BPCE - 2019 Universal Registration Document

FINANCIAL REPORT

IFRS CONSOLIDATED FINANCIAL STATEMENTS OF BPCE SA GROUP 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 justify 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 necessarily involves 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

issued debt instruments designated at fair value are classified • as Level 2 when the underlying derivatives are classified as Level 2; 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 product 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; 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 justify 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).

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

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UNIVERSAL REGISTRATION DOCUMENT 2019 | GROUPE BPCE