NATIXIS - 2018 Registration document and annual financial report

RISK FACTORS, RISK MANAGEMENT AND PILLAR III Risk management

Correlation assumptions are based on the rating of each issuer’s creditworthiness within the IRC horizon (one year). The simulation process is based on intra-sector correlation inputs. The internal IRC calculation model used by Natixis was approved by the Autorité de Contrôle Prudentiel et de Résolution in 2012. In accordance with regulatory requirements, Natixis established an internal model validation policy as well as procedures. This model validation phase is a prerequisite for their use. Stress tests and operational indicators In addition to VaR, SVaR and IRC measures, stress tests are used to simulate the impact of extreme market conditions on the value of Natixis’ portfolios as well as operational indicators: stress tests to measure potential losses on portfolios in 1) extreme market conditions. Natixis’ mechanism is based on two categories of stress tests: overall stress tests and dedicated stress tests for each business. Overall stress tests are subject to continuous review. They are performed daily and can be grouped into two categories: historic stress tests consist of reproducing sets of changes j in market parameters observed during past crises in order to create an ex-post simulation of the P&L changes recorded. While stress tests do not have any predictive value, they do make it possible to gauge the exposure of the portfolio to known scenarios. There are 12 hypothetical stress tests covering the most significant events since 1987, the year of the stock market crash, including the Lehman Brothers collapse in the 2008 period and the terrorist attack of September 11, 2001, through to the sovereign debt crisis in 2011. hypothetical stress tests are used to simulate changes in j market parameters for all the activities, based on plausible assumptions regarding one market’s predicted response compared with another’s, depending on the nature of the initial stress. Stresses are determined through a joint effort involving the Risk division, the front office and Economic Research. A set of seven scenarios have been defined: fall in stock market indices combined with a flattening of 1. the yield curve and an increase in credit spreads; strong rise in European interest rates in an inflationary 2. environment; failure of a financial institution with a rise in credit 3. spreads and interest rates and a moderate fall in equity markets; commodity crisis based on a scenario of disruption to 4. supply due to geopolitical events; emerging market crisis reflecting the consequences of a 5. sudden withdrawal of capital from an emerging country during a global economic downturn (higher refinancing costs, stock market crash and depreciation of the currency against the US dollar);

failure of a high-profile corporate based on a credit market 6. shock; liquidity crisis characterized mainly by a sharp widening of 7. European interbank spreads, a widening of the liquidity spread and higher “peripheral” yields. Specific stress tests are also calculated daily in the management tools for all the portfolios and are governed by limits. They are set on the basis of the same severity standard and are aimed at identifying the main loss areas by portfolio. In addition, reverse stress tests are used to highlight the most high-risk scopes and market environments as well as concentration and contagion links. This mechanism is based on plausible scenarios drawn from extremely adverse assumptions on the fulfillment of risk factors leading to the breach of a loss threshold, and allows Natixis to implement a new risk monitoring and steering tool, identify circumstances that may trigger this loss and adapt the appropriate action plans where necessary. All stress test mechanisms are defined by the Risk division, which is responsible for defining principles, methodology and calibration and scenario choices. The Stress Test Committee is responsible for the operational implementation of stress tests and meets on a monthly basis. The Committee approves work to be carried out, its workload and determines the annual IT budget; loss alerts by portfolio and aggregated by business line, 2) which alert management and the Risk division if losses reach a certain threshold over a given month or on a cumulative basis since the beginning of the year. These thresholds are set by the Market Risk Committee according to the characteristics of each portfolio, past performance and budgetary targets; finally, the supervisory framework includes operational 3) indicators on an overall and/or by business basis, which focus on more directly observable criteria (sensitivity to changes in the underlying and to volatility, correlation, nominals, etc.). The limits of these qualitative and quantitative indicators are set in line with the VaR and stress test limits. Independent valuation control The valuation of Natixis’ various market products forms part of the independent control system made up of dedicated procedures. In accordance with the provisions of IFRS 9, financial instruments are recognized at their fair value. (See Chapter 5 of the Natixis 2017 registration document for further information on fair value accounting methodologies.) Fair value determination is subject to a control procedure aimed at verifying that the valuation of financial instruments is determined and validated by an independent function in terms of prices and/or valuation models.

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Natixis Registration Document 2018