BPCE - 2020 Universal Registration Document

FINANCIAL REPORT

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

The characteristics of this instrument model those of the hedged item. Effectiveness is then assessed by comparing the changes in value of the hypothetical instrument with the actual hedging instrument. This method requires the preparation of a maturity schedule. The effectivenessof the hedge must be shown prospectively and retrospectively. The hedge is effective prospectively if, for each target maturity band, the nominal amount of items to be hedged is higher than the notional amount of the hedging instruments. The retrospective test calculates the retrospective effectiveness of a hedge initiated at various balance sheet dates. At each balance sheet date, changes in the fair value of hedging instruments, excluding accrued interest, are comparedwith those of hypotheticalinstruments.The ratio of their respective changes should be between 80% and 125%. If the hedged item is sold or the future transactionis no longer highly probable, the cumulative unrealized gain or loss recognized in other comprehensive income is transferred immediately to profit or loss. When the hedging relationship ceases, if the hedged item is still shown on the balancesheet, or if it is still highly probable, unrealized cumulative gains and loss in comprehensive income are amortizedon a straight-linebasis. If the derivative has not been canceled, it is reclassifiedas a tradingderivative, and subsequent changes in its fair value are recognized in income. Documentation as fair value hedges Some of the Group’s institutions document their macro-hedging of interest rate risk as fair value hedges by applying the carve-out arrangementsunder IAS 39 as adopted by the European Union. The version of IAS 39 adopted for use by the EuropeanUnion does not include certain hedge accounting provisions that appear incompatible with the strategies implemented by European banks to reduce their overall exposure to interest rate risk. In particular, this carve-outallows the Group to make use of hedge accounting for interbank interest rate risk on customer transactionsat fixed rates (loans, savings accounts and demand deposits). The Group mainly uses plain vanilla interest rate swaps designated at inception as fair value hedges of fixed-rate deposits or loans. Macro-hedging derivatives are accounted for in the same manner as derivativesused to hedge the fair value of specific transactions (micro-hedging). 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 interest rates. They transform fixed-rate assets or liabilities into floating-rate instruments. Fair value macro-hedgesare used to manage the overall interest rate risk position, in particular to hedge: fixed-rate loan portfolios; • demand deposits; •

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 derivativesoffset 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. If a hedging relationshipceases, the revaluationadjustment is amortized on a straight-linebasis 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 accountingpurposeswhen the nominal amount of the hedged items falls below the notional amount of the hedging instruments, for example in the case of observed and modeled 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 consolidatingentity 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 presentationcurrency of the consolidating entity’s financial statements. Net investmenthedges 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). 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.

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UNIVERSAL REGISTRATION DOCUMENT 2020 | GROUPE BPCE