NATIXIS - 2018 Registration document and annual financial report

FINANCIAL DATA Consolidated financial statements and notes

Fair value of financial instruments 6.6 General principles The fair value of an instrument (asset or liability) is the price that would be received to sell an asset or paid to transfer a liability in a standard arm’s length transaction between market participants at the measurement date. Fair value is therefore based on the exit price. The fair value of an instrument on initial recognition is normally the transaction price, i.e. the price paid to acquire the asset or received to assume the liability. In subsequent measurements, the estimated fair value of assets and liabilities must be based primarily on observable market data, while ensuring that all inputs used in the fair value calculation are consistent with the price that market participants would use in a transaction. In this case, fair value consists of a mid-market price and additional valuation adjustments determined according to the instruments in question and the associated risks. The mid-market price is obtained based on: the quoted price if the instrument is quoted on an active market. a A financial instrument is regarded as quoted on an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring transactions on an arm’s length basis on the main market or, failing that, the most advantageous market; valuation techniques if the market for a financial instrument is a not active. The techniques used must maximize the use of relevant observable entry data and minimize the use of non-observable entry data. They may refer to observable data from recent transactions, the fair value of similar instruments, discounted cash flow analysis and option pricing models, proprietary models in the case of hybrid instruments or non-observable data when no pricing or market data are available. Additional valuation adjustments incorporate factors related to valuation uncertainties, such as market, credit and liquidity risks in order to account, in particular, for the costs resulting from an exit transaction on the main market. Similarly, a Funding Value Adjustment (FVA) aiming to account for—through assumptions—costs associated with the funding of future cash flows of uncollateralized derivatives or imperfectly collateralized derivatives is also taken into account. The main additional Funding Value Adjustments are as follows: Bid/ask adjustment – Liquidity risk This adjustment is the difference between the bid price and the ask price corresponding with the selling costs. It reflects the cost requested by a market player in respect of the risk of acquiring a position or of selling at a price proposed by another market player.

Adjustment for model uncertainty This adjustment takes into account the imperfections of the valuation techniques used—in particular, the risk factors that are not considered, even when observable market inputs are available. This is the case where risks inherent to various instruments differ from those considered by the observable inputs used to value them. Adjustment for input uncertainty Observing certain prices or inputs used in valuation techniques may be difficult or the price or input may be too regularly unavailable to determine the selling price. Under these circumstances, an adjustment may be necessary to reflect the probability that market participants might adopt different values for the same inputs when evaluating the financial instrument’s fair value. Value adjustment for counterparty risk (Credit Valuation Adjustment – CVA) This adjustment applies to valuations that do not account for the counterparty’s credit quality. It corresponds to the expected loss related to the risk of default by a counterparty and aims to account for the fact that Natixis cannot recover all the transactions’ market value. The method for determining the CVA is primarily based on the use of market inputs in connection with professional market practices for all counterparty segments included in this calculation. In the absence of liquid market inputs, proxies by type of counterparty, rating and geographic area are used. Value adjustment for own credit risk (Debit Valuation Adjustment – DVA) and funding valuation adjustment (FVA) The DVA is symmetrical to the CVA and represents the expected loss, from the counterparty’s perspective, on liability valuations of derivative financial instruments. It reflects the impact of Natixis’ own credit quality on the valuation of these instruments. The adjustment is made by observing credit spreads on a sample of comparable entities, taking into account the liquidity of Natixis’ CDS spread over the period. The funding valuation adjustment (FVA) is taken into account in the DVA calculation. The following criteria are used to determine whether a market is active: the level of activity and trend of the market (including the level a of activity on the primary market); the length of historical data of prices observed in similar a market transactions; scarcity of prices recovered by a service provider; a sharp bid-ask price spread; a steep price volatility over time or between different market a participants.

5

285

Natixis Registration Document 2018