BPCE - 2020 Universal Registration Document

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FINANCIAL REPORT

IFRS CONSOLIDATED FINANCIAL STATEMENTS OF GROUPE BPCE AS AT DECEMBER 31, 2020

derivatives and the hedged items is both prospectively and retrospectively effective. Fair value hedges mainly consist of interest rate swaps that protect fixed-rate financial instrumentsagainst changes in fair value attributableto changes in market rates of interest. They transform fixed-rate assets or liabilities into floating-rate instruments and include mostly hedges of fixed-rate loans, securities, deposits and subordinated debt. Fair value hedging is also used to manage the overall interest rate risk position. 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. The notional amounts of derivative instrumentsare 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. The hedging relationship qualifies for hedge accounting if, at the inception of the hedge, there is formal documentationof the hedging relationship identifying the hedging strategy, the type of risk hedged, the designationand characteristicsof the hedged item and the hedging instrument. In addition, the effectiveness of the hedge must bedemonstrated at inception and subsequently verified. Derivatives contracted as part of a hedging relationship are designated according to the purpose of the hedge. Groupe BPCE used the option available in IFRS 9 not to apply the provisions of the standard relative to hedge accounting, and to continue to apply IAS 39 as adopted by the European Union for the recognitionof these transactions, i.e. excluding certain provisions relating to macro-hedging. Fair value hedges Fair value hedgesare intendedto reduceexposureto changes in the fair value of an asset or liability carried on the balance sheet, or of a firm commitment,in particular the interest rate risk on fixed-rate assets and liabilities. The gain or loss on the revaluation of hedging instruments attributable to the risk beinghedged is recognized in income in the samemanner as the gain or loss on the hedged item. The ineffective portion of the hedge, if any, is recorded in the income statement under “Net gains or losses on financial instruments at fair value through profit or loss”. Accrued interest on thehedging instrument is taken to income in the same manner as the accrued interest on the hedged item. Where identified assets or liabilities are hedged, the revaluation of the hedged component is recognized on the same line of the balance sheet as the hedged item. The ineffective portion relating to the dual-curve valuation of collateralized derivatives is taken into account when calculating the effectiveness of a hedge. If a hedging relationship ceases (investment decision, failure to fulfill effectivenesscriteria, or because the hedged item is sold beforematurity), the hedging instrumentis transferredto the trading book. The revaluation difference recorded in the balancesheet in respect of the hedged item is amortizedover the residual life of the initial hedge. If the hedged item is sold before maturity or redeemedearly, the cumulativeamount of

the revaluation gain or loss is recognized in income for the period. Cash flow hedges The purposeof cash flow hedges is to hedge the exposureto the variability of cash flow that is attributable to a particular risk associated with a recognized asset or liability or with a future transaction (hedge of interest rate risk on floating-rate assets or liabilities, hedge of conditions relating to future transactions such as future fixed interest rates, future prices, exchange rates, etc.). The portion of the gain or loss on the hedging instrumentthat is deemed to be an effective hedge is recognized on a separate line of “Gains and losses recognizeddirectly in other comprehensiveincome”.The ineffectiveportionof the gain or loss on the hedging instrument is recorded in the income statementunder “Net gains or losses on financial instruments at fair value through profit or loss”. Accrued interest on thehedging instrument is taken to income under interest income in the same manner as the accrued interest on the hedged item. The hedged items are accounted for using the treatment applicable to their specific asset category. If a hedging relationshipceases (becausethe hedge no longer meets the effectivenesscriteria, the derivative is sold or the hedged item ceases to exist), the cumulative amounts recognized in other comprehensiveincome are transferred to the income statement as and when the hedged item impacts profit or loss, or immediately if the hedged item ceases to exist. Special case: portfolio hedging (macro-hedging) Documentation as cash flow hedges Some Group institutions document their macro-hedging of interest rate risk as cash flow hedges (hedgingof portfoliosof loans or borrowings). In this case, the portfolios of assets or liabilities that may be hedged are, for each maturity band: floating-rate assets and liabilities; the entity incurs a risk of • variability in future cash flows from floating-rate assets or liabilities insofar as future interest rate levels are not known in advance; future transactions deemed to be highly probable • (forecasts): assuming total outstandings remain constant, the entity is exposed to the risk of variability in future cash flows on future fixed-rate loans insofar as the interest rate at which the loan will be granted is not yet known. Similarly, the Group may be exposed to the risk of variability in future cash flows on the funding that it will need to raise in the market. Under IAS 39, hedges of an overall net position of fixed-rate assets and fixed-rate liabilities with similar maturities do not qualify for hedge accounting. The hedged item is therefore deemed to be equivalent to a share of one or more portfolios of identified floating-rate instruments (portion of deposit outstandings or floating-rate loans); the effectiveness of the hedges is measuredby creating a hypothetical instrument for each maturity band and comparing its changes in fair value from inception to those for the documented hedging derivatives.

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UNIVERSAL REGISTRATION DOCUMENT 2020 | GROUPE BPCE

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