BPCE - 2019 Universal Registration Document

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FINANCIAL REPORT

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

Macro-hedging derivatives are accounted for in the same manner as derivatives used to hedge the fair value of specific transactions (micro-hedging). In a macro-hedging relationship, gains and losses on the revaluation of the hedged item are recorded in “Revaluation differences on interest rate risk-hedged portfolios”, under balance sheet assets for hedges of a portfolio of financial assets and under balance sheet liabilities for hedges of a portfolio of financial liabilities. The hedges are deemed effective if the derivatives offset the interest rate risk on the underlying fixed rate portfolio. The ineffective portion relating to the dual-curve valuation of collateralized derivatives is taken into account. Effectiveness is tested in two ways: asset-based testing: for plain vanilla swaps designated as • hedging instruments at inception, the Group verifies that no over-hedging exists both prospectively at the date the hedging relationship is designated and retrospectively at each balance sheet date; quantitative testing: for other swaps, the change in the fair • value of the actual swap must offset the changes in the fair value of a hypothetical instrument that exactly reflects the underlying hedged item. These tests are conducted prospectively at the date the instrument is designated as a hedge and retrospectively at each balance sheet date. Fair value hedges mainly consist of interest rate swaps that protect fixed rate financial instruments against changes in fair value attributable to changes in market rates of interest. They transform fixed rate assets or liabilities into floating rate instruments Fair value macro-hedges are used to manage the overall interest rate risk position, in particular to hedge: fixed rate loan portfolios; • demand deposits; • PEL home savings deposits; • the inflation component of Livret A passbook savings • accounts. Fair value micro-hedges are notably used to hedge: fixed rate liabilities; • fixed rate liquidity reserve securities and inflation-indexed • securities. Cash flow hedges fix or control the variability of cash flows arising from floating rate instruments. Cash flow hedging is also used to manage the overall interest rate risk position. Cash flow hedges are mainly used to: hedge floating rate liabilities; •

If a hedging relationship ceases, the revaluation adjustment is amortized on a straight-line basis over the remaining term of the initial hedge, if the hedged item has not been derecognized. It is taken directly to income if the hedged item is no longer recorded in the balance sheet. In particular, derivatives used for macro-hedging may be disqualified for hedge accounting purposes when the nominal amount of the hedged items falls below the notional amount of the hedging instruments, for example in the case of the prepayment of loans or the withdrawal of deposits. Hedges of net investments in foreign operations A net investment in a foreign operation is the amount of the investment held by the consolidating entity in the net assets of the operation. The purpose of a hedge of a net investment in a foreign operation is to minimize the foreign exchange effect for a consolidating entity of an investment in an entity whose functional currency is different from the presentation currency of the consolidating entity’s financial statements. Net investment hedges are accounted for in the same manner as cash flow hedges. Unrealized gains and losses initially recognized in other comprehensive income are taken to income when the net investment is sold in full or in part (or when partially sold with loss of control). hedge the risk of changes in value of future cash flows on • liabilities; provide macro-hedging of floating rate assets. • The main causes of ineffective hedging are related to: ineffective dual-curve valuations: the value of collateralized • derivatives (with margin calls yielding EONIA) is based on the EONIA discount curve, while the value of the hedged component of items covered by fair value hedges is calculated using a Euribor discount curve; the time value of options; • over-hedging for asset-based testing of macro-hedges • (notional amounts of hedging derivatives higher than the nominal amount of the hedged items, in particular where prepayments on the hedged items were higher than expected); credit value adjustments and debit value adjustments linked to • credit risk and own credit risk on derivatives; differences in interest rate fixing dates between the hedged • item and the hedge. The notional amounts of derivative instruments are merely an indication of the volume of the Group’s business in financial instruments and do not reflect the market risks associated with such instruments.

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UNIVERSAL REGISTRATION DOCUMENT 2019 | GROUPE BPCE

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