BPCE - 2018 Registration document

6 RISK REPORT Market risks

6.8.3

Market risk measurement methods

Information provided in respect of IFRS 7 The market risk monitoring system relies on three types of indicators used to manage activity, on an overall basis and by similar activity, by focusing on more directly observable criteria, including: sensitivity to variations in the underlying instrument, variations in ● volatility or to correlation, nominal amounts, and diversification indicators. The limits corresponding to these qualitative and quantitative operational indicators thus complement the VaR limits and stress tests; daily assessment of global market risk measurement through a 99% ● 1-day VaR; stress tests to measure potential losses on portfolios in extreme ● market conditions. The Group system relies on comprehensive stress tests and specific stress tests for each activity. Special reports on each business line are sent daily to the relevant operational staff and managers. The DRCCP also provides a weekly report summarizing all of the Group’s market risk, with a detailed breakdown for Natixis, BRED Banque Populaire and Banque Palatine. Moreover, for Natixis, a global market risk report is submitted daily to the central institution, covering the scope of the BPCE guarantee. When significant changes are detected, Natixis sends detailed controls and appropriate justifications to the DRCCP. Finally, a global review of Groupe BPCE’s consolidated market risks (covering VaR measures and hypothetical/historic stress scenarios) is presented to the Group Market Risk Committee, in addition to risk reports prepared for the entities. In response to the Revised Pillar III Disclosure Requirements (Table MRB: Qualitative disclosures for banks using the Internal Models Approach), the main characteristics of the various models used for market risk are presented in the Natixis registration document. SENSITIVITIES Each institution’s Risk Management division monitors and verifies compliance with sensitivity limits on a daily basis. If a limit is breached, an alert procedure is triggered in order to define the measures required to return within operational limits. VAR Market risk is also monitored and assessed via synthetic VaR calculations, which determine potential losses generated by each business line at a given confidence level (99%) and over a given holding period (one day). For calculation purposes, changes in market inputs used to determine portfolio values are modeled using statistical data. All decisions relating to risk factors using the internal calculation tool are revised regularly by committees involving all of the relevant participants (DRCCP, Front Office and Results department). Quantitative and objective tools are also used to measure the relevance of risk factors.

VaR is based on numerical simulations, using a Monte Carlo method which takes into account possible non-linear portfolio returns based on the different risk factors. It is calculated and monitored daily for all of the Group’s trading books, and a VaR limit is defined on a global level and per business line. The calculation tool generates 10,000 scenarios, which provides satisfactory precision levels. For certain complex products, which account for a minor share of the trading books, their inclusion in the VaR is obtained by using sensitivities. VaR backtesting is carried out on approved scopes and confirms the overall robustness of the model used. Extreme risks, which are not included in VaR, are accounted for using stress tests throughout the Group. This internal VaR model used by Natixis was approved by the ACPR in January 2009. Natixis thus uses VaR to calculate capital requirements for market risks in approved scopes. STRESS TESTS Stress tests are calibrated according to severity and occurrence levels, which are consistent with the portfolio management objectives: trading book stress tests are calibrated over a 10-day period and a ● 10-year probability of occurrence. They are based on: historic scenarios which reproduce changes in market conditions - observed during past crises, their impacts on current positions and P&Ls. They can be used to assess the exposure of the Group’s activities to known scenarios. Eleven historic stress tests have been in place since 2010, hypothetical scenarios which consist in simulating changes in - market conditions in all activities on the basis of plausible assumptions concerning the dissemination of an initial shock. These shocks are based on scenarios defined according to economic criteria (real estate crisis, economic crisis, etc.), geopolitical considerations (terrorist attacks in Europe, toppling of a regime in the Middle East, etc.) or other factors (bird flu, etc.). Six theoretical stress tests have been in place since 2010; banking book stress tests are calibrated over a longer period (three ● months) in line with the banking book’s management periods: a bond stress test calibrated using a mixed hypothetical-historic - approach which reproduces a stress on European sovereigns (similar to the 2011 crisis), a bond stress test calibrated using a mixed hypothetical-historic - approach which reproduces a stress on corporates (similar to the 2008 crisis), an equity stress test calibrated over the 2011 historic period, - applied to equity investments for the purpose of the liquidity reserve. The various stress tests are subject to limits adapted by each institution, which are monitored through recurring controls and regular reports.

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Registration document 2018

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