,265	$	—	$	356,265	$	(274,630	)	$	(3,730	)	$	77,905


(1)	Cash collateral received from our counterparties in relation to market value exposures of derivative contracts in our favor is recorded as a component of “short-term borrowings” on our consolidated balance sheets.

The following table summarizes our liabilities subject to enforceable master netting arrangements as of March 31, 2018 and December 31, 2017:



	Gross Amounts of Recognized Liabilities		Gross Amounts offset in the Statement of Financial Position		Net Amounts of Liabilities Presented in the Statement of Financial Position		Gross Amounts Not Offset in the Statement of Financial Position But Subject to Master Netting Arrangements						Net Amount
(Dollars in thousands)	Gross Amounts of Recognized Liabilities		Gross Amounts offset in the Statement of Financial Position				Financial Instruments			Cash Collateral Pledged (1)			Net Amount
March 31, 2018
Derivative Liabilities:
Foreign exchange forwards	$	102,439	$	—	$	102,439	$	(6,624	)	$	(82,502	)	$	13,313
Foreign currency options	1,886		—		1,886		(962		)	(434		)	490
Client interest rate derivatives	13,369		—		13,369		—			(13,278		)	91
Total derivative liabilities	117,694		—		117,694		(7,586		)	(96,214		)	13,894
Repurchase, securities lending, and similar arrangements	—		—		—		—			—			—
Total	$	117,694	$	—	$	117,694	$	(7,586	)	$	(96,214	)	$	13,894
December 31, 2017
Derivative Liabilities:
Foreign exchange forwards	$	95,454	$	—	$	95,454	$	(10,997	)	$	(69,110	)	$	15,347
Foreign currency options	1,187		—		1,187		(501		)	(130		)	556
Client interest rate derivatives	11,940		—		11,940		—			(11,924		)	16
Total derivative liabilities	108,581		—		108,581		(11,498		)	(81,164		)	15,919
Repurchase, securities lending, and similar arrangements	—		—		—		—			—			—
Total	$	108,581	$	—	$	108,581	$	(11,498	)	$	(81,164	)	$	15,919


(1)	Cash collateral pledged to our counterparties in relation to market value exposures of derivative contracts in a liability position is recorded as a component of “cash and cash equivalents" on our consolidated balance sheets.