BPCE_PILLAR_III_2017

6 COUNTERPARTY RISK

Counterparty risk management

Counterparty risk management 6.1

Counterpartyrisk is the credit risk generated on market, investment and/or settlement transactions.It is the risk of the counterpartynot being ableto meet its obligations to Group institutions. Counterpartyrisk is also linked to the cost of replacinga derivativeif the counterpartydefaults. It is similar to market risk in the event of default. Measuring counterparty risk In economic terms, Groupe BPCE and its subsidiaries measure counterparty risk for derivative instruments (swaps or structured products, for instance) using the IRB method for Natixis, or the market price assessment method for other institutions. In order to perfect the economic measurementof the current and potential risk inherent in derivatives, a tracking mechanismbased on a consistent economic measurement is currently being instituted throughout Groupe BPCE. In order to measure and manage its own counterparty risk, Natixis uses an internal model. Using Monte Carlo simulations for the main risk factors, this model measures the positions on each counterparty Counterpartyrisk is subject to Group wide caps and limits, which are validated by theGroup Counterparty and Credit Committee. Use of clearinghouses and futures contracts(daily margin calls under ISDA agreements, for example) govern relations with the main customers (mainly Natixis). Accordingly,the Group has implemented EMIR requirements. The principles of counterparty risk management are based on: a risk measurementdeterminedaccordingto the type of instrument ● in question, the term of the transactions,and whether or not any Counterparty risk mitigation techniques

Counterparty risk arises on cash management and market activities conducted with customers, and on clearing activities via a clearing house or external clearing agent. Exposure to counterparty risk is measured using the internal ratings-based approach and standardized approach. BPCE SA group managescounterpartyrisk daily using a standardizedapproach,given the nature of vanilla transactions.

and for the entire lifespan of the exposure, taking netting and collateralizationcriteria into account. The model thus determines the EPE (Expected Positive Exposure) profile and the PFE (Potential Future Exposure) profile, the latter being the main indicator used by Natixis for assessing counterparty risk exposure. This indicator is calculated as the 97.7% percentile of the distribution of exposures for each counterparty. With respect to the Group’s other entities, the counterpartyrisk base for market transactions is calculated using a mark-to-market valuation. incorporationof specific wrong-wayrisk: wrong-wayrisk refers to ● the risk that a given counterparty exposure is heavily correlated with the counterparty’s probability of default. From a regulatory standpoint, this risk is represented by: specific wrong-way risk, i.e. the risk generated when, due to the ● nature of the transactionsenteredinto with a counterparty,there is a direct link between its credit quality and the amount of the exposure; general wrong-way risk, i.e. the risk generated when there is a ● correlation between the counterparty’s credit quality and general market factors. Natixis complies with Article 291.6 of the European regulation of June 26, 2013 including the obligation to report wrong-way risk (WWR). The article states that “institutions shall provide senior management and the appropriate committee of the management body with regular reports on both Specific and General Wrong-Way risks and the steps being taken to manage those risks.”

nettingand collateralizationagreements are inplace; counterparty risk limits and allocation procedures; ●

a value adjustmentin respect of counterpartyrisk: the CVA (Credit ● Value Adjustment)represents the market value of a counterparty’s default risk (see CVA section below);

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Risk Report Pillar III 2017