BPCE - 2019 Universal Registration Document

FINANCIAL REPORT

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

SBGM and Hunt Kennedy models are used to value fixed • income products that are sensitive to volatility smiles ( i.e. implied change in volatility relative to the exercise price) and to autocorrelation (or correlation between interest rates); foreign exchange products: foreign exchange products • generally have specific characteristics which determine the choice of model. The main models used to value and manage foreign-exchange • products are local and stochastic volatility models, as well as hybrid models, which combine modeling of the underlying foreign exchange with two Hull & White 1 factor models, to ascertain the fixed income factors. Inputs relating to all such Level 2 instruments were demonstrated to be observable and documented. From a methodology perspective, observability is based on four inseparable criteria: inputs are derived from external sources (primarily a • recognized contributor, for example); they are updated periodically; • they are representative of recent transactions; • their characteristics are identical to the characteristics of the • transaction. If necessary, a proxy may be used, provided that the relevance of such an arrangement is demonstrated and documented. The fair value of instruments obtained using valuation models is adjusted to take account of liquidity risk (bid-ask), counterparty risk, the risk relating to the cost of financing uncollateralized or partially collateralized derivatives, own credit risk (measurement of liability derivative positions), and modeling and input risk. The margin generated when these instruments begin trading is immediately taken to profit or loss. LEVEL 3: VALUATION USING UNOBSERVABLE MARKET INPUTS Level 3 comprises instruments measured using unrecognized models and/or models based on unobservable market data, where they are liable to materially impact the valuation. This mainly includes: unlisted shares whose fair value could not be determined • using observable inputs; private equity securities not listed on an active market, • measured at fair value with models commonly used by market participants, in accordance with International Private Equity Valuation (IPEV) standards, but which are sensitive to market fluctuations and whose fair value determination requires a judgment call; structured securities or securities representative of private • placements, held by the Insurance business line; hybrid interest rate and currency derivatives and credit • derivatives that are not classified in Level 2; loans in the syndication process for which there is no • secondary market price; loans in the securitization process for which fair value is • determined based on an expert appraisal;

investment property whose fair value is calculated using a • multi-criteria approach, by capitalizing rent at market rates and

through comparisons with market transactions; instruments with a deferred day one margin; •

units of UCITS for which the fund has not published a recent • NAV at the valuation date, or for which there is a lock-up period or any other constraint calling for a significant adjustment to available market prices (NAV, etc.) in respect of the low liquidity observed for such shares; issued debt instruments designated at fair value are classified • as Level 3 when the underlying derivatives are classified as Level 3; The associated “issuer credit risk” is regarded as observable and it is therefore classified as Level 2; instruments carried at fair value on the balance sheet and for • which data are no longer available due to a freeze in trading in the wake of the financial crisis. When there is a significant drop in trading in a given market, a valuation model is used based on the only available relevant data. Plain vanilla derivatives are also classified as Level 3 fair value when exposure is beyond the liquidity horizon determined by underlying currencies or by volatility surface ( e.g. certain foreign currency options and volatility caps/floors). In accordance with the Ministerial Order of February 20, 2007, as amended by the Order of November 23, 2011 on capital requirements for credit institutions and investment companies and pursuant to the European Regulation of June 26, 2013 (CRR) on the Basel III requirements, for each of the models used, a description of crisis simulations applied is provided in Chapter 3 “Risk Management”. Under IFRS 9, day one profit should be recognized only if it is generated by a change in the factors that market participants would consider in setting a price, i.e. only if the model and parameters input into the valuation are observable. If the selected valuation model is not recognized by current market practices, or if one of the inputs significantly affecting the instrument’s valuation is not observable, the trading profit on the trade date cannot be recognized immediately in the income statement. It is taken to income on a straight-line basis over the life of the transaction or until the date the inputs become observable. Any losses incurred at the trade date are immediately recognized in income. At December 31, 2019, instruments for which the recognition of day one profit/loss has been deferred mainly included: multi-underlying structured equity and index products; • mono-underlying structured products indexed to sponsored • indices; synthetic loans; • options on funds (multi-assets and mutual funds); • structured fixed income products; • securitization swaps. • These instruments are almost all located at Natixis.

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UNIVERSAL REGISTRATION DOCUMENT 2019 | GROUPE BPCE