BPCE - 2020 Universal Registration Document

FINANCIAL REPORT

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

The HW2F model is used to model the yield curve with two factors, calibrated on vanilla interest rate options and spread-option type instruments. The HW1VS model is used to model both the Gaussian factor representing the yield curve and its volatility (like the LSV model for Equity); 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 (like the LSV model for Equity), as well as hybrid models, which combine modeling of the underlying foreign exchange transaction with two Hull & White 1-factor models of the yield curves of domestic and foreign economies. 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 parameters are identical to the • characteristicsof 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 to be syndicated for which there is no secondarymarket • 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

Greek sovereign securities, whose fair value is recorded under • Level 2; shares of UCITS that do not calculate and report their net • asset value on a daily basis but which are subject to regular reporting or which offer observable data from recent transactions; 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, using parameters 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, 2020, 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 a Hull & White 1 factor (H&W1F) model, and Local Stochastic Volatility (LSV). 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 LSV model is based on the joint diffusion of the underlying asset and its volatility (two factors in total), with a local volatility function (known as a decorator), to ensure consistency with all vanilla options; fixed income products: fixed income products generally have • specific characteristics which determine 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 (HW1F) and two-factor (HW2F) models or a one-factor Hull & White stochastic volatility model (HW1FVS)). The HW1F model is used to model the yield curve with a single Gaussian factor, calibrated on vanilla interest rate options.

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

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UNIVERSAL REGISTRATION DOCUMENT 2020 | GROUPE BPCE