BPCE - 2018 Risk report / Pillar III

MARKET RISKS Market risk measurement methods

Market risk measurement methods 8.3

The market risk monitoringsystem relies on three types of indicators used to manageactivity,on an overall basis and by similar activity,by focusing onmore 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 quantitativeoperationalindicatorsthus complementthe VaR limits and stress tests; daily assessmentof global market risk measurementthrougha 99% ● 1-day VaR; stress tests to measure potential losses on portfolios in extreme ● market conditions.The Group systemrelies on comprehensivestress 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 forNatixis, BREDBanquePopulaireand Banque Palatine. Moreover,for Natixis, a global market risk report is submitteddaily to the centralinstitution, 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/historicstress 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 inthe Natixisregistration document.

Sensitivities

Each institution’sRisk Managementdivision monitors and verifies compliancewith sensitivity limits on a daily basis. If a limit is breached, an alert procedureis triggeredin order to define the measuresrequired toreturn withinoperationallimits.

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 calculationpurposes,changes in market inputs used to determine portfolio values are modeled using statistical data. All decisionsrelatingto risk factors using the internalcalculationtool 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’stradingbooks, and a VaR limit is definedon 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 inclusionin the VaR is obtainedby 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 throughoutthe Group. This internal VaR model used by Natixis was approvedby the ACPR in January 2009. Natixis thus uses VaR to calculatecapital requirements for marketrisks inapproved scopes.

8

Stress tests Stress tests are calibratedaccordingto severityand occurrencelevels, which are consistent with the portfolio managementobjectives: trading book stress tests are calibratedover a 10-day period and a ● 10-year probabilityof 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 exposureof the Group’s activities to known scenarios. Eleven historic stress tests have been inplace since 2010,

167

Risk Report Pillar III 2018