BPCE - 2019 Universal Registration Document

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FINANCIAL REPORT

IFRS CONSOLIDATED FINANCIAL STATEMENTS OF GROUPE BPCE AS AT DECEMBER 31, 2019

The methodological principles in respect of fair value applied by Natixis were examined in the second quarter of 2019, leading to the further refining of the observability criteria and a review of the classification of financial assets and liabilities by fair value

issuer credit risk is also considered to be observable. It is • measured using the discounted future cash flows method, with inputs such as the yield curve and revaluation spreads. For each issue, this valuation represents the sum of the notional amount outstanding and its sensitivity, taking into account the existence of calls and the difference between the revaluation spread (based on the BPCE cash reoffer curve at December 31, 2019 as for previous closing dates) and the average issue “spread”. Changes in own credit risk are generally not material for issues with an initial maturity of less than one year. Complex instruments Certain hybrid and/or long-maturity financial instruments are measured using a recognized model on the basis of market inputs derived from observable data such as yield curves, implied volatility layers of options, market consensus data or active over-the-counter markets. The main models for determining the fair value of these instruments are described below by type of product: equity products: complex products are valued using: • market data, – a payoff, i.e. the formula of positive or negative flows – attached to the product at maturity, a model of changes in the underlying asset. – These products can have single or multiple underlyings, or be hybrids (fixed income/equity for example). The main models used for equity products are local volatility models, local volatility combined with Hull & White 1 factor (H&W1F), Tskew and Pskew. The local volatility model treats volatility as a function of time and the price of the underlying. Its main property is that it considers the implied volatility of the option (derived from market data) relative to its exercise price. The local volatility hybrid model, paired with the H&W1F, consists of pairing the local volatility model described above with a Hull & White 1 factor type fixed income model, described below (see fixed income products). The Tskew model is a valuation model for mono and multi-underlying options. Its principle is to calibrate the distribution of the underlying asset or assets at maturity to standard option prices. The Pskew model is similar to the Tskew model. It is used in particular for simple ratchet equity products such as capped or floored ratchet products; fixed income products: fixed income products generally have • specific characteristics which determine the choice of model. Underlying risk factors associated with the payoff are taken into account. The main models used to value and manage fixed income • products are Hull & White models (one-factor and two-factor models or one-factor Hull & White stochastic volatility model), the Hunt Kennedy model and the “smiled” BGM model. The Hull & White models are simple pricing models for plain • vanilla fixed income products and can be calibrated easily. Products valued using these models generally contain a Bermudan-type cancellation option ( i.e. one that may be exercised at certain dates set at the beginning of the contract).

hierarchy (see below). Fair value hierarchy

For financial reporting purposes, IFRS 13 requires fair value measurements applied to financial and non-financial instruments to be allocated to one of three fair value levels: LEVEL 1: VALUATION USING PRICES QUOTED ON A LIQUID MARKET Level 1 comprises instruments whose fair value is determined based on directly usable prices quoted on active markets. This mainly includes securities listed on a stock exchange or traded continuously on other active markets, derivatives traded on organized markets (futures, options, etc.) whose liquidity can be demonstrated, and units of UCITS that calculate and report their net asset value on a daily basis. LEVEL 2: VALUATION USING OBSERVABLE MARKET INPUTS Level 2 fair value comprises instruments other than those mentioned in Level 1 fair value and instruments measured using a valuation technique incorporating inputs that are either directly observable (prices) or indirectly observable (derived from prices) through to maturity. This mainly includes: Simple instruments Most over-the-counter derivatives, swaps, credit derivatives, forward rate agreements, caps, floors and plain vanilla options are traded in active markets, i.e. liquid markets in which trades occur regularly. These instruments are valued using generally accepted models (discounted future cash flow method, Black & Scholes model, interpolation techniques), and on the basis of directly observable inputs. For these instruments, the extent to which models are used and the observability of inputs has been documented. Instruments measured using Level 2 inputs also include: securities that are less liquid than those classified as Level 1, • whose fair value is determined based on external prices suggested by a reasonable number of active market makers and which are regularly observable without necessarily being directly executable (prices mainly taken from contribution and consensus databases); where these criteria are not met, the securities are classified as Level 3 fair value; securities not quoted on an active market whose fair value is • determined based on observable market data (for example, using market data for listed peers or the earnings multiple method based on techniques widely used in the market); Greek sovereign securities, whose fair value is recorded under • Level 2 given the wide bid-ask price spread on market prices; shares of UCITS that do not calculate and report their net • asset value on a daily basis but which are subject to regular reporting or which offer observable data from recent transactions; issued debt instruments designated at fair value are classified • as Level 2 when the underlying derivatives are classified as Level 2;

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UNIVERSAL REGISTRATION DOCUMENT 2019 | GROUPE BPCE

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