BPCE_REGISTRATION_DOCUMENT_2017

3 RISK REPORT Market risks

Within the scope of the trading book, market risk is monitored daily by measuringGroup Value at Risk (VaR) and using global and historic stress tests. The proprietary VaR calculation system developed by Natixis is used by the Group. This system provides a tool for the measurement, monitoring and control of market risk at the consolidatedlevel and for each company in the Caisse d’Epargneand BanquePopulairenetworksand the BPCE subsidiaries,on a daily basis and taking account of correlations between the various portfolios. There are certain distinctivecharacteristicsof Groupe BPCE that must be considered, inparticular: for Natixis: given the significance of its capital market activities, ● Natixis’ risk management system is specifically adapted to this entity; for the Banque Populairenetwork:only BRED Banque Populairehas ● a capital markets business. It monitors the financial transactions carried out by the Banque Populaire network trading floor and Finance division daily, using 99% 1-day value-at-risk, sensitivity, volume and stress scenario indicators; for Banque Palatine: daily monitoring of trading book activities is ● based on supervision by the DRCCP of 99% 1-day value-at-risk, stress tests and compliance with regulatory limits. The market risk monitoringsystem relies on three types of indicators used to manageactivity,on an overall basis and by similar activity,by focusing onmore directly observable criteria, including: sensitivity to variations in the underlying instrument, variations in ● volatility or to correlation, nominal amounts, and diversification indicators. The limits corresponding to these qualitative and quantitativeoperationalindicatorsthus complementthe VaR limits and stress tests; daily assessmentof global market risk measurementthrougha 99% ● 1-day VaR; stress tests to measure potential losses on portfolios in extreme ● market conditions.The Group systemrelies on comprehensivestress tests and specific stress tests for each activity. Special reports on each business line are sent daily to the relevant operational staff and managers. The DRCCP also provides a weekly report summarizing all of the Group’s market risk, with a detailed breakdown forNatixis, BREDBanquePopulaireand Banque Palatine. Moreover,for Natixis, a global market risk report is submitteddaily to the centralinstitution, covering the scope of the BPCE guarantee. When significant changes are detected, Natixis sends detailed controls and appropriate justifications to the DRCCP. Finally, a consolidatedreview of Groupe BPCE’s market risks (relating to VaR calculations,and hypotheticaland historic stress scenarios)is presented to the Group Market Risk Committee, in addition to risk reports prepared for the entities. 3.8.3

All limits (operationalindicators,VaR, and stress tests) are monitored daily by the each institution’s Risk Management division. All limit breaches must be reported and, where applicable, are subject to a Management decision concerning the position in question (close, hedge, hold,etc.). These supervision mechanisms also have operational limits and resilience thresholds that determine the Group’s risk appetite for trading operations. Banking book risk is monitored by asset class: bonds, securitizations, private equity and UCITS. The bond portfolio is monitored monthly throughthe supervisionof credit risk (limit per issuer) and market risk (stress test limit). The Group’s single treasury and central bank collateral management pool is subject to daily monitoring of risks and economic results for all of its activities, which are mainly related to the banking book. In particular, a 99% 1-day Monte Carlo VaR is calculated and analyzed by risk factor. Compliance with operational limits in terms of sensitivityto interest rates, both overall and by time buckets, as well as by counterparty,is monitoreddaily. Supervisionof this activityalso includes specific stress scenarios as well as exposure limits per operator (for both individual and cumulative transactions processed per day). SENSITIVITIES Each institution’s Risk Management division monitors and verifies compliance with sensitivity limits on a daily basis. If a limit is breached, an alert procedure is triggered in order to define the measuresrequired to return within operational limits. VALUE-AT-RISK (VAR) Market risk is also monitored and assessed via synthetic VaR calculations, which determine potential losses generated by each business line at a given confidence level (99%) and over a given holding period (one day). For calculationpurposes,changes in market inputs used to determine portfolio values are modeled using statistical data. All decisionsrelatingto risk factors using the internalcalculationtool are revised regularly by committees involving all of the relevant participants (DRCCP, Front Office and Results department). Quantitative and objective tools are also used to measure the relevance of risk factors. VaR is based on numerical simulations,using a Monte Carlo method which takes into account possible non-linear portfolio returns based on the different risk factors. It is calculated and monitored daily for all of the Group’stradingbooks, and a VaR limit is definedon a global level and per business line. The calculation tool generates 10,000 scenarios, which provides satisfactory precision levels. For certain complex products, which account for a minor share of the trading books, their inclusionin the VaR is obtainedby using sensitivities.VaR backtesting is carried out on approved scopes and confirms the overall robustness of the model used. Extreme risks, which are not included in VaR, are accounted for using stress tests throughoutthe Group.

Market risk measurement methods

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Registration document 2017